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.”