Tuesday, March 19, 2013

Will the CFP Board Move the Ball Forward, or Stall Progress Toward a True Profession?

While the Certified Financial Planner Board of Standards, Inc. ("CFP Board") has come a long way in its embrace of the fiduciary standard of conduct, I am concerned that the CFP Board - by not embracing the fiduciary standard fully - may be harming the emergence of the profession of financial planning.  And it may, as well, be misleading consumers.  Permit me to explain both of these conclusions, and suggest a logical evolution it is now time for the CFP Board to embrace.

Dodd-Frank Misses the Point: Those Who Provide Investment and Financial Advice Have Always Been Fiduciaries

To understand the issues discussed in this brief, it is first necessary to review when fiduciary status is obtained under the law.

While much of the recent public debate has been regarding Section 913 of Dodd Frank's, and the SEC's authority thereunder to apply the fiduciary standard existing under the Advisers Act of 1940 to broker-dealers and their registered representatives when they provide "personalized investment advice," there is another body of law which already applies the fiduciary standard in such circumstances.  It is state common law - the accumulation of centuries of court decisions in the United States (and even to the common law of England, adopted by the U.S. at the time of the formation of our country).

It was always recognized, under state common law, that those who provide advice in relationships of trust and confidence are, if fact, fiduciaries.  This is regardless of how the person providing advice is regulated.  This is fundamentally an outcome that flows from agency law - i.e., the scope of the fiduciary relationship is defined by the scope of the services being provided.

Early on both the SEC and the NASD recognized that brokers, when providing advice, were fiduciaries.

For example, in 1942 the SEC summarized a court decision finding that the furnishing of investment advice by a broker was a “fiduciary function.”  The SEC stated:

“In the Stelmack case the evidence showed that the firm obtained lists of holdings from certain customers and then sent to these customers analyses of their securities with recommendations listing securities to be retained, to be disposed of, and to be acquired … The [U.S. Securities and Exchange] Commission held that the conduct of the customers in soliciting the advice of the firm, their obvious expectation that it would act in their best interests, their reliance on its recommendations, and the conduct of the firm in making its advice and services available to them and in soliciting their confidence, pointed strongly to an agency relationship and that the very function of furnishing investment counsel constitutes a fiduciary function.”

1942 SEC Annual Report, p. 15, referring to  In the Matter of Willlam J. Stelmack Corporation, Securities Exchange Act Releases 2992 and 3254.

Even earlier, and shortly the self-regulatory organization for broker-dealers, NASD, was formed, NASD (now FINRA) pronounced that brokers were fiduciaries: “Essentially, a broker or agent is a fiduciary and he thus standards in a position of trust and confidence with respect to his customer or principal.  He must at all times, therefore, think and act as a fiduciary.  He owest his customer or principal complete obedience, complete loyalty, and the exercise of his unbiased interest.  The law will not permit a broker or agent to put himself in a position where he can be influenced by any considerations other than those to the best interests of his customer or principal … A broker may not in any way, nor in any amount, make a secret profit … his commission, if any, for services rendered … under the Rules of the Association must be a fair commission under all the relevant circumstances.” – from The Bulletin, published by the National Association of Securities Dealers, Volume I, Number 2 (June 22, 1940).

Investment advisers are always fiduciaries.  Even early on, shortly after the enactment of the Investment Advisers Act of 1940, it was well known that all investment advisers were bound by broad fiduciary obligations to their clients.  In other words, if you provided advice, you were a fiduciary with respect to the advice provided.

But the Investment Advisers Act of 1940 did NOT - as many now seem to conclude - state that brokers are NOT fiduciaries.  It only prescribed when brokers must register as investment advisers.  It was long recognized that brokers, even though not investment advisers, are fiduciaries with respect to the investment advice they provide.

The state common law - case after case - opines that brokers, when in a confidential relationship with their customer - are fiduciaries.  And it is through the application of this common law that brokers are so often charged with fiduciary status in court cases and arbitration proceedings.  Indeed, it was recently reported that "breach of fiduciary duty" is the most common allegation in FINRA arbitration proceedings.

What is a "Confidential Relation"?

