Thursday, November 6, 2014

Should We Rally Around the CFP Board's Rules of Conduct?

It is time to look for an appropriate marketplace solution to the problem that consumers do not know who they can trust. The essential problem is that Wall Street has captured the SEC, and that the SEC has over the past three decades essentially gutted the fiduciary standard under the Investment Advisers Act - by not applying it and by permitting investment advisers (especially dual registrants) to disclaim away their core fiduciary duty of loyalty. Of course, we know consumers don't understand these disclaimers ("disclosures"), nor the impact of the conflict-ridden practices which the SEC permits dual registrants to engage in.

[See my prior post for a detailed set of subordinate rules, underlying the five core fiduciary principles, which collectively set forth what amounts to a bona fide fiduciary standard.]

Given its size and resources, since my prior post some financial advisors have suggested to me that the Certified Financial Planner Board of Standards, Inc. is the best-positioned organization to effect a marketplace solution with a bona fide fiduciary standard. Yet, are the CFP Board's Rules of Conduct a true, bona fide fiduciary standard? And are the CFP Board's conduct standards applied at all times when personalized investment or financial planning advice is delivered?

By way of background, the CFP Board's rules state, in part: "1.4 A certificant shall at all times place the interest of the client ahead of his or her own. 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."

Not All CFPs are Fiduciaries: The Puzzle as to When "Financial Planning" Takes Place.

The CFP Board also goes on to describe when a "financial plan" is being undertaken in its Rules of Conduct. While, to its credit, the CFP Board takes the position that once fiduciary status is assumed the certificant remains a fiduciary throughout the financial planning relationship, there still appear to be instances in which the definition of "financial planning" is construed quite narrowly.

Many, including me, have expressed dismay at the CFP Board's interpretation of when "financial planning" exists. In essence, it appears to be a vague, multi-factor test which in my view has little basis in common law. Even worse, the CFP Board's application of the test is confusing to both certificants and advisors. I've listened several times to the CFP Board's webinars which directly address when "financial planning" takes place, and I come away each time befuddled (but not amused). I'm trained as a lawyer, a compliance officer, and I'm an academic - yet I cannot understand the fine lines which the CFP Board attempts to draw (or, perhaps, not draw) nor can I discern how they are founded in established principles of law, including the duty to avoid fraudulent representations found in all commercial transactions.

Should not, as well, the mere holding out as an expert advisor evoke fiduciary status? Should not the use of the term "Certified Financial Planner" automatically result in fiduciary status, at all times when providing any financial advice (including any investment advice)? (See my prior blog post for detail as to when "advice" is provided - I encourage the adoption of Harold Evensky's "you" test.) Otherwise, as others have written, does not the use of a term or title which denotes a relationship of trust and confidence, when none exists, result in a "bait-and-switch" and become tantamount to fraud?

Does the CFP Board Believe That Disclosure of a Conflict of Interest is All That is Required?

I firmly believe that the core fiduciary duty of loyalty cannot be waived. Even the "contractualists" (of fiduciary law theory) seem to agree with this general proposition. This is why the fiduciary duty of loyalty requires, even after disclosure occurs, that informed consent of the client occur, and even then that the transaction be fundamentally fair to the client.

In other words, courts refuse to believe that clients would consent to be harmed. At least that is not "informed" consent. (Unless, of course, you believe that clients are gratuitous, and like to gift extra fees to their fiduciary advisors to their own detriment.) Also, courts require that even with disclosure and informed consent, the transaction be and remain substantively fair to the client. If the client does not receive advice which is in the client's best interest, by reason of subordination of the client's interest to the desire of the advisor for more compensation, then such advice is not substantively fair.

In other words, disclosure of a conflict of interest does not negate the ongoing duty of the advisor to keep the client's best interests paramount, and to not subordinate the client's interests to those of the advisor or his or her firm.

