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June 28, 2017 at 11:27 AM
To follow up on my blog last week (“Board to Death: Is the CFP Board’s New Fiduciary Standard Really Better than No Standard at All?”) about the CFP Board’s recently released proposed changes to its Code of Ethics and Standards of Conduct, I’ve been reading reactions to those proposals across the various industry sites, posts and publications. While most reviewers are applauding the proposals, one point that the more astute observers are consistently making (including the Institute for the Professional Standard’s President Knut Rostad in his new blog on ThinkAdvisor) is that they take a rather soft stand on conflicts of interest; far softer than the ’40 Act and subsequent case law does for RIAs.
Conflicts of interest are important to the fiduciary duty discussion because they create incentives — usually financial — to act in other than the clients’ best interests. That’s why the ’40 Act requires RIAs to avoid conflicts when possible, and failing that to mitigate their effects. Only when those first two remedies prove impossible, are they required to disclose the remaining conflicts to the client. For instance, the instructions for the SEC’s Form ADV note: “As a fiduciary, you must also seek to avoid conflicts of interest with your customers, and, at a minimum, make full disclosure of all material conflicts of interest between you and your clients that could affect the advisory relationship.”
(Related: CFP Board Seeks to Impose ‘Strengthened’ Fiduciary Standard on All Advice)
Yet in its new recommendations, the CFP Board only requires simple disclosure, as it states in Section A, Part 9, “Duties Owed to Clients”:
“Disclose Conflicts. When providing financial advice, a CFP professional must make full disclosure of all material conflicts of interest with the CFP professional’s client that could affect the professional relationship. This obligation requires the CFP professional to provide the client with sufficiently specific facts so that the client is able to understand the CFP professional’s conflicts of interest and the business practices that give rise to the conflicts, and give informed consent to such conflicts or reject them. A sincere belief by a CFP professional with a material conflict that he or she is acting in the best interest of the client is insufficient to excuse failure to make full disclosure.”
Notice the lack of any mention of avoiding or even mitigating conflicts, whether they be large or small. Instead, this is simply a reiteration of the FINRA standard for brokers to “disclose and manage” any all conflicts. At least the board had the decency to require these unmitigated conflicts to be disclosed in a manner that the client is likely to understand.
Yet I must confess that the lack of insight of the average retail client into either investments or the workings of the financial services industry, combined with the huge financial incentives the industry has to make sure that clients continue to fail to understand these workings, leads me to be skeptical that these disclosures will lead to any increased understanding, or resulting change in behavior, of many clients.
Consequently, it seems to me that if the CFP Board is truly interested in increasing the likelihood that more CFPs will act in the best interests of their clients, it must take two steps in the area of conflicts. First, it should add the requirement to avoid all conflicts of interest when possible (to be determined by an independent panel rather than the CFP in question); and to mitigate said conflicts when avoidance is not possible.
Second — and most importantly — to help CFPs in those cases in which conflicts are not avoidable or able to be mitigated, the board should publish a comprehensive list of all the conflicts that are likely to arise, along with the specific language that CFPs are required to use when describing and explaining these conflicts to their clients.