That is not to say that all registered representatives and broker-dealers are fiduciaries, all that time.  Fiduciary status only attaches when they are in a "relationship of trust and confidence."

What is a "confidential relation," for purposes of determining whether fiduciary status attaches?  There are numerous cases in the state courts which explore when a person becomes a fiduciary.  But perhaps thee Supreme Court of Virginia opined as to this definition way back in 1933:

“Confidential relation is not confined to any specific association of the parties; it is one wherein a party is bound to act for the benefit of another, and can take no advantage to himself. It appears when the circumstances make it certain the parties do not deal on equal terms, but, on the one side, there is an overmastering influence, or, on the other, weakness, dependence, or trust, justifiably reposed; in both an unfair advantage is possible.

Trust alone, however, is not sufficient. We trust most men with whom we deal. There must be something  reciprocal in the relationship before the rule can be invoked. Before liability can be fastened upon one there must have been something in the course of dealings for which he was in part responsible that induced another to lean upon him, and from which it can be inferred that the ordinary right to contract had been surrendered ...."

J.B. Hancock v. Jessie G. Anderson, 160 Va. 225; 168 S.E. 458; 1933 Va. LEXIS 201(Va. 1933).

The SEC also “has held that where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer … [BD advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers in situations where such reliance is not merited, and obscuring the merchandising aspects of the retail securities business … Where the relationship between the customer and broker is such that the former relies in whole or in part on the advice and recommendations of the latter, the salesman is, in effect, an investment adviser, and some of the aspects of a fiduciary relationship arise between the parties.” 1963 SEC Study, citing various SEC Releases.

Of course, it would be nice to get away from determining if a "confidential relation" exists.  In essence, this is the authority provided to the SEC under Dodd-Frank, at least with respect to brokerage firms and their registered representatives.  The SEC can choose to draw a new line, respective of the common law, and declare that the bona fide fiduciary standards found under the Advisers Act apply to brokers as to any customer for whom they provided personalized investment advice.

This is all just applying common sense - if you provide advice regarding this complex financial world in which we live - with its multitude of investment products and strategies and tax and financial planning concerns - you are relied upon to act in the best interests of the person who has hired you.  And that's a highly reasonable expectation by the person.

Be Wary of How You Hold Yourself Out! - Use of "Financial Planner" Is Significant Factor in Finding Fiduciary Status Exists.

Early on the SEC warned that, if you don't want to be a fiduciary, you should not be disguised as a trusted advisor.  In its 1941 Annual Report, the U.S. Securities and Exchange Commission noted: “If the transaction is in reality an arm's-length transaction between the securities house and its customer, then the securities house is not subject' to 'fiduciary duty. However, the necessity for a transaction to be really at arm's-length in order to escape fiduciary obligations, has been well stated by the United States Court of Appeals for the District of Columbia in a recently decided case:

‘[T]he old line should be held fast which marks off the obligation of confidence and conscience from the temptation induced by self-interest.  He who would deal at arm's length must stand at arm's length.  And he must do so openly as an adversary, not disguised as confidant and protector.  He cannot commingle his trusteeship with merchandizing on his own account…’”

Seventh Annual Report of the Securities and Exchange Commission, Fiscal Year Ended June 30, 1941, at p. 158, citing Earll v. Picken (1940) 113 F. 2d 150.

Also, several common law court cases over the past few decades – i.e., those few reported decisions which escape from the restrictions of securities arbitration and then, through appeals, lead to reported decisions – find that the use of titles that denote relationships of trust and confidence – such as “financial advisor” – becomes a significant factor in determining whether fiduciary status exist.

Account and Other Documentation Not Determinative of Fiduciary Status

One might assume, based on the discussion in the foregoing session, that all one must do to avoid being a fiduciary is to clearly disclose that the relationship is not a fiduciary one, and to not use titles or other descriptors which denote oneself as a trusted advisor.  But such an assumption would be incorrect.  You just can't declare yourself "not a fiduciary."  It's what you do, and how you hold yourself out, in all respects, that is conclusive as to whether fiduciary status exists under state common law.

