A Reply to the CEO of the CFP Board

I appreciate the November 1, 2012 response of the CFP Board’s CEO, Kevin Keller in Financial Planning (http://www.financial-planning.com/blogs/Fiduciary-Standard-Moving-the-Ball-Forward-2681644-1.html?pg=1) to my prior blog post, and I welcome the continued dialogue on these important issues.  I urge all stakeholders affected by this discussion to weigh in with their views.  To this end, and as a means of replying to Mr. Keller’s remarks, I offer this follow-up blog post on this important issue.

INTRODUCTION

As I mentioned previously, I applauded the CFP Board for having moved the ball forward in 2007.  Furthermore, I also state now that I applaud the CFP Board’s educational and testing regimes; over time these have set the standard for the minimal competency levels which should be expected of every person providing personalized individual financial or investment advice.

I have questioned, however, in the context of continued evolution of the profession toward a true profession, whether it is time that the CFP Board’s Standards of Professional Conduct be revised and updated, in order to reflect: (1) the greater understanding of the fiduciary standard of conduct by leaders of the profession, now compared to five years ago; (2) the broad application of the fiduciary standard to brokers and their registered representatives who provide personal financial or investment advice (notwithstanding lack of registration as an RIA); (3) the importance of the fiduciary standard as a means of consumer protection, especially in this modern era where it is well-known that disclosures are largely ineffective as a means of consumer protection when dealing with such complex, intricate matters as financial planning and investments.

ON THE ISSUE OF “FRAUD.”

Mr. Keller questions my statement that failure to hold CFP® certificants to fiduciary status amounts to fraud.  I reply.

First, I note that my previous blog post stated:

“[T]he 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 designee as a “confident” – when the certificant or designee is not – amounts to fraud? …

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 would first note, as set forth in my recent blog post (but omitted from Mr. Keller’s commentary), that the CFP Board uses advertisements and promotions which either expressly state or imply that a relationship of trust exists between CFP certificants and consumers.  I simply ask that the CFP Board not undertake misrepresentations to consumers.  It is a reality that, under the CFP Board’s own rules, currently not all CFP® certificants place all consumers’ best interests first when providing personalized financial planning or investment advice.  Until and unless the CFP Board actually requires that all CFP® certificants adhere to the fiduciary standard at all times when providing advice to clients, these particular ads should cease.

For some additional examples of the content which is questionable, please refer to the following:

1.             CFP Board Commercial:  “Does your financial advisor see a client? or Cash? Put your needs first. Work with a CFP® Professional.”  [Emphasis added.]  A copy of this commercial located at http://www.youtube.com/watch?v=F2yVP3mEYbw&feature=rellist&playnext=1&list=PL9B1E9E1C26D1A25D.
2.          CFP Board’s “Garden’ Banner Ad” which states: “Is your financial advisor more interested in growing your finances … or taking his cut? … Put your needs first.  Work with a CFP® Professional.”  [Emphasis added.]  For a copy of this and other banner ads, visit http://www.cfp.net/publicawareness/banners.asp.
3.          CFP Board’s written ad containing the phrase, “Americans Need Financial Advice They Can Trust,” which is found at http://www.cfp.net/teamup/toolkit.asp#Ads. [Emphasis added.] 
4.    .    CFP Board’s “Let’s Make a Plan – Talking Points” document states, in part, “As a CFP® professional, I’m here to serve consumers … My CFP® mark distinguishes me among my peers in the financial services industry as it shows that I have voluntarily met rigorous requirements of education, examination and experience and abide by CFP Board’s Standards of Professional Conduct, which includes agreeing to a fiduciary standard of care that places my clients’ interests first.”  [Emphasis added.]  http://www.cfp.net/publicawareness/messages.pdf

Again, since the CFP Board acknowledges that not all those use the certification marks (CFP® or Certified Financial Planner™) adhere to the fiduciary standard when providing financial or investment advice, I remain concerned that the public is misled by some of the content contained in the CFP Board’s promotional campaigns. 

There is significant scholarly and legal and regulatory authority in support for my proposition that if one holds out as a “financial planner” or “Certified Financial Planner™ (“CFP®), without assuming fiduciary status, fraud may well occur.  For example, the following extendeed passage is from a fairly recent article by Professors Angel and McCabe:

“The relationship between a customer and the financial practitioner should govern the nature of their mutual ethical obligations. Where the fundamental nature of the relationship is one in which customer depends on the practitioner to craft solutions for the customer’s financial problems, the ethical standard should be a fiduciary one that the advice is in the best interest of the customer. To do otherwise – to give biased advice with the aura of advice in the customer’s best interest – is fraud. This standard should apply regardless of whether the advice givers call themselves advisors, advisers, brokers, consultants, managers or planners.”

Angel, James J. and McCabe, Douglas M., Ethical Standards for Stockbrokers: Fiduciary or Suitability? (September 30, 2010).  Available at SSRN: http://ssrn.com/abstract=1686756.

