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How Should CFP Board Raise Its Standards?

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The CFP Board announced on Tuesday that it will release a draft of proposed changes to its Standards of Professional Conduct on June 20. The Institute for the Fiduciary Standard applauds the CFP Board for reviewing its standards. Over the past few years, the Institute has conducted its own review of CFP standards as they apply to a CFP’s fiduciary duty to his or her client. With the initiation by the CFP Board of a discussion of proposed new standards, the Institute believes that now is the time to release its review of CFP professional conduct standards.  

The Institute’s findings were announced on Tuesday in order to set out where the CFPB standards fall short of meeting a bona fide fiduciary standard and also to offer a basis for assessing proposed changes and subsequent debate.

(Related: Barry Ritholtz Sees DOL Fiduciary Rule as a ‘Test Run’)

It is important to understand the backdrop for evaluating these standards now. Research continues to suggest that many investors still view financial services and advisors with distrust. The conservative-leaning American Enterprise Institute went so far as to say, “Americans see Wall Street as a culture apart, one that operates by a foreign code of conduct.”

Research also shows the advisory industry a way forward. A 2016 paper by the CFA Institute, “From Trust to Loyalty: A Global Survey of What Investors Want,” shows 11 attributes that retail investors find important. Five attributes are associated with transparency and clear communications about fees and conflicts of interest. Together, they rank above other attributes. The message is that higher ethical standards dominate investors’ “wish list” from financial services.

The Institute identified three primary areas of concern and recommended action steps to address them.

1. Ambiguity over when CFPs are fiduciaries persists. The Board discusses at length its one standard for all CFPs and its other standard for CFPs who do financial planning. Yet it’s hard to tell the standards apart by what they are called and do. One standard requires CFPs to meet “the highest of standards,” while the other standard requires CFPs to act in “the best interest of the client.” Differences are modest. CFPs doing financial planning are held to the Board’s definition of fiduciary and required to make some disclosures and the agreement in writing.

Require that all CFP registrants do what most investors believe they do — meet a single rigorous fiduciary standard that is plainly written. ACTION STEP: Eliminate the CFP Board’s “two-standard” standard whereby CFP registrants have different conduct standards depending on whether they are offering financial planning advice or not. Communicate this standard in plainly written language.

2. The Board appears to view conflicts of interest as ubiquitous, unavoidable — and benign. This view departs sharply from longstanding views of jurists, academics and advisors who have viewed conflicts of interest as, essentially, toxic to fiduciary advice.

Adopt a rigorous standard on conflicts of interest that discusses the well-recognized risks and potential harms to clients that conflicts create. Clearly urge avoiding or eliminating. ACTION STEP: Initiate a robust discussion that reflects history, law and plain common sense on why CFP registrants should avoid conflicts. Provide guidance on how conflicts that are not avoided must be managed. Outline the burden advisors must overcome. Include guidance on disclosure and informed consent. Replace allowing a “general summary of likely conflicts of interest” with the SEC policy requiring written disclosure with “sufficiently specific facts so the client is able to understand the conflicts of interest … and can give informed consent.” Honor the principle that, though no one can be free of all conflicts, everyone can avoid most conflicts. Conflicts cannot be taken lightly or accepted as a norm.

3. Compensation and expense disclosure requirements reflect a minimum standard. The CFP Board’s standards only require disclosure of “compensation methods” and “information related to costs and compensation” by the CFP and his or her firm. They do not require, as a matter of course and without specifically being asked, disclosure of actual fees and investment costs, or a good faith estimate of these total costs.   

Require transparency and clarity in fee disclosure. ACTION STEP: Stop allowing a “general description of compensation arrangements” and “information related to costs upon request.” Instead, require clear disclosure of what the client will pay in underlying investment costs and what the CFP registrant and the firm will be paid as a result of the advisor’s advice or product recommendation, along with a good faith estimate of these fees and costs.

In conclusion, the CFP Board has a great opportunity to strengthen the CFP mark. It can set out conduct standards that meet high historic standards that today’s investor demands. The Institute for the Fiduciary Standard considers the above recommendations as vital to the future integrity and credibility of the CFP marks.

— Read Crunch Time Part II: CFP Board’s ‘D Day’ on ThinkAdvisor.


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