Early on even the SRO for broker-dealers, NASD (now FINRA), in discussing the decisions of two court cases, said it was “worth quoting” statements from the opinions:  “In relation to the question of the capacity in which a broker-dealer acts, the opinion quotes from the Restatement of the law of Agency: ‘The understanding that one is to act primarily for the benefit of another is often the determinative feature in distinguishing the agency relationship from others. *** The name which the parties give the relationship is not determinative.’ And again: ‘An agency may, of course, arise out of correspondence and a course of conduct between the parties, despite a subsequent allegation that the parties acted as principals.’” - from N.A.S.D. News, published by the National Association of Securities Dealers, Volume II, Number 1 (Oct. 1, 1941).

Where is the Line Drawn – Fiduciary vs. Non-Fiduciary?

That's the subject of some debate.  Under state common law, it is always necessary to look at the totality of the facts and circumstances.  Fiduciary status is likely to be imposed where the client of a financial planner or securities investment broker is unsophisticated (i.e., the vast majority of clients).  Fiduciary status is less likely to be imposed upon a highly knowledgeable, sophisticated client.  (Wealth is not the determinant; rather, it is whether the client has vast experience and a very high level of knowledge regarding the transaction at hand - so that reliance by the sophisticated client does not exist.)  Of course, if the sophisticated person were truly that sophisticated, that person would have negotiated that the advisor with which he or she is dealing expressly assumes fiduciary status.  Why otherwise would a sophisticated investor desire, and expect to rely upon, the advisor's advice?

If you want an easy answer on where to draw the line, I would look no further than the comments made by a long-time leader of the profession, Harold Evensky.  As he eloquently puts it, if you just describe a financial product to a client, you are not a fiduciary.  But if you opine as to whether that product is good for the client, you are an advisor and hence a fiduciary.  It's a straightforward, relatively easy to apply line.

Many registered representatives may now be wondering ... "what about our suitability obligations, don't they require fiduciary status as you set forth the test above?"  Yes - suitability obligations still exist.  But "suitability" is an internal determination (and subsequent record) by the firm, and does not require that all of the determinations regarding suitability be conveyed to the client.  (Of course, facts and circumstances of the client must be periodically updated for the broker's internal records and to aid in the suitability analysis; but again a suitability determination does not require the furnishing of advice to the client.)

The CFP Board's Application of Fiduciary Status - Far Different from State Common Law?

This brings me to the CFP Board, and its methodology for applying fiduciary status.

I would first note that when, in 2007, the CFP Board adopted its current Standards of Professional Conduct, many who desire to see financial planners arise to the level of true fiduciaries were most appreciative of the courage the CFP Board undertook at the time.  This is especially so when we look back and realize that, just five years ago, there was little scholarly literature concerning the application of the fiduciary standard upon investment advisers and financial planners.

But with time has come a greater understanding of fiduciary duties, when they are applied under the law.  And hence, it is time to look more closely at the CFP Board's application of fiduciary status.

The CFP Board sets forth that there are several “personal financial planning subject areas” or “financial planning subject areas”, which “denote the basic subject fields covered in the financial planning process” and “which typically include, but are not limited to:”
• Financial statement preparation and analysis (including cash flow analysis/planning and budgeting),
• Insurance planning and risk management,
• Employee benefits planning,
• Investment planning,
• Income tax planning,
• Retirement planning, and
• Estate planning.

The CFP Board’s Standards of Professional Conduct then define “Personal financial planning” or “financial planning” as denoting the “process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial planning integrates the financial planning process with the financial planning subject areas. In determining whether the certificant is providing financial planning or material elements of financial planning, factors that may be considered include, but are not limited to:
• The client’s understanding and intent in engaging the certificant.
• The degree to which multiple financial planning subject areas are involved.
• The comprehensiveness of data gathering.
• The breadth and depth of recommendations.
Financial planning may occur even if the material elements are not provided to a client simultaneously, are delivered over a period of time, or are delivered as distinct subject areas. It is not necessary to provide a written financial plan to engage in financial planning.”

The CFP Board then proclaims, in its Standards of Professional Conduct, that “When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.”

The language found in the CFP Board’s Standards of Professional Conduct is not wholly unsatisfactory (as to when fiduciary status attaches), although some ambiguities are created.  More important, however, is how the CFP Board has chosen to apply this language.