Many court decisions also reflect the principle that how one holds himself or herself out is a significant factor in determining whether fiduciary status exists.  For example:

•           In a bankruptcy case involving an insurance agent (Mr. Smith) who filed for bankruptcy and sought to discharge a claim based upon breach of fiduciary duty, the Court stated: “In the present instance [the customers] were parties devoid of any financial sophistication. On the other hand, Mr. Smith claimed to be and, in fact, was a ‘financial advisor’ who certainly possessed a far superior expertise concerning investments than either [of the customers]. Mr. Smith was fully aware of the financial conditions of both considering their age and their situation in life … Even to suggest and recommend, let alone persuade [the customers] to invest their entire retirement assets in such a [Ponzi] scheme, was while not fraudulent, certainly amounted to a breach of the fiduciary duty owed by Mr. Smith to Ms. Wilson and Ms. Judson.” In re Gregory Smith (Bkrpt.Ct. M.D. Fl. 2005).
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•           “In the fall of 1985, plaintiff, having recently divorced and relocated to Columbus, Ohio, sought investment advice from Thomas J. Rosser. At the time, Rosser was a licensed salesman for Great Lakes Securities Company and held himself out as a financial advisor … [T]he evidence established that Rosser was a licensed stockbroker and held himself out as a financial advisor, and that plaintiff was an unsophisticated investor who sought investment advice from Rosser precisely because of his alleged expertise as a broker and investment advisor. Further, Rosser testified that plaintiff had relied upon his experience, knowledge, and expertise in seeking his advice. Therefore, we conclude that plaintiff presented sufficient evidence to establish that she and Rosser were in a fiduciary relationship.”  Mathias v. Rosser, 2002 OH 2531 (OHCA, 2002).
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•         When a bank held out as either an “investment planner,” “financial planner,” or “financial advisor,” the Wisconsin Supreme Court held that a fiduciary duty may arise in such circumstances.  Hatleberg v. Norwest Bank Wisconsin, 2005 WI 109, 700 N.W.2d 15 (WI, 2005).
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•          A dual registrant crossed the line in "holding out" as a financial advisor, and in stating that ongoing advice would be provided, and other representations, and in so doing the dual registrant, who sold a variable annuity, and was found to have formed a relationship of trust and confidence with the customers to which fiduciary status attached. Western Reserve Life Assurance Company of Ohio vs. Graben, No. 2-05-328-CV (Tex. App. 6/28/2007) (Tex. App., 2007).
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• .       Insurance agents who introduced themselves as “investment counselors or enrollers” and who tailored retirement plans for each person depending on the individual’s financial position, and who led the customers to believe that an investment plan was being drafted for each customer according to each customer’s needs, was held by a federal court, apply Iowa state common law, to lead to the possible imposition of fiduciary status.  Cunningham vs. PLI Life Insurance Company, 42 F.Supp.2d 872 (1990)
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•       A U.S. District Court in 1985 held that a fiduciary relationship existed in part because of a defendant's holding out as a financial planner to clients.  CSCC was primarily in the business of real estate syndication, but also in business under the name Creative Financial Planning.  “The developer defendants obtained investment capital from the public by posing as financial planners ... The financial planners typically had a background in either insurance or real estate sales …  As an alleged financial planning company, CSCC, dba Creative Financial Planners, contacted potential investors by conducting Creative Financial Planning seminars open to the public. Utilizing a slick presentation… CSCC attempted to lure investment capital out of savings accounts, home equity, insurance policies, and other conservative investment vehicles and into the speculative real estate ventures it controlled … At the seminars, CSCC offered to draft a ‘Coordinated Financial Plan’ for attendees at little or no charge. Individuals who accepted this offer received recommendations to purchase limited partnership or trust deed interests in CSCC controlled partnerships and project ....” Koehler v. Pulvers, 614 F. Supp. 829 (USDC, Cal, 1985).

Some state statutes also reflect the principle that if one “holds out” as a financial planner, fiduciary status should exist, although it remains unclear as to whether, and how, these statutes are actually enforced.  For example, in Maryland the statutes provide that ones who holds out as a financial planner is deemed to fall within the definition of investment adviser. {“An investment adviser means a person who, for compensation: (i) Engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities; or (ii) 1. Provides or offers to provide, directly or indirectly, financial and investment counseling or advice, on a group or individual basis; 2. Gathers information relating to investments, establishes financial goals and objectives, processes and analyzes the information gathered, and recommends a financial plan; or 3. Holds out as an investment adviser in any way, including indicating by advertisement, card, or letterhead, or in any other manner indicates that the person is, a financial or investment ‘planner’, ‘counselor’, ‘consultant’, or any other similar type of adviser or consultant.” Md. Code Ann., Corps. & Ass'ns § 11-101(h). [Emphasis added.]]  Of course, it would be wholly dysfunctional to think that a “certified financial planner™” would be excepted from these statutory requirements, which applies to a “financial planner” – simply because the word “certified” is utilized as a prefix thereto.

