Executive Summary
Yesterday the US Government Accountability Office (GAO) released the results of its study on the regulation of financial planning, as mandated by the Dodd-Frank Wall Street Reform legislation. Seen by many as a potentially significant step in the recognition of financial planning as a profession, the study came far short of recommending standalone regulation for financial planners, instead finding that the regulatory structure for planners is already "generally comprehensive" and delivering as its primary recommendations... more studies. Nonetheless, the GAO report represents the clearest picture yet of the financial planning landscape, with acknowledgement of the problems entailed in varying standards of care for different financial services channels, and consumer confusion over the myriad of titles and designations that financial planners use.
The GAO released both a summary of its results, along with a public copy of the full report entitled "Consumer Finance: Regulatory Coverage Generally Exists for Financial Planners, but Consumer Protection Issues Remain"; the executive summary on page two of the report provides a good recap of the analysis and results of the study and the GAO's conclusions and recommendations.
As the title notes, the conclusion of the GAO study was that the existing framework for regulatory coverage generally covers financial planners fairly well, although the study acknowledges that in the end financial planners are primarily regulated via the products and services sold, rather than as financial planners.
"There is no specific, direct regulation of “financial planners” per se at the federal or state level...
...Financial planners are primarily regulated by federal and state investment adviser laws, because planners typically provide advice about securities as part of their business. In addition, financial planners that sell securities or insurance products are subject to applicable laws governing brokerdealers and insurance agents...
...In addition to providing advisory services, such as developing a financial plan, financial planners generally help clients implement the plan by making specific recommendations and by selling securities, insurance products, and other investments."
Notwithstanding the implied 'comprehensiveness' of regulatory coverage ("The regulatory system for financial planners covers most activities in which they engage"), the GAO study also notes that "enforcement of regulation may be inconsistent and some questions exist about consumers’ understanding of the roles [and] standards of care..." The GAO study explicitly acknowledges the differing standards of care involved, which vary depending on the products or services being implemented (along with the "hat switching" that sometimes occurs when multiple products or services are received from the same individual), from the fiduciary standard of care for investment advisors to the suitability standard for securities and insurance products. The GAO differentiates these by stating:
"Under the fiduciary standard applicable to investment advisers, financial planners must mitigate any potential conflicts of interest and disclose any that remain. But under a suitability standard applicable to broker-dealers, conflicts of interest may exist and generally may not need to be disclosed up-front."
In addition, the GAO also notes that "Consumers May Be Confused about the Ways Financial Professionals Present Themselves to the Public" because of the myriad of titles and designations that financial planners use:
"Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public, including financial planner, financial consultant, and financial adviser, among many others. However, evidence suggests that the different titles financial professionals use can be confusing to consumers."
Notwithstanding these issues, the GAO study's general conclusion was that "Some Changes in the Oversight of Financial Planners Could Be Beneficial, but Most Stakeholders Believe Substantial Overhaul Is Not Needed" as it reviewed numerous proposals, from the Financial Planning Coalition's recommendation of a professional standards-setting oversight board to for financial planners, to augmenting oversight of investment advisors with a supplemental self-regulatory organization (SRO), to extending coverage of the fiduciary standard. Despite all of the suggestions, the GAO observed that "Most Stakeholders Saw Little Need for an Additional Oversight Body Governing Financial Planners" because an additional oversight body "was generally seen as duplicative of existing regulation."
Although some will claim that the GAO's unwillingness to commit to a more substantial regulatory overhaul was a failure for consumer protection, the GAO itself notes that one of the biggest issues in recommending regulatory change is the lack of clear data as to what harm is actually occurring to consumers. As the GAO puts it quite simply: "Available data do not show a large number of consumer complaints and enforcement actions involving financial planners" - which implies that greater regulation isn't necessarily required. On the other hand, the GAO does not that "the exact extent to which financial planners may be a source of problems is unknown" due in large part to the fact that "Regulators Generally Do Not Track Data Specific to Financial Planners." Furthermore, the GAO notes:
"Consumer complaint data may not be an accurate gauge of the extent of problems. Complaints may represent only a small portion of potential problems and complaints related to “financial planners” may not always be recorded as such. As we have previously reported, consumers also may not always know where they can report complaints."
