Part 6 of a Series on the Regulation of Financial and Investment Advice, and on the Emerging Profession
Part VI: A Wish List for an Accelerated Path toward a True Profession
We must plan strategically for a profession of personal financial and investment advisers, if we desire to take advantage of the opportunities that may arise to move in that direction. Many actions are needed – and you can contribute to these efforts.
By Ron A. Rhoades
Imagining a True Profession
A strong ethical foundation. A recognized body of knowledge, acquired by the practitioner and applied expertly to benefit the client. And the view that collectively we exist to serve not just the interests of our clients, but the wider interests of society at large. These are the foundations for a true profession.
When I imagine a true profession for personal financial advisers, I begin with a bona fide fiduciary standard. One in which the client’s best interests remain paramount at all times. Where most conflicts of interest are avoided. And where the remaining conflicts of interest are properly managed.
And I envision that all personal financial advisers should be, and will become, experts. Armed with the foundational body of knowledge we have come to know as the Certified Financial Planner™ curriculum. And striving toward ever-higher levels of expertise via tough-to-obtain specializations.
FINRA and Other Challenges
Yet, imagining this vision of the future is not enough to make it happen. Indeed, many forces exist that would deny any true profession from coming into assistance.
For example, FINRA has long sought to both regulate investment advisers, while seeking to limit the application of the fiduciary standard of conduct to both financial planning and investment advisory activities.
As I’ve alluded to in prior articles in this series, Wall Street lobbyists and their lawyers – what we may term the “securities bar” – promote limited fiduciary duties that lie far below that of the classical understanding of the fiduciary standard of conduct.
The revolving door at the S.E.C. has, to any casual observer of the inexplicably weak rules the Commission has recently proposed, resulted in what can only be considered “regulatory capture” of the agency by the broker-dealer community – at least at the very highest levels.
Commercial interests dominate the current public discourse, with huge amounts of money going into Congressional coffers. In many of the visits I (and many other fiduciary advocates) make to Capitol Hill, to promote fiduciary standards and common-sense reforms, we are often welcomed with the comment that for each visit pro-fiduciary and consumer advocates undertake, 20 visits are made from professional lobbyists hired by broker-dealer firms, insurance companies, asset managers, and their many lobbying organizations.
The opponents are many, and they are strong. But victory is not only possible, but probable. For truth and righteousness underpin our efforts to create a true profession.
The Fiduciary Advocacy Movement Builds
A decade ago advocacy surrounding the fiduciary standard was in its infancy, with only a few consumer groups and investment adviser organizations promoting it – often through individual visits lacking any coordination with each other. Then came the Great Financial Crisis, consideration of legislation that became the Dodd Frank Act, and the U.S. Department of Labor “Conflicts of Interest” and related rules. While setbacks have recently occurred in the courts and at the S.E.C., there exists a continued focus by these many organizations and their members on the need to expand the application of the fiduciary standard to all providers of financial and investment advice.
In fact, there exist nearly 100 consumer, financial planning, and investment adviser organizations who actively support the correct application of fiduciary standards. And, most importantly – they often work together to support issues involving the proper regulation of investment and financial advice, and to foster rules that will assist Americans in gaining greater retirement security.
A prime example of leadership can be found in the Certified Financial Planner Board of Standards, Inc.’s adoption of its “Fiduciary At All Times” new Code of Ethics and Standards of Conduct, effective October 1, 2019. In addition, the Investment Adviser Association, the National Association of Personal Financial Advisers (NAPFA), and the Financial Planning Association have all long advocated for fiduciary standards of conduct, devoting their resources to this activity.
Other professional groups promote and advocate for higher standards of conduct, such as the CFA Institute, the AICPA’s Personal Financial Planning division, the XY Planning Network, the Garrett Planning Network, the Alliance for Comprehensive Planners, The Committee for the Fiduciary Standard, and The Institute for the Fiduciary Standard. And consumer groups, led by the Consumer Federation of America, AARP, Better Markets, Americans for Financial Reform, the Public Investors Arbitration Bar Association ("PIABA"), and many, many others, support the principles of the fiduciary standard and their application for the benefit of all Americans, as well as the economic future of America itself.
Peer Review, State-Level CE, National Standards of Conduct, and Simplified Registrations
Yet, there exists a greater need to think, and to act, strategically. To be more proactive, rather than reactive. To be ready with proposals for legislation and rule-making at both the federal and state levels, in order to seize opportunities when they arise.
To this end, we must envision the “end game” – i.e., what the landscape would look like if we were successful in achieving a true profession. Yet, in creating and adopting such a vision, we must be realistic. What we may believe is ideal – for example, one national professional regulatory organization that establishes uniform, nationwide rules and requires but one registration for personal financial and investment advisers – is likely not in our future. We are not dealing with a blank slate, but rather with established federal and state regulators that will resist far-reaching new structures that would completely replace the status quo.
This leads me to think of what attributes we would like to see in “professional regulation.” These might include peer review, enhanced testing for entry into the profession, minimal educational standards including a four-year college degree, restrictions on the use of titles, a common set of professional standards of conduct, and continuing education requirements.