But is this the way the CFP Board actually enforces its Rules of Conduct? I note the following excerpt from Bob Veres' Sept. 9, 2014 article, appearing in AdvisorPerspectives, entitled: "What is 'Fee-Only?' Is the CFP Board Taking the Right Approach to Defining It?"

"[U]nder the trees at [the FPA] Retreat, [Rick] Kahler says he posed this fiduciary enforcement question to [Michael] Shaw [General Counsel of the CFP Board], who happens to be a former Northwestern Mutual life agent and NASD (now FINRA) staff attorney in an organization whose primary mission was (and is) to regulate sales activities.  'His answer,' says Kahler, 'was: Rick, if I enforced the fiduciary standard on life insurance agents, I would put insurance companies out of business. I found myself wondering:  who are they supposed to be protecting, the insurance companies or the public? Later he told me: I just can’t get into hair-splitting on what fiduciary is or isn’t. In some cases, those high-fee commission products may have been appropriate. My basic concern is that they disclose compensation.  If they have disclosed compensation, they have fulfilled their fiduciary obligation.' (Another participant in this under-the-trees conversation confirmed to me the accuracy of Kahler’s portrayal of it.  Shaw categorically denies that he said this, though he does say that the general subject of 'fiduciary' was raised.)" [Emphasis added.]

I hope that this position - that mere disclosure of compensation equates to proper management of the conflicts of interest that compensation arrangements often create - is NOT the position of the CFP Board.

Yet, the CFP Board's Rules of Conduct, though progressive at the time they were re-proposed in 2006 and adopted in 2007, appear strikingly bare in describing the parameters of the fiduciary duties of the certificant. This leaves the door wide open for various misinterpretations.

I served as Reporter for the Financial Planning Association's Fiduciary Task Force in 2006-7, which issued a lengthy report. Since the time of that report, in large part due to the ongoing legislative and regulatory debates about whether to apply the fiduciary standard (by rule) to brokers who provide personalized investment advice, we now possess a much greater understanding of what the fiduciary standard is all about, and what it requires. In essence, the CFP Board's 2007 Rules of Conduct are now outdated, and require revision.

Should We "Rally Around" the CFP Certification? Should the FPA?

Michael Kitces alludes to the "rallying" cry around the CFP Board's marks, in a fairly recent blog post (Could The FPA’s Waning Power Given Its Declining Market Share Of CFP Certificants Lead To Its Untimely Demise? - A response from the FPA occurred, followed by a response from Michael (both found at

Further commentary thereon has been provided by Bob Clark (Should the FPA Get Behind the CFP Board, or Go It Alone? ThinkAdvisor Also see Bob's more recent post:

While the discussion involves many aspects of the history of the Financial Planning Association and its relationship with the CFP Board, I believe the focus of any discussion by other industry organizations (FPA, NAPFA, and perhaps others) should be simply this: Are the CFP Board's Rules of Professional Conduct, as written and as applied and as enforced, sufficient to constitute a bona fide fiduciary standard, thereby entitling consumers to look toward all CFP Board's certificants as THE source of trusted, objective, expert (and fiduciary) advice?

In Search of the Marketplace Solution.

As I related in my prior blog post, a recent survey demonstrated that many consumers do not use financial advisors, of any kind, because they don't know if they can trust any of them.

I would prefer that the SEC reverse its policies of the last few decades and draw a meaningful and sensical line between sales and advice, and prohibit the use of titles which denote relationships of trust and confidence by "pretend advisors" who do not abide by, or disclaim away, the fiduciary duty of loyalty. Yet, given the substantial influence by Wall Street over the SEC, I doubt this is possible, in the current political climate. Especially given the influence by Wall Street over Congress, which in turn exerts its own influence on the SEC.

Hence, we must come up with a marketplace solution. I ask again - is the CFP Board the solution, around which we should all rally? I cannot at this time bring myself to that conclusion, as the CFP Board's application of its fiduciary standard seems to be hole-ridden and weak. Without a substantial revision of its standards, these discrepancies will continue to exist.