Nonetheless, the message seems relatively clear from the GAO: if financial planners want to be seen (and overseen, and regulated) as a standalone profession, they need to make a clearer case about what harm is being done to the consumer public by not having such regulatory lines drawn in place. Although financial planners within the industry can often paint a picture of harm done via inappropriate product sales, those products already have a regulatory structure in place (albeit one that could perhaps be improved). If financial planners want to be regulated above and beyond the implementation of products, they have to demonstrate the danger to the public that exists beyond the mere sale of already-regulated products. Or at the very least, we need to figure out how to better gather data on financial planning improprieties that are already occurring but do not currently have a clear mechanism for reporting as financial planning infractions.
Even though the outcome of the GAO study may not be what some planners had hoped for, it still provides the clearest p
icture yet of the financial planning landscape. In the GAO report's conclusions, they note specifically that "consumers may be unclear about standards of care that apply to financial professionals, particularly when the same individual or firm offers multiple services that have differing standards of care. As such, consumers may not always know whether and when a financial planner is required to serve their best interest." Furthermore, the GAO states that "we have seen that financial planners can adopt a variety of titles and designations. The different designations can imply different types of qualifications, but consumers may not understand or distinguish among these designations, and thus may be unable to properly assess the qualifications and expertise of financial planners." But nonetheless, the GAO also still notes that there is "limited information about the nature and extent of problems specifically related to financial planners because it [the SEC, or other regulatory bodies] does not track complaints, examination results, and enforcement activities associated with financial planners specifically, and distinct from investment advisers as a whole." As a result, regulatory change is difficult, because "a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking." On the other hand, "Because financial planning is a growing industry and has raised certain consumer protection issues, regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services."
So what did the GAO recommend? Ultimately, they made three recommendations back to Congress, that:
- The National Association of Insurance Commissioners [NAIC], in concert with state insurance regulators, take steps to assess consumers’ understanding of the standards of care with regard to the sale of insurance products, such as annuities, and take actions as appropriate to address problems revealed in this assessment.
- The SEC incorporate into SEC’s ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumers’ investment decisions; and
- That the SEC collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services, and take actions to address any problems that are identified.
So there you have it. Overall, it seems to me that the GAO study is by far the clearest picture yet of the financial planning landscape and the problems that exist. It seems to convey a far better understanding of the problems than the SEC's highly-criticized 2008 RAND study. Although the outcome of the study was not perhaps what some had hoped - clear recognition of financial planning as a standalone profession and a need for it to be regulated as such - it still provides public acknowledgement of some of the problems that exist, and gives indirect guidance to financial planning advocates about how to advance their cause: if you want financial planning to be acknowledged as a standalone profession, demonstrate how improperly delivered financial planning services are causing public harm (thereby necessitating regulatory oversight). Expect to hear more in the coming months about the next steps that groups like the Financial Planning Coalition will take to pursue this.
In the meantime, the report acknowledges the problems with varying standards of care, confusion about the titles and designations financial planners use, and what seems to be a very specific concern directed at insurance regulators about the lack of consumer understanding regarding the standards of care that apply to the sale of insurance products.
So what do you think? Do the results of the GAO study represents a success of groups like the Financial Planning Coalition and its advocacy efforts (many attribute the inclusion of the GAO study in the Dodd-Frank legislation in the first place to the efforts of the Coalition). Is the GAO study a success for advancing the financial planning profession, or a setback? Did the GAO get it "right"?
Here is a question for the GAO: what is a financial planner? The definition that they provide in the summary could mean any number of folks: members of RIAs, Insurance agents, estate planning attorneys, CPA’s, Mutual Fund wholesalers, Brokers and of course as we know THAT is the major problem. Overall, though I thought the study was a good step in the right direction: awareness. Of course we all want the endgame to be a recognized and fully regulated profession (like a Doctor or Lawyer), but in reality we are still quite a way off from that.
Another terrific post, Michael.
My January Journal of Financial Planning column touches on the fundamental problem with the current regulatory environment – at least from a planner’s perspective. A great product misdeployed can be just as damaging as implementing a sound idea with a lousy product.
Since another comment mentioned definitions, I would highly recommend readers take a look at the white paper FA just released regarding the definition of financial planning. It was produced by personnel from major firms and contains some interesting stuff.
All the best and thank you for such great posts.