Peer review might be defined as “an organized effort whereby practicing professionals review the quality and appropriateness of services performed by their professional peers.” Peer review can be proactive in nature, such as that which exists for CPAs who perform audits, with the goal of increasing professional competence and adherence to standards. Or it can be reactive, such as might exist in disciplinary proceedings.
For this latter purpose, peer review might exist at two major points in a disciplinary proceeding against a professional personal financial/investment adviser. First, there may exist a “probable cause panel,” to ascertain whether a further investigation of an adviser’s activities is warranted, after a complaint is received. And peer review may exist as a means of final adjudication (subject to certain rights of appeal) of whether the adviser’s conduct violates professional standards of conduct.
In my view, both of these instances of peer review should be part of any profession we possess. We need to have our fellow professionals evaluate our conduct, rather than administrative law judges who may not fully understand what we actually do as professionals and the standards we strive to live by.
Another area in which professional involvement is altogether necessary and appropriate is the provision of continuing education. The delivery of personal financial advice requires, in most (but not all) instances, the attainment of a body of knowledge that is both very wide and very deep. And, that body of knowledge – as well all are well aware – often changes, with new laws (especially tax law changes), new types of products, and new investment strategies and planning techniques appearing often. In addition, variation in laws and regulations often occurs at the state level – with different income and transfer tax state and local laws, variations in consumer protection laws, different estate planning and estate/trust administration laws and procedures, distinct laws affecting asset protection techniques for both residents and non-residents, and much more.
I hope you see where there is leading. Due to the geographic dispersion of personal financial and investment advisers across the United States and its territories, the desire for peer review, and the need for state-specific continuing education, there exists the need to establish structures for the profession that lie, in part, at the state level.
Given the existence of state securities administrators (or the assumption of their functions in some states by state attorneys general or other agencies) in all 50 states, our longstanding principles of federalism, blue sky laws that go back to far before the enactment of the major securities laws of the 1930’s, and the focus of insurance market conduct regulation at the state level, it further makes sense to seek to append peer review onto existing state structures. State securities administrators, in particular, may welcome state legislation or regulation that provides them with expert assistance in evaluating the conduct of investment advisers and (in some states at present) financial planners, via a peer review process.
I can hear the chorus of those who seek one national professional regulatory organization, instead. Yet, I don’t believe such is achievable – at least not totally. We may be able to achieve certain functions of a national professional organization, however.
For example, it might be possible to have a “National Board of Standards” (similar, in some respects, to the Financial Accounting Standards Board) adopt professional standards of conduct (subject to input from state securities administrators, and subject to approval by the U.S. Securities and Exchange Commission.
Even then, however, states would be free to adopt higher standards (although, if a bona fide fiduciary standard of conduct is adopted, the impetus of the states to adopt higher standards is dramatically reduced). I, for one, am not willing to forestall a state’s ability to combat fraud upon its citizens. The importance of this, as a means of creating “regulatory competition” and avoiding “regulatory capture” cannot be overstated. For example, just recently we have seen the states begin to step up to the table with proposals to apply a fiduciary standard of conduct to the delivery of investment advice, as the S.E.C. has sought to eviscerate the distinctions between brokers and investment advisers.
We can also seek national legislation permitting registration of personal financial/investment adviser firms and their advisers in one state (i.e., the state of their primary office, or residence), with much simplified (and less expensive to undertake) “notice” filings to the other states. In essence, we can obtain many of the benefits of a national professional regulatory scheme, while maintaining the benefits obtained through peer review dispersed among the 50 states.
The Legal Battles
Another specific area some of our members may undertake contributions toward is legal research and advocacy as to what the law is, and should be, surrounding the fiduciary standard of conduct and its application. There are powerful forces that exist which seek to weaken fiduciary duties, and which seek to ensure that they are never correctly applied to the delivery of financial and investment advice. These forces need to be better countered via the development of sound legal reasoning to further underpin the application of the classical fiduciary standard of conduct upon financial and investment advisory activities.
Hence, we need to organize better to examine in detail the legal issues which have arisen. Our activities might include, but are not limited to, exploring the legal issues and concepts set forth below, and preparing legal memoranda to support the correct view. These issues include:
- Whether the classical fiduciary standard of conduct does, indeed, apply under the Advisers Act and under state common law, including the duties of no conflict, no profit, and undivided loyalty.
- Whether SEC vs. Capital Gainsdoes not, as some in the securities bar currently opine, hold that disclosure is all that is required when a conflict of interest is present.
- Whether estoppel and waiver possess limited application when fiduciary duties exist for investment/financial advisors (in contrast to the SEC’s apparent view on this point).
- Whether fiduciary status should be found for a broker, under state common law, who holds out as an “investment adviser” or any similar terms (i.e., any use of the adjectives “wealth,” “financial,” “investment,” etc. in conjunction with the nouns “planner,” “advisor,” “adviser,” “consultant,” or similar terms, or who advertises (or whose firm advertises) in a manner suggesting that a relationship of trust and confidence exists.
