CFP Board Begins The Process Of Updating Its Fiduciary Standards of Professional Conduct

CFP Board Commission On Standards To Revise The CFP Standards of Professional Conduct

Last December, the CFP Board announced that it was forming a Commission on Standards – a new 12-person committee, with diverse representation across large firms and small, broker-dealers and RIAs, NAPFA and insurance companies, and even a consumer advocate, to be led by former CFP Board chair Ray Ferrara.

The purpose of this new group will be to update the CFP Board’s Standards of Professional Conduct, which includes assessing potential changes across four key sections:

- Code of Ethics and Professional Responsibility: The 7 core ethical principles to which all CFP certificants should aspire, including Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, and Diligence

- Rules of Conduct: The specific rules by which the conduct of CFP professionals will be evaluated, including a CFP certificant’s obligations to define the client relationship, disclose conflicts to the client, protect client information, and the overall duty of conduct of the CFP certificant to the client, to employers, and to the CFP Board itself.

- Financial Planning Practice Standards: The standards that the CFP certificant should follow that define what financial planning “is” and how the 6-step financial planning process itself should be delivered.

- Terminology: The definitions of key terms used in the Standards of Professional Conduct, from what constitutes a “financial planning engagement” to what it means to be a “fiduciary” and the definition of “fee-only” and what is considered “compensation” to be disclosed.

Notably, the updating process itself is simply part of a periodic review that the CFP Board conducts – the last round of updates were adopted by the CFP Board back in mid-2007, with an effective date of July 1, 2008 and an enforcement date of January 1, 2009. Changes the last time around included refinements to the definitions of the Code of Ethics principles, the separation of the Rules of Conduct from the Financial Planning Standards themselves, and the implementation of a fiduciary duty for CFP certificants doing financial planning or material elements of financial planning with clients, along with updates to the terminology to define “fiduciary” as it pertains to financial planning.

At this point, the CFP Board has not (at least publicly) set any specific agenda for what is expected to be changed in the process of updating the Standards of Professional Conduct, though it will almost certainly encompass recent controversial areas, like the CFP Board’s “fee-only” compensation definitions. And in fact, it’s possible nothing substantive will be altered.

Nonetheless, as financial planning continues to evolve towards a profession, and more generally the industry environment in which financial planning is delivered continues to change, there are several parts of the Standards of Professional Conduct that seem ripe for changes and improvement.

Correcting “Fee-Only” And Making Compensation Definitions Meaningful Again

Without a doubt, the most publicly “controversial” aspect of the CFP Board’s Standards of Professional Conduct in recent years has been their rules for compensation disclosure, including their definition of “fee-only”, over which the CFP Board found itself embroiled in a lawsuit for almost two years with CFP certificants Jeff and Kim Camarda. And with the CFP Board’s victory in the lawsuit last summer (although the Camardas are still pursuing an appeal), the time is ripe to fix widely criticized ambiguities and alleged inconsistencies in how CFP Board has been applying its rules.

The primary issue at hand is how the CFP Board defines what constitutes “compensation” itself, for the purposes of disclosure. The Terminology section of the Standards themselves define the term “compensation” as “any non-trivial economic benefit, whether monetary or non-monetary, that a certificant or related party receives or is entitled to receive for providing professional activities.”

This definition may seem relatively straightforward to apply. It stipulates that a CFP certificant, in disclosing compensation, must include not only fees and/or commissions paid directly to the advisor, but also paid indirectly to a related party as compensation for the advisor’s professional activities.

In the case of Camarda, clients were being engaged by one of Camarda’s businesses on a “fee-only” basis but were then being referred to a related-party entity (also owned by the Camardas) to implement insurance products for a commission. In this context, the CFP Board (correctly, I believe) declared that this was an inappropriate use of the “fee-only” label since the Camardas were not only being compensated by fees but also by insurance commissions through the related entity.

