Knut A. Rostad, president of the Institute for the Fiduciary Standard; Jeffrey McClure, president of The Personal Wealth Coach; and Stan Mock, general agent of Financial Planning Services LLC, took on this question in a webinar hosted by WealthManagement.com. McClure and Mock both hold CFP designations. (Rostad is a frequent contributor to ThinkAdvisor.)
CFP Board was invited to partake in the webinar but declined.
The draft proposal, titled Code of Ethics and Standards of Conduct, is a significant revision to the standards with a range of important changes, including broadening the application of the fiduciary standard for CFP professionals — effectively requiring them to put a client’s interest first at all times — and enhancing and updating standards related to financial planning.
The “big change” to the standards, though, is the extension of the fiduciary duty to cover all financial advice.
At the end of July, the CFP Board had received more than 1,000 comments on the proposed revisions.
Mock’s take is that the proposed rules are too strong.
“I am very comfortable with the current rules that the Board has,” he said during the webinar. “I am very uncomfortable with the proposed rules that the Board has.”
Mock, who has been in the business for 48 years and is on his fourth generation of clients, said he’s hoping a lot of CFPs resist the changes.
“I don’t like the idea of the CFP Board strengthening the rules,” he said. “I think the rules we have now are adequate. I think they’re working. I think they’re more stringent than anybody else’s are in the industry. I think they will put us in a disadvantage if these new proposed rules go forward. I think we’ll be left out of a level playing field.”
Mock says he’s not a big believer that rules work, using Bernie Madoff as an example.
“[Madoff] supposedly was audited just like the rest of us were audited and they didn’t find anything wrong,” Mock said. “And it’s hard for me to believe [that] when a person has a checkbook for their clients’ accounts, no third-party investments.”
The only individual that Mock has seen that “really controls” who stays in the business and who doesn’t is the client.
“An individual who doesn’t have their best interest, the client can see that in their eyes,” he said.
Rostad’s view is that the proposed rules may be too weak.
“In terms of the CFP Standards as proposed, I think it’s important to note, they are a very good first step,” Rostad said during the webinar. “They have made significant headway since the prior version put together in 2007.”
There are two particular areas where Rostad says the CFP Board is making “a good first step” in its proposed changes.
The first is that all CFPs who render advice must act as fiduciaries. The second is that conflicts begin to be addressed in the proposed standards with disclosure and management being required.
“But, this said, I think more needs to be done,” he added.
Rostad then explained three specific areas where he thinks the CFP Board could strengthen its standards.
The standards call for disclosure and management of conflicts. However, Rostad thinks neither is defined well enough.
“Conflicts should be defined and understood and talked about as inherently harmful. Of course they must be avoided,” he said, adding that “No one believes that disclosure alone works. Any significant reliance on disclosure is misplaced.”
In addition to disclosure, Rostad said, “we also need mitigation.”
Rostad also thinks all costs should be disclosed in writing.
“Is there any other product sale or professional service where this simple question is often so tough to answer?” he asked.
The last suggestion Rostad had for the Board was to have CFPs put a statement of adherence to the standards on their Form ADV.
McClure is generally on board with the CFP Board’s new fiduciary standard.
“When providing financial advice, the new standards are very simple. They require that the CFP mark’s holder be a fiduciary,” McClure said.
According to McClure, a fiduciary standard is going to come.
“We can get ahead of it or we can let it run us over,” he said.
He then spent the majority of his presentation giving his opinion on the enforcement of the proposed standards.
Under existing anti-fraud rules of the Securities and Exchange Commission and the Financial Industry Regulatory Authority, failure to act as a fiduciary once having held forth to be acting in that role is “fraud,” he said.
“We’re about to all become fiduciaries if this goes into effect whether we like it or not, and the law is very clear on what happens to fiduciaries who violate fiduciary duty,” McClure said.
McClure then points to an abstract from the American Bar Association that defines a “breach of fiduciary duties” as based on three questions:
1. Did a fiduciary relationship exist at the time of the alleged misconduct?
2. If so, what was the scope of the relationship? (CFP Standards define “scope.”)
3. Was there a breach of the duties that arose within the scope of the relationship?
“Any act other than a fiduciary will result in … you’ve committed fraud,” McClure said.
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