The CFP Board places a huge emphasis on whether the financial planning engagement touches on more than one subject area.  For example, the CFP Board’s Q&A regarding its Standards state:

“Question 1-14: How many financial planning subject areas can a CFP® professional address with a client without reaching the level of “material elements of financial planning”?

Applying the financial planning process to a single subject area is not likely to be considered financial planning or material elements of financial planning. CFP® professionals who integrate the financial planning process and two or more subject areas may be providing financial planning or material elements of financial planning.”

Where did this “two or more subject areas” emphasis come from?  Not from the common law!  There are many cases which illustrate that the provision of investment advice, alone, involves a fiduciary relationship.  And other cases illustrate where another subject area – retirement planning – invokes fiduciary status.

(Indeed, as an instructor of retirement planning, there are not many instances within the realm of "retirement planning" in which advice is not provided to a client - whether it be to a plan sponsor or to an individual client.  I've never seen a "retirement plan" that does not provide advice - and a whole lot of it.)

The key again, under state common law, is not whether more than one “financial planning subject area” is touched upon, as the CFP Board appears to now emphasizes. Rather, the key is whether any advice is provided.  Whether the advice be investment advice, retirement planning (accumulation or decumulation planning included), or estate planning, all of these are likely to arise to the level of a fiduciary relationship.

It is this recent emphasis by the CFP Board on “two or more subject areas” that is befuddling.  The CFP Board needs to make it clear that the provision of any advice, even within one subject area, will likely give rise to the application of fiduciary status under state common law.  Otherwise, CFP Certificants may be blindly led down a path – at each Certificant’s peril - in which they assume they are not fiduciaries, but where a court or arbitrator would likely decide otherwise.

Fraudulent Advertising by CFP Board?

When it was announced, I applauded the CFP Board’s advertising campaign.  Designed to promote the CFP® mark, and lead to greater understanding by consumers of the benefits of personal financial planning, I saw it as a means of advancing the profession of financial planning.  I still do.

But I am disturbed by some aspects of this advertising campaign.

Let me preface this by the fact that I constantly remind myself of a quote from a paper written in 2010 by Professors James Angel and Douglas M. McCabe: “To give biased advice with the aura of advice in the customer’s best interest is fraud.”

And I’m reminded of the language of the SEC’s 1941 annual report, that a product salesperson (non-fiduciary) “must do so openly as an adversary, not disguised as confidant and protector.” 

I am also reminder of this excerpt from the SEC’s 1963 Report: “where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer … [BD advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers.”

So why I am disturbed by the actions of the CFP Board?  Here are just two examples:

One CFP Board’s advertisment that states: “Bring all your finances together w/help of the 1 person who can" implies CFPs provide ADVICE, not products.

Another CFP Board advertisement boldly proclaims that CFPs "Put Your Needs First."  It doesn’t take a rocket scientist to know that this implies – to consumers – that CFPs are trusted advisors (and hence fiduciaries).

But, as it stands right now, not all CFPs are fiduciaries.

Moreover, the mere use of the title “financial planner” (and even more so, Certified Financial Planner™” – leads the consumer to believe that advice will be received.

Of course, not just the CFP Board can be singled out on this point.  Many other designations and certifications use terminology such as “financial consultant” or “advisor” within the title.  One must ask … didn’t they know, at the time they created the designation, that holding oneself out as a “consultant” or “planner” or “advisor” (or similar terms) was a significant factor, under state common law, in finding that fiduciary status exists?  And don’t they realize that disguising the certificant or designess as a “confident” – when the certificant or designee is not – amounts to fraud?

Where Do We Go From Here?

I hope the CFP Board “moves the ball forward.”

I hope the CFP Board recognizes that nearly all consumers believe that securities professionals – espcially CFPs – are trusted advisors.  They believe that the CFP Certificant is acting in their best interests.  That trust should not be violated by the CFP Board’s overly permissive policies.

I hope the CFP Board will revise and clarify its Standards of Professional Conduct, and recent interpretations thereof, to recognize that all those who hold themselves out as CFP® Certificants should be held to fiduciary status at all times.  To do otherwise is fraud.