The problem with the CFP Board’s compensation definition actually began in a separate case in late 2012 against former CFP Board Chair Alan Goldfarb, who was ultimately declared to be in violation of the CFP Board’s Standards of Professional Conduct for calling himself “fee-only” while also having a (small) ownership interest in a broker-dealer to which clients could potentially pay a commission. The distinction, however, was that while Camarda’s clients were clearly doing business with both their “fee-only” firm and their related insurance entity, there was never any public information that Goldfarb’s clients ever actually did business with the “related” broker-dealer. In fact, Goldfarb’s involvement was merely in an oversight capacity (he wasn’t acting as a “broker” for the firm), and the primary purpose of the broker-dealer was not to sell commission-based products at all, but to help facilitate small business purchase/sale transactions for the clients that worked with his parent-company accounting firm. In other words, while Goldfarb had a relationship to a broker-dealer that conceivably could have done commission-based business with his clients, it appears that none of his clients actually did so; thus, in practice, Goldfarb was publicly admonished for failing to disclose commissions that had never even been paid because they didn’t actually exist.

Notwithstanding this problematic scenario – where a CFP certificant was disciplined for failing to disclose commissions that had never actually even occurred – the CFP Board insisted that CFP certificants should be required to disclose not only the compensation they are actually paid, but any conceivable compensation that could be paid even if there was no plan or intention to do so (nor any evidence it ever occurred). In the summer of 2013, the CFP Board doubled down on this problematic approach and issued a Notice to CFP Professionals affirming this requirement to disclose compensation even if it didn’t actually exist, despite a warning (first issued on this blog) that such a requirement would mean that any/every CFP certificant affiliated with a broker-dealer, insurance company, or even bank or holding company, would automatically run afoul of being “fee-only” (even if there was proof that 100% of clients paid only 100% in fees). Sure enough, just a few months later, Financial Planning magazine investigated the matter further, and documented 468 wirehouse brokers in violation of the “fee-only” rule, despite any actual evidence that their clients were paying commissions.

Of course, in any situation where clients actually do pay both fees to the advisor, and commissions (either to the advisor, or a related party/entity), the advisor should absolutely be required to disclose his/her compensation as both “commission and fees”. The issue at hand is that under the CFP Board’s interpretation of its current rules, a CFP certificant is required to disclose “commission compensation” even when there is no intention to collect such compensation, nor any proof that it has or will ever occur. This is akin to requiring someone who merely owns a gun to confess to murder, even without any evidence of an intent to commit murder nor any proof the gun has ever been fired.

And more generally, the requirement to disclose “commissions” merely due to the fact that the advisor, or a company the advisor works for, has some related entity in its network that could hypothetically generate a commission (even if there’s no intent to do so or proof it has occurred), renders such compensation disclosure virtually meaningless altogether – as it literally means that two advisors, one who receives 99% in commission compensation, and the other who receives 0% in commission compensation (but works for a large financial services organization with related entities), will provide the same “commission-and-fee” compensation disclosure to clients, despite having radical differences in actual compensation.

Notwithstanding all of these difficulties, though, it turns out that the solution for the CFP Board’s compensation disclosure woes is actually rather straightforward: CFP certificants should simply be required to disclose only the compensation that clients will actually pay in the first place. If a client really does pay both fees and commissions (to the advisor or related entities), and the advisor failed to disclose those compensation sources, the CFP certificant has failed in his/her disclosure requirements. However, in situations where clients really only pay fees (to the advisor and/or any related parties), the advisor should legitimately be able to call themselves “fee-only” to reflect the reality of the client engagement (regardless of the parent company or platform they happen to work for)!

Fiduciary CFP Certificants: Doing Vs Being

While fiduciary advocates lauded the CFP Board for incorporating a fiduciary obligation to clients in its 2008 changes to the Rules of Conduct, a notable caveat of the fiduciary rule for CFP certificants is that it only applies if the CFP professional is actually doing financial planning, or material elements of financial planning. The mere fact that someone is a CFP certificant does not automatically create a fiduciary obligation to clients.

