Executive Summary
Continuing the fiduciary financial planning momentum created by the CFP Board's release last year of their updated Standards of Professional Conduct, the FPA has promulgated one of the first formal statements of a "Standard of Care" for the delivery of financial planning services - a step that many consider to be crucial for financial planning to become widely recognized as a profession. But is the planning community really ready to go where this road leads?
The FPA's new Standard of Care - which was announced on their website here and was further expanded upon at the organization's Annual Convention on October 4-7 - is a fairly broad first stab at a Standard of Care, encapsulating in plain language through five bullet points the required manner in which all financial planning services should be delivered. The entire Standard of Care reads as follows:
All financial planning services will be delivered in accordance with the following standard of care:
- Put the client's best interests first;
- Act with due care and in utmost good faith;
- Do not mislead clients;
- Provide full and fair disclosure of all material facts; and
- Disclose and fairly manage all material conflicts of interest.
As Standards of Care go, this is a good start. But if we reflect on the Standards of Care for other professions, it quickly becomes evident that we have a long way to go. In the medical world, for example, Standards of Care define the series of proper steps to take for the evaluation of a particular set of symptoms, diagnosis of certain test results, and/or treatment of a specified illness, not just an overall statement about how to conduct onesself as a professional.
From this framework, it seems that we still have a long way to go. Part of the challenge for financial planning in particular is that unlike other professions, our body of knowledge still lacks the models and framework to even agree on what the proper diagnosis should be to a particular set of client conditions in the first place.
For example, if you ask 5 planners what the proper investment selection/approach is for a client retiring with a $500,000 IRA who wants to spend $25,000/year, you will likely get 5 different answers ranging from active mutual funds to passive funds to annuities to stocks and a cash reserve. Each of these are viewed as different valid options for "treating" this particular client. By contrast, though, if a patient visited the doctor's office complaining of chest pains radiating to the neck and left arm, shortness of breath, and a cold sweat, the proper steps for the doctor are to review the patient's medical history, administer a physical exam, take an EKG reading, and test for certain enzymes - and if a heart attack is determined to be the problem, to in turn treat it using yet another well-defined standard of care. If a doctor deviates from the accepted Standard of Care, at this level of detail, the doctor risks being found to be professional negligent in his/her duties. When the planners come up with 5 different recommendations/treatments for a series of details/symptoms for a client situation, the fact that planner #2 does differently than #1 is not a sign that one must have been professionally negligent; we consider it to be a reasonable (and defensible) diversity of opinion.
Thus, ironically, the ultimately fruition of an in-depth Standard of Care is, in essence, to reach the point where a financial planning professional can legally be held liable for failing to follow that Standard of Care. In today's world, this level of accountability doesn't really exist for virtually any financial planning services. Certainly, to the extent that you deliver a recommendation (particularly in the context of investments) that is patently unsuitable and inappropriate for the client, you may be held liable. But imagine a world where the framework for evaluation a long-term care situation is so rigorous that when a client situation presents itself, you either follow the Standard of Care and recommend long-term care insurance to that client, or risk your professional license. The planner profession hasn't reached that point - in fact, we as a profession haven't yet been able to come to a clear consensus about how to evaluate many such situations to determine an "officially appropriate" recommendation in the first place!
Why does this matter for you? Because if the Standard of Care is developed along a series of guidelines that are different than what you currently do for your clients, your choices will be to abandon your beliefs and adopt the agreed-upon Standard of Care, or risk your personal professional livelihood. Fortunately, this is what leads us to have a true series of Standards of Care for the delivery of services where planning professionals can be held accountable for making recommendations outside of the "accepted" standard. Unfortunately, with such a diversity of opinion that currently exists about the precisely appropriate recommendation for many relatively common client situations, it may be exceedingly difficult to create those Standards, and many planners will inevitably be unhappy about the consensus solutions that are ultimately determined by the planning community.
The financial planning body of knowledge still has a long way to go before it can achieve this level of specificity in the models and framework for determining the appropriate way to evaluate, diagnose, and treat various financial planning problems. Nonetheless, we have starting down the bumpy road of fully defining a series of Standards of Care that will ultimately define what we do as professionals and hold us accountable to it. Ready or not, here it comes.
I agree that moving toward a standard of care will bring with it the necessity that recommendations gradually become more consistent across the industry (is that a charitable enough way to put it?) and that we all would become more accountable to our recommendations. I do not believe that it means moving toward a model that is as “cookbook” as you fear it might be.
The medical example is an extreme one. And not inappropriate, though it does not match the specificity of your financial scenario. If a doctor recommended to the patient you describe “take two aspirin and call me in the morning” his survivors would obviously have grounds for a malpractice case.
Your financial example, though, is far more general than that. Translating it into medical terms, it might be more like “I want to lose 10 pounds over the next year” or “I need to bring my cholesterol into a healthy, normal range”. And, if this is an acceptable comparison, the medical advice considered acceptable would not be so clear cut. Any one of a range of recommendations would fall well within professional guidelines. Everyone might agree that exercise was an important part of a treatment plan, but how much and what type would be open to professional discretion. And recommendations for diet could be all over the map, with different regimens relying on significantly different and even somewhat contradictory research studies. (Does fat intake really matter? Would a patient be better of limiting caloric intake or simply watching the balance of proteins and carbs?)
For extreme examples, I think there are generally accepted standards in investing just like in medicine. If the client has set aside $40,000 for college and the tuition is due in 6 months, I think we can all agree that any investment besides cash is irresponsible. For other situations in which more variables may come into play, there are a range of possible recommendations, both in planning and in medicine.
I think this direction is productive, and a necessary one if we are to move more in the direction of becoming a profession.