CFPs to Become "F.A.A.T."? - "Fiduciaries At All Times"

ALL POSTS PRIOR TO 2021 HAVE NOT BEEN REVIEWED NOR APPROVED BY ANY FIRM OR INSTITUTION, AND REFLECT ONLY THE PERSONAL VIEWS OF THE AUTHOR.

(An earlier version of this blog post can be found at RIABiz.)

In a dramatic evolution that is certain to reverberate throughout the financial services industry, the Certified Financial Planner Board of Standards, Inc. released on June 20, 2017 its proposed revised “Code of Ethics and Standards of Conduct” that, essentially, would require all CFP® certificants to be “fiduciaries at all times.”

There is certain to be heavy pushback upon this proposal, especially by insurance companies. However, I believe it is likely that the CFP Board’s proposal is likely to proceed to implementation given recent developments.

Why? Momentum.

For example, on June 9th the U.S. Department of Labor in implemented its “best interest” standard for IRA accounts with a fairly strict duty of loyalty and the application of the prudent investor rule.

In addition, increased support for fiduciary standards at the state level exists (including their recent adoption in Nevada for all financial planners - except insurance agents who don't "hold out" as financial planners).

Also, the Financial Planning Coalition (which includes the CFP Board, the Financial Planning Association, and the National Association of Personal Financial Advisors) have long supported SEC adoption of fiduciary standards for all those providing personalized investment advice.

The June 20th proposal by the CFP Board is likely to be viewed as a significant step in the path toward a true profession for investment and financial advisers.

With the CFP Board engaging in the seventh year of its public awareness campaign, the recognition of the Certified Financial Planner™ certification by the public has grown tremendously and far outpaces the recognition of competing designations.

The vast majority of the over 77,000 professionals licensed to use the CFP Board’s marks in the United States will likely strongly support the adoption of the “fiduciary at all times” standards, given that their adoption will likely further the trust and confidence placed by consumers in Certified Financial Planners™. In turn, this will lead to even greater utilization of financial advisors, which numerous studies have shown is altogether necessary in order for individual Americans to navigate today’s increasingly complex financial world.

While some insurance companies and a few broker-dealer firms may resist the new proposals, should such firms not permit the continued use of the marks by their advisers these firms possess huge risks. Given the substantial educational and experience qualifications required of certificants, together with passage of the difficult CFP® exam, insurance agents and registered representatives may choose to exit firms that do not follow the CFP Board’s lead. Moreover, advisers at such a firm would be at a significant marketing disadvantage.

The 60-day comment period on the CFP Board’s proposal begins today and ends of on Monday, August 21, 2017. Public forums will then be held in eight cities during late July. A final version of the revised Code of Ethics and Standards of Conduct is likely by year-end, with an implementation date sometime in 2018.

Understanding One's Fiduciary Obligations.

It is one thing to say "I am a fiduciary." It is altogether another to fully understand the obligations assumed as a result. The difficulty is even greater given the different fiduciary standards that exist - from ERISA's "sole interests" standard, to the DOL's B.I.C.E. and its "best interests" standard (and the impartial conduct standards found therein), to the Advisers Act fiduciary standard (as applied by the SEC), to state statutory and common law standards, and now the CFP Board's standards.

The challenge for us, as a profession, as we further study the language of the CFP Board's standards, is to more fully understand the implications of the fiduciary standard, come together on how to correctly apply the fiduciary standard of conduct to various common situations that financial and investment advisers face.

In so doing, we must endeavor to not create - as the late Justice Benjamin Cardoza so aptly stated some 89 years ago, "particular exceptions" that would result in a "disintegrating erosion" of the fiduciary principle.

Ron A. Rhoades, JD, CFP® serves as Program Director of the Financial Planning Program at Western Kentucky University. He is a frequent commentator and speaker on the application of fiduciary standards to investment and financial advice. This article represents his own views and are not necessarily those of any institution or organization with whom he may be affiliated.

ADDENDUM: EXCERPTS FROM PROPOSED CFP BOARD'S STANDARDS

The broad application of fiduciary duties can be found in Paragraph D.1. of the CFP Board’s proposed Standards of Conduct, which provides in pertinent part:

1. A CFP® professional shall at all times serve as a fiduciary when providing financial advice to a Client. As a fiduciary, a CFP® professional must always act in the best interest of the Client. In this regard:

     a. Duty of Care. A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise based on the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.

     b. Duty of Loyalty. A CFP® professional shall place the Client’s interest above the interest of the CFP® professional and the CFP® professional’s firm. A CFP® professional must seek to avoid conflicts of interest. Material conflicts of interest that are not avoided must be disclosed and managed. A CFP® professional must act without regard to the financial or other interests of the CFP® professional, the CFP® professional’s firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a conflict of interest continues to have a duty to act in the best interest of the Client and place the Client’s interest above the CFP® professional’s.

In the Terminology section of the proposal, the CFP Board provides the following all-inclusive definition of “Financial Advice”:

   (a) A communication, based on the financial needs of a Client, that based on its content, context, and presentation, would reasonably be viewed as a suggestion that the Client engage in or refrain from taking a particular course of action with respect to:
       1. the development or implementation of a financial plan addressing retirement, insurance, taxes, education, employee benefits, estate planning, charitable giving, or other financial matters;
       2. the value of or the advisability of investing in, purchasing, holding, or selling Financial Assets;
       3. investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters;

       4. the selection and retention of other persons to provide financial or professional services to the Client ….