Of course, to the extent that a CFP certificant would typically “do” financial planning anyway, this limitation to the scope of a fiduciary duty is not necessarily problematic. And in point of fact, it’s not without precedent in other professions either. For instance, doctors take a Hippocratic Oath to uphold the ethics of the medical profession… which applies when they actually practice medicine. Lawyers have a code of professional responsibility which includes a fiduciary duty to their clients, but it legally only applies when the lawyer is actually engaged by a client as a lawyer. A doctor or a lawyer would not be expected to provide a fiduciary duty to the patient/client outside the scope of their professional duties – for instance, if I buy the doctor’s car in a private transaction, or am playing tennis with a lawyer.

However, the complicating factor in the context of CFP certificants is that at least with other professionals, it’s clear when an interaction is happening outside of the professional scope. With CFP certificants, the line is far more blurry, because a CFP may engage with a client in the financial services industry in a manner where the client believes the CFP is doing financial planning, even if the CFP is merely selling a financial services product.

For instance, a CFP certificant who operates solely as an insurance salesperson and just “takes an order” from a client who asks to be sold a certain product is not delivering financial planning or material elements of financial planning. The CFP certificant is simply operating as an order taker. Yet arguably, a consumer who engages in such a purchase from a CFP certificant might reasonably expect that the CFP would still apply his or her professional knowledge to question whether the purchase is advisable in the first place. After all, patients cannot self-prescribe their own drugs by going to a doctor and asking for a prescription – the doctor is not only required to do a basic assessment to know the patient (similar to the CFP insurance agent who has an obligation to “know your client” as well), but a doctor cannot prescribe an inappropriate drug and claim to have merely been an order taker. There is an explicit professional expectation and requirement that the physician affirm that the order was appropriate in the first place, and deliver that advice as a professional in the interests of the patient.

Similarly, then, a reasonable modification to the CFP Board’s Standards of Professional Conduct would be the recognition that even when a consumer is “just” purchasing a financial services product, if that purchase is made with a CFP professional there is still an implicit fiduciary duty not to blindly fulfill the order without the CFP engaging in his/her fiduciary duty as a professional.

In other words, it’s time for the fiduciary duty of CFP certification to attach not just to whether the CFP professional is doing financial planning or material elements of financial planning, but simply because the individual is a CFP professional. The mere act of being a CFP certificant, and holding out to the public as such, creates the impression of a professional in the mind of the client, and thus should be subject to a fiduciary duty. It should not be up to the client to determine whether a request to purchase a product from a CFP professional is being delivered as a professional, or merely as a CFP salesperson.

Eliminating Conflicts Of Interest Versus Merely Disclosing Them

One key issue of the looming Department of Labor fiduciary rule is that it is expected to revamp advisor compensation and business models, potentially in a significant manner, and limit many potential conflicts of interest that advisors face, such as the commissions that advisors are paid to sell financial services products (and especially for selling their company’s own proprietary products). In other words, the new DoL fiduciary rule may eliminate at least some types of product commissions.

This transition shouldn’t be entirely surprising. The fact that some conflicts of interest are too deemed so problematic they must be limited or eliminated altogether – and cannot merely be managed – is actually a hallmark of fiduciary duty. It’s the same reason why the professional standards of doctors prevents them from being paid commissions by drug companies (rather than selling drugs and just ‘disclose’ the drug company commissions), and why attorneys have similar rules against having conflicts of interest. In scenarios where consumers must rely upon a professional’s expertise in the first place, mere disclosure is often insufficient, in part because the consumer may not fully understand the complex issues involved (which is why the consumer was seeking expert guidance in the first place!).

In fact, one recent study found that when experts provide disclosure of their conflicts of interest, they actually have a slight tendency to behave even worse. As it turns out, once we disclose a conflict, we become more likely to take more advantage of those conflicts for our own benefit! Perhaps the fact that the client was “warned” in advance absolves our guilt about pushing the line?

Notwithstanding these challenges of “just” disclosing conflicts of interest, versus trying to avoid them altogether – at least the worst, most problematic conflicts – it is notable that the CFP Board’s Standards of Professional Conduct have virtually no requirements whatsoever to eliminate, or even proactively manage, an advisor’s conflicts of interest.

