Back in 2008, the CFP Board announced that it was revising its professional standards to include a requirement that CFPs act as fiduciaries for their clients. At the time, the advisor fiduciary standard was experiencing one of its periodic 15 minutes of fame following the Financial Planning Association’s victory in federal court over the Securities and Exchange Commission, which established that brokers have a fiduciary duty to their investors when managing portfolios for a fee.
(Related: How Should CFP Board Raise Its Standards?)
For those of us who were advocating for a more client-centered financial planning profession back in the day, the Board’s standards appeared to be a major step forward. That is, until we began to discover that, at best, CFPs had a “part-time” fiduciary duty requiring them to act in the best interest of their clients when creating their financial plans, but under no such obligation when recommending the investments and other financial products necessary to implement those plans.
For me, this was indeed a learning experience. I and many others realized that a part-time fiduciary duty was actually more harmful to investors than no fiduciary duty at all. Perhaps not surprisingly, many clients were confused about the responsibilities of their CFPs and the nature of the advice they were (and still are) getting; confusion that one can only assume translates into a misplaced trust in the product recommendations they receive, including the competitiveness of the costs they will incur.
As you’re probably aware, the CFP Board released on Tuesday its long-awaited recommendations for changes to its Code of Ethics and Standards of Conduct for CFPs. These recommendations address many issues regarding the nature and delivery of financial planning services. Yet many industry observers, including myself, believe that the most pressing issue for the Board to address in these changes is to bring financial planning into the 21st century of client-centered, full-time fiduciary financial advice.
Consequently, the key question is whether this revised standard is, in fact, a real fiduciary standard, or yet another fake standard that is likely do more harm than good. In that regard, the recommendations should close the loopholes in the existing Standards of Conduct that allow CFPs to be part-time fiduciaries.
Toward that end, the Board’s recommendations appear to be surprisingly comprehensive and on point. I say “appear” because, as I’ve learned, with any quasi-regulatory document, the practical application of the proposed changes can vary greatly from the way they appear at first blush and ultimately depends on a specific word here or a slightly unconventional definition there. I’ll get to my concerns after we look at the proposed changes at a surface level.
What the New Standards Call For
The essence of the proposed changes on the fiduciary duty issue are succinctly described in the third paragraph of the document: “A CFP professional must at all times act as a fiduciary when providing financial advice to a client, and therefore act in the best interest of the client.”
In this regard, the proposed standards state, a CFP professional must:
- Place the interests of the client above the interests of the CFP professional and the CFP professional’s Firm
- Seek to avoid conflicts of interest, or fully disclose material conflicts of interest to the client, obtain the client’s informed consent, and properly manage the conflict
- Act without regard to the financial or other interests of the CFP professional, the CFP professional’s firm, or any individual or entity other than the client, which means that a CFP professional acting under a conflict of interest continues to have a duty to act in the best interest of the client and place the client’s interest above the CFP professional’s.
Did you catch that? The Board has changed its former requirement that CFPs act as a fiduciary “when providing financial planning” to “when providing financial advice.” Sounds like a pretty big step toward a full-time fiduciary duty, doesn’t it? But just to make sure, let’s take a quick look at the definition of “financial advice” in the glossary section.
The CFP Board’s proposal for new standards defines financial advice as the following:
“A. A communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the client take or refrain from taking a particular course of action with respect to:
- The development or implementation of a financial plan addressing goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy or other relevant elements of a client’s personal or financial circumstances
- The value of or the advisability of investing in, purchasing, holding or selling financial assets
- Investment policies or strategies, portfolio composition, the management of financial assets or other financial matters
- The selection and retention of other persons to provide financial or Professional services to the client; or
B. The exercise of discretionary authority over the financial assets of a client.”
The proposal also noted that “the determination of whether financial advice has been provided is an objective rather than subjective inquiry. The more individually tailored the communication is to the client, the more likely the communication will be viewed as financial advice.”
Call me crazy, but that all sounds quite a lot like the implementation of a financial plan to me, which, in turn, sounds like a pretty significant step toward a full-time fiduciary duty for CFPs. But that doesn’t quite answer all the questions.
The biggest issue that comes to my mind is enforcement. How will the Board find out when a broker with a CFP at a major wirehouse or an indie BD has failed to give advice in her or his client’s best interest? Is the BD going to tell them? Not very likely. FINRA? Probably not; as its regs don’t require a full-time fiduciary duty, they aren’t likely to care. What about a client taking a broker to arbitration? It might come to light that way, but since it’s not a breach of BD rules, it isn’t likely. So, as far as I can tell, a broker’s breach of their CFP fiduciary duty probably isn’t going to surface. Now, RIA CFPs are another story, but since they already have a fiduciary duty, the CFP Board duty is kind of moot.
It seems to me that for this fiduciary duty to be better than the Board’s prior fiduciary duty (read: better than no fiduciary duty at all), the Board is going to have to add a meaningful enforcement element so that investors can be reasonably confident that their CFP is truly acting in their best interest — for instance, a requirement that all CFPs register as RIAs or work full-time for their BDs’ RIA…
— Read CFP Board Seeks to Impose ‘Strengthened’ Fiduciary Standard on All Advice on ThinkAdvisor.