- Whether fiduciary status should be found when a broker promotes or advertises, in any fashion, that the broker acts in the “best interests” or “sole interests” or “interests” of the customer, or that a “client’s interests come first,” or “our brokers are committed to putting your investment needs and/or wants first”; or similar language, or when the broker promotes “financial advice” or “investment advice” as its service offering.
- Whether “special compensation” exists via the receipt of 12b-1 fees, or other continuing (other than de minimus) compensation paid to a broker over the course of a relationship with a customer.
- Whenever, when a dual registrant is in a fiduciary relationship with a customer as to one account, that fiduciary status extends to the entirety of the relationship between the dual registrant and the customer, and whether any switch from a fiduciary to a non-fiduciary relationship should be permitted only when such change is desired by the client and would be clearly beneficial for the client, given all of the facts and circumstances existing at the time.
- Whether to adopt an elicitation of the fiduciary standards of due care, loyalty, and utmost good faith, under state common law, that could be and should be applied when common law actions are brought for breach of fiduciary duties.
- Whether to, and how best to, educate policymakers on the limited effectiveness of disclosure as a means of consumer protection in the financial/investment advice field.
Earning the Right to Be a Profession: Efforts by Our Associations
All of us must also accelerate our efforts to earn the right to become a profession. This requires actions on many fronts.
For example, to pave the way for state-level peer review, our professional financial planning and/or investment adviser organizations may desire to form state-level entities, or at least state-wide chapters or councils. Such councils could engage in discussions with state lawmakers and regulators, with the goal of aiding in the addition of peer review upon existing regulatory structures. (Not always would peer review exist. For example, cases of outright fraud – such as theft of client funds, the sale of non-registered securities, etc. – probably don’t require peer review.) In addition, statewide councils could seek out educational programming specific to the laws of that state.
The CFP Board, with its new (effective 10/1/2019) Code of Ethics and Standards of Professional Conduct, and with its already well-formulated and established disciplinary procedures and processes, can take actions to further support the establishment of a profession. For example, peer review disciplinary proceedings might be structured at the state-wide level (or, in the interim, within various regions), to foster ease by CFP® professionals in attending disciplinary proceedings. Probable cause hearings could also be implemented, which may serve to reduce the actual number of full-fledged disciplinary proceedings. At the national level, the CFP Board can accumulate, organize, annotate, publish and then update a body of “case law” that reveal how the CFP Board’s new Standards of Conduct are applied, for the education of all personal financial advisors. And the CFP Board, together with other organizations, can continue to work to foster the academic body of knowledge that provides the foundation for any discipline.
The Financial Planning Association, perhaps in alignment with NAPFA, the AICPA/PFP, and the CFA Institute, may find a way to establish state-wide councils to foster continuing education that is state-specific. Such councils could also serve to provide support to, and connections with, policy makers in state legislatures and state agencies. While separately chartered state-wide organizations of personal financial advisors may be preferred, as an interim measure and for purposes of efficient operation more informal state-wide councils could exist, falling within the legal umbrella of one of the existing national organizations.
Lastly, we must strive to always improve upon the quality of the continuing education for personal financial and investment advisers. We should advocate for minimum CE standards for investment advisers. We must also substantially raise the standards for our own due diligence with respect to investment strategies, investment products, and the management of investment portfolios. Each and everyone one of us must strive to attain higher levels of knowledge and expertise, as we seek to earn the right to be called, collectively, a true profession.
Efforts by Individuals - They Matter a Great Deal
There are hundreds, and indeed thousands, of individuals who currently participate in advancing this emerging profession. However, we need to take our efforts to “the next level.” We need to oppose those who seek to weaken our standards – by “taking the gloves off.” We need to possess a collective vision for where we desire to be, and then work even harder to achieve that vision, in order to seize upon the future opportunities that will arise.
Each and every individual who cares about the future of our profession should utilize their own personal strengths – whether they lie in organizational leadership, education, advocacy, writing, media communications, or otherwise – to contribute to the accomplishment of a true profession. Contemplate how you can contribute – to your local chapter or society or study group, to your statewide organizations, and/or to your national organizations and their many committees and task forces. Find the way to increase your supporting efforts and activities during this coming year.
Acting together, with a common purpose, we can accelerate this vision coming true. For the sake of our fellow professionals. For the benefit of our clients. For the improvement of American society, improved capital formation and accumulation, and to foster U.S. economic growth. We can achieve a true profession of personal financial and investment advisers – for the benefit of America.
Ron A. Rhoades, JD, CFP® is the Director of the Personal Financial Planning Program at Western Kentucky University’s Gordon Ford College of Business. A professor of finance, tax and estate planning attorney, investment adviser, and Certified Financial Planner™, he has long written about application of fiduciary law as the delivery of financial planning and investment advice. This article represents his personal views, and are not necessarily the views of any institution, organization, nor firm with whom he may be associated.