Lastly, and perhaps most importantly, I also referred, in my original blog post, to statements made by the SEC, cautioning on the use of advertisements and titles to denote a relationship of trust and confidence when none exists.

For example, in its 1940 Annual Report the U.S. Securities and Exchange Commission stated: “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.

The SEC also “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.

In summary, I don’t believe it is too much to request that the CFP Board not engage in advertising which may mislead the public.  Until such time as all CFP® certificants are held by the CFP Board to fiduciary status at all times when providing personalized investment and/or financial advice, the advertisements of the CFP Board suggesting a relationship of “trust” and that CFP® certificants act in the “best interests” of their clients could, as to some customers of some CFP® certificants®, be misleading.  Hence, these advertisements should be withdrawn (or modified with an appropriate disclaimer).  Right now, as it stands, the CFP Board’s advertisements are not always reflective of the reality of the engagement which actually ensues between the consumer and the “planner.”

Simply put, if the CFP Board promotes all CFP certificants as trusted advisors who put the clients’ best interests first and foremost, then the CFP Board should hold all of its certificants to the fiduciary standard.   If the CFP Board is going to talk the talk, then the CFP Board should walk the walk.

ON THE ISSUE OF “DETERMINING A FIDUCIARY RELATIONSHIP.”

Mr. Keller writes: “Rhoades mistakenly accuses CFP Board of placing a ‘huge emphasis on whether the financial planning engagement touches on more than one subject area.’  In actuality, the degree to which multiple financial planning subject areas are involved is just one of a number of factors the board considers in determining whether a CFP professional is in a fiduciary relationship.”

I find it hard to reconcile Mr. Keller’s statement with both the presentations I have seen (in CFP Board ethics courses in recent years), as well as the following language which I set forth in my previously blog.  This language is taken from the CFP Board’s own Q&A regarding its Standards:

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’?”

[Answer.]  “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.”

If Mr. Keller’s statement is more reflective of the current state of the CFP Board’s interpretation, then I urge the CFP Board to revise or withdraw the foregoing language from its Q&A document.

A CALL FOR THE CFP BOARD TO LEAD THE WAY.

I would ask of us all these questions:

 If our professional organizations do not voluntarily hold us to the fiduciary standard of conduct, what right to we have to request that it be imposed by legislators or regulators?  In other words, hHow can we approach policy leaders to insist on statutory or regulatory imposition of bona fide fiduciary standards without adopting the fiduciary standard ourselves?

Just as importantly, should our professional organizations lead us toward a true profession, or should we only seek to achieve such status when forced to by our regulators? 

As we seek to answer these questions, we must realize that the fiduciary standard is one of the hallmarks of a true profession.  Robert Kennedy, in his Sept. 2001 article, “The Professionalization of Work,” noted: “As a practical matter, we are willing to permit professionals a great deal of liberty as long as we believe that we can trust them to place the welfare of those they serve (clients, patients, students, and so on) ahead of their own interests, and to practice competently … This trust is sometimes betrayed by professionals, and the community is rightly skeptical of the power of those with special knowledge. This knowledge can be used to help or to harm, and often we do not discover which it will be until it is too late.”

Professor Kennedy goes on to discuss the service attribute of a true profession, stating: “[T]he true professional also professes service to others. That is, professionals publicly commit themselves to use their special knowledge principally to serve others and not primarily to serve themselves. This does not mean that professionals must be selfless in their practices. Quite the contrary, they may be well compensated in a variety of ways for what they do. However, their first concern in making decisions will always be the benefit to the person served, and only secondarily the consequences to themselves. Furthermore, they place themselves at the service not only of their friends and neighbors, but of strangers as well. They are public persons and so have an obligation to serve those in need, regardless of personal relationship.”

I urge us all to consider this reality, as well.  If CFP® become bound by the fiduciary standard of conduct at all times when providing financial or investment advice, then the demand for the services of CFP® certificants will soar.

I repeat my close from my earlier blog post: "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."

I now add that I further hope that the CFP Board’s leaders will not just seek to protect the CFP® mark, as to the number of certificants who utilize the mark. Should some certificants feel compelled to surrender their certification if a bona fide fiduciary standard is adopted for all those who utilize the mark “CFP®,” so be it.  We need to move forward to a true profession, and if this means that the number of CFP® certificants falls briefly, then so be it.

Rest assured, however, of the final result should the CFP Board move forward in the direction I (and many others) have proposed.  Within a short time of adopting a “fiduciary-all-the-time-when-providing-advice” standard for CFP® certificants, the consuming public (in large part due to the media attention such a move will garner, both initially and thereafter) will possess a much greater respect for CFP® certificants and flock in large numbers to seek out their services.  In turn this will lead to a far greater number of new CFP® certificants, in order to meet the substantially increased demand for fiduciary financial advice.

In short, moving forward is good for consumers, and it is likewise good for CFP professionals. Let us give this concept of "moving forward" our increased attention, and deliberate and careful consideration, in the weeks and months ahead.

Respectfully submitted.  Ron A. Rhoades, JD, CFP®