Thus, while section 1.4 of the Rules of Conduct require a CFP certificant to act as a fiduciary and place the interest of the client ahead of his/her own, the entirety of section 2 of the Rules of Conduct discuss all the ways that advisors shall disclose – but just disclose – their various conflicts of interest. The words “manage” or “eliminate” do not appear even once in discussing a CFP certificants fiduciary obligations regarding potential conflicts of interest, and the word “avoid” is only used to explain that advisors should avoid misleading clients, not avoid the conflicts of interest in working with them.

Sadly, this disclosure-centric aspect of fiduciary is not unique to CFP certificants. The SEC’s application of the fiduciary duty to registered investment advisers is actually similar – relying heavily on disclosure and only slightly on actual management or elimination of conflicts – likely due to the fact that an RIA’s fiduciary duty stems primarily from how the courts in SEC v. Capital Gains Research Bureau (1963) interpreted Section 206 of the Investment Adviser Act of 1940, which prohibits an advisor from fraudulent or deceitful advertisements by advisers. While disclosure may be sufficient to avoid deceitful advertisements, it doesn’t necessarily set a very high bar for managing the conflicts of interest that were disclosed.

Ultimately, then, the opportunity for the CFP Board in updating its Standards of Professional Conduct is to finally take up the issue of what conflicts of interest are considered so serious for a CFP certificant, that they should not merely be disclosed, but must be proactively managed, or eliminated/avoided altogether, in a manner similar to fiduciaries in other professions. Should CFP certificants be allowed to earn commissions of all types? Just some types? Should commissions be required to be levelized, in a manner similar to compensation for ERISA fiduciaries? Should CFP certificants be limited in their recommendations of their company’s own proprietary products?

Undoubtedly the decision about where to draw such lines will be highly controversial, and the CFP Board will likely take at best only a conservative first step. Nonetheless, at a time when the Department of Labor is already making an effort to limit at least the most severe conflicts of interest, hopefully the CFP Board’s standards can at least be modified to remain in line with whatever regulatory standard the DoL may set!

CFP Board Public Forums And Public Comment Period

As changes to the CFP Board’s Standards of Professional Conduct are being considered in the coming year, the CFP Board is providing several opportunities for stakeholders to engage in the process.

The starting point will be a series of public forums in the first quarter of 2016. The first occurred at the end of January in Philadelphia, New York, and Boston, but additional public forums are coming in the third and fourth weeks of February in Miami, Houston, Chicago, Los Angeles, San Francisco, and Denver. (Registration is now open via the CFP Board’s website.)

From there, the Commission on Standards will collect initial comments, plus what will likely be some CFP Board staff recommendations, and formulate an initial recommendation on changes to the Standards of Professional Conduct. Those proposed changes will then be published for a CFP Board public comment period – likely sometime this summer – and the Commission will have an opportunity to make adjustments based on the public comments, and even consider a second public comment period if necessary (as was done with the last changes to the Standards of Professional Conduct in 2008).

Of course, in the long run, the CFP Board’s primary challenge will be not merely setting the appropriate standard for CFP certificants, but also enforcing it – a non-trivial challenge, given that legally the CFP Board is not actually a formal regulator, and lacks such powers as the ability to subpoena documents and compel testimony. Nonetheless, given the increasing value of the CFP marks itself, and the adverse consequences of being publicly admonished by the CFP Board – or worse, having the CFP marks publicly suspended or revoked – arguably the rise of the CFP marks has given the CFP Board more and more capabilities to oversee and enforce its standards.

Nonetheless, now is the time for CFP certificants to get engaged in the process of changing the standards. Or stated more simply, if you don’t like the way the rules are written, 2016 is your opportunity to add your two cents about how you think it should be! So be certain to participate in the public forum (if it comes to a city near you!), and stay tuned for the announcement of the proposed rules and (first) public comment period sometime around the late spring or summer!

So what do you think? What would you suggest the CFP Board change in its Standards of Professional Conduct? Are the compensation disclosure definitions, scope of fiduciary standard, and managing conflicts of interest appropriate issues? What else should the CFP Board’s Commission on Standards be considering?