I hope that the CFP Board further takes the necessary step to delineate what fiduciary standards exist – for the education of CFP Certificants.  Currently the CFP describes the “fiduciary duty of care.”  Even a cursory elicitation of fiduciary duties sets forth that there are the often-referred-to triparte fiduciary duties of “due care, loyalty, and utmost good faith.”  And it is possible to come up with much better guidance within the Standards of Professional Conduct – by elaborating on the principles further.  This is illustrated by the American Bar Association’s Model Rules of Professional Conduct for lawyers.

I further hope that the CFP Board will lead the profession – toward a true profession, in which Certified Financial Planners are fiduciaries at all times.  Every profession has the incentive to ensure its members hold themselves to higher standards.  By adopting the fiduciary standard for all CFPs, at all times, consumers will come to recognize that they can trust CFPs.  This will lead to far greater utilization of the services of Certified Financial Planners by consumers.

Indeed, adopting a clear, unequivocal fiduciary standard of conduct, as found in state common law, for CFP Certificants, will do far, far more to advance the CFP® mark and the utilization of financial planning services than any advertising campaign could ever hope to achieve.

Of course, there are powerful economic forces which oppose application of fiduciary standards.  And the adoption of a common-sense all-the-time clear fiducary standard for CFP Certificants may well cause some who hold the CFP© certification to relinquish it.  But, in my mind, that’s ok.  If you don’t want to act in the best interests of your clients, I don’t want you as my professional colleague.

And, those CFP Certificants who remain will be proud to associate with the remaining CFP Certificants,.  With a new, clear understanding of the vital trust placed into our hands by consumers, and that all “planners” are “advice providers” and hence fiduciaries at all times, we will move the profession forward, and rapidly, to even greater interest from the public.  With such greater demand for services will come new entrants into the CFP community, attracted by the high standards of conduct and the new level of respect which CFP Certificants are afforded.

In 2007 a brave group of directors of the Certified Financial Planner Board of Standards, Inc. set aside their individual self-interests and adopted a fiduciary standard of conduct (at least much of the time) for Certified Financial Planners.  Now, more than five years later, it is time for this Board of Directors to complete the task – and in so doing move us toward a true profession of financial planners, all bound together by the highest standards of conduct, mutual admiration, and the respect of the public and public policy makers alike.


  1. Hi Ron:

    As always I appreciate your thorough analysis and certainly agree with as a CFP and according to State Common Law we almost always owe the client and the prospective client a fiduciary standard.

    I would also add that in relation to when it applies, it is not limited to providing financial planning lr the material elements but and most importantly depends on the clients understanding and intent. This is outlined in the practice standards and in the FAQs and in a large part speaks to "holding out" and the confusion that the public has around designations and titles.

    Coming from a place of "superior knowledge"
    (at least we would hope) the certificant has the obligation to insure thatthe "uderstanding" goes beyond an obscure or "difficult written disclosure"

    The DEC has begun working on a revision of the practice standards that speaks to greater specificity .

    Thank you for your "eagle eye" and work

    Martin Siesta

  2. Hi. I took the CFP Exam. I came to the biz after being poorly handled by a dual registered "advisor" whom I dumped and was largely self educated and paranoid to start. FYI I almost vomited when I got to Practice standard 5.2 ( 500 Series is Implementation ) after three months of studying.

    500-2: Selecting Products and Services for Implementation :

    "The financial planning practitioner shall select appropriate products and services that are consistent with the client's goals, needs and priorities.
    Explanation of this Practice Standard

    The financial planning practitioner shall investigate products or services that reasonably address the client's needs. The products or services selected to implement the recommendation(s) must be SUITABLE to the client's financial situation and consistent with the client's goals, needs and priorities.

    The financial planning practitioner uses professional judgment in selecting the products and services that are in the client's interest. Professional judgment incorporates both qualitative and quantitative information."

    I could not believe it, remember I was a client first, sold crap. I get the difference. I spent how much money to buy into a diluted mark that allows suitable implemenatation in the clients interest. Very disappointed. Whats the point - other than distinguishing my education - if all that work boils down to merely suitable implementation. I feel had. How is this justified ??

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