As a profession, we must ask - WHO DO WE SERVE? Many a jurist has opined that a fiduciary cannot serve two masters. If we truly serve clients, as their trusted advisors, we must embrace fiduciary standards under which that trust cannot be betrayed by particular exceptions or by the non-application of the standards to the delivery of professional advice.

The Financial Planning Association long ago embraced the CFP mark as the mark of the "profession." Yet, as the Financial Planning Association has apparently moved over the past 15 years or so toward greater service to the public and the embrace of fiduciary standards, over the past several years the CFP Board has seemingly moved in the opposite direction. The CFP Board has possessed significant targets for expansion of its number of certificants. Many have suggested that this broader base of certificants includes many who are primarily engaged in insurance and security sales, not the delivery of advice. And commentators have opined that many large broker-dealer firms and insurance companies have embraced the CFP Board, yet have also pressured the CFP Board to not apply or enforce its fiduciary standards.

This has placed the Financial Planning Association in a difficult position. Even though the FPA split off its brokers into a different organization many years ago, and then the FPA put its resources into defeating the SEC's ill-advised "fee-based accounts" rule, the FPA's past embrace of the CFP mark may not now be appropriate, given the CFP Board's evolution over the past several years.

I can hear the rebuttals already. Organizations might be inclined to reply that they continue to support the fiduciary standard as found in the Advisers Act. Yet, as I've stated previously, that Advisers Act's fiduciary standard has itself been eviscerated by the SEC, either expressly (through particular exceptions) or through de facto rule making via non-enforcement. As a profession we should not calibrate our standards to the weak standards of a regulator, but rather we should adopt a standard which justifies the placement of trust and confidence by consumers in the members of our profession.

Hence, I would ask the following of any organization which seeks to reply ... Would you agree that your members (or certificants, or designees) should all sign the "Fiduciary Oath" (as promulgated by The Committee for the Fiduciary Standard, and as re-printed in my previously blog post)? And, just as importantly, would you also agree that the 18 specific principles (or rules) I set forth in my previous blog post are firmly entrenched in your own standards? Would you be willing to adopt, in writing, those specific standards - for the benefit of both advisors (to ensure their understanding of the bona fide fiduciary standard) and for the benefit of the consumers they serve?

(In essence, I request that your organization does not reply with mere talking points and flowery general statements. If you choose to reply, be very clear and state whether your organization believes in, applies, and enforces the bona fide fiduciary standard I previously set forth.)

In a larger view, this is an old question that has haunted the "profession" since its inception (with sales roots) - are we, today, "advisors" or are we "salespersons"?

Only if we become bona fide fiduciaries will we be deserving of the trust and confidence of the public, and all of our clients. Until then, consumers won't trust us. Our profession will not achieve status as a "true profession" serving the public interest if we possess members who eschew bona fide fiduciary standards. Nor will we deserve legislative recognition as a profession. In short, the distrust which so many consumers possess of all "financial advisors" and "financial planners" may continue to occur, and be justified, at least at the professional organization level. Of course, this affects all of us.

I ask again ... what organization (non-profit or profit), or set of standards, deserves to be rallied around as a foundation for a true profession?

A related question arises, as we seek to move forward in the development of a true profession in which each of member of the profession is deserving of the trust and confidence of consumers (through adherence to bona fide fiduciary standards) ... What organizations, due to the weakness of their standards or inappropriate non-application of their standards, risk becoming irrelevant?

UPDATE: 12/4/2014: Bob Clark opines on one of my recent blog posts: Why Aren’t CFPs Always Subject to a Fiduciary Standard?


  1. If you are concerned with being lumped in with people the public doesn't trust, why do you want to bring so many that the public doesn't trust into similar standing with you? The market solution is NAPFA. Embrace that, not regulation. I had a prospect yesterday seeking a fiduciary. Those that have a desire to have a fiduciary are finding them. Not as quickly as many would like, however, nothing changes over years. It takes a generation.

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