Executive Summary
Notwithstanding some of the successes of the Financial Planning Coalition in pushing forward the fiduciary battle in Washington, requiring all advisors to act in the best interests of their clients is still an uphill fight.
Nonetheless, the fiduciary movement seems to be gaining momentum, from coming regulations from the Department of Labor to reforms in 401(k) plans to the scrutiny of regulators in the aftermath of debacles from Stanford to Madoff. But what happens if the fiduciary fight is won over the next few years? Does that mean the public is now protected? Perhaps not.
After all, it doesn't really help to ensure that advisors act in the interest of their clients, if there's no assurance that advisors have the actual knowledge, skills, and expertise to craft appropriate recommendations and deliver the right solutions to clients in the first place. In other words, protecting the public is not just about fiduciary. To restore the public's trust in advisors, the fight must be about competence, too.
The inspiration for today's blog post comes from a recent conversation I had with Knut Rostad, President of the Institute for the Fiduciary Standard, about what's next for the financial planning profession, and the financial services industry at large, when a fiduciary standard is eventually implemented. True, the fight for fiduciary is not over yet, and it may take several more years, but ultimately I believe the delivery of advice will be regulated according to a fiduciary standard. Which raises the question: so then what? As I told Knut, I believe the next great frontier will be... competence.
After all, the reality is that it doesn't really help the public for all advisors to be subject to a fiduciary standard where they must act in their client's best interests and minimize or prudently manage conflicts of interest, if there is no assurance that the planner has the competence to craft the right recommendations and deliver the right solutions in the first place! It simply means that when the public gets bad advice that leads to bad results, it will be due to the advisor's ignorance or incompetence instead of his/her greed or self-interest.
Notably, some suggest that a true fiduciary standard should actually incorporate the concerns of competence into the standard itself. For instance, the Institute for the Fiduciary Standard includes "Act prudently - with the care, skill, and judgment of a professional" where "skill... of a professional" would certainly imply a competence requirement.
Ultimately, I believe that the financial planning profession must and will evolve to a standard similar to that of NAPFA and the CFP Board - where competency is explicitly acknowledged as a requirement to be a professional and deliver advice to the public. In turn, this means the next frontier in protecting the public is to determine what the appropriate minimum standard for competence should be. Is the CFP certification the appropriate standard, as is implied by the requirements of both NAPFA and the FPA to be a certificant in order to be classified as a "practitioner" member?
The bottom line is that the profession's efforts to protect the public will shift in the coming years. Eventually, the fiduciary fight will be won; but the end result will not protect the public, but simply shift the fight from ensuring that advisors act in the interests of their clients, to trying to ensure that advisors have the competence necessary to deliver the right advice to their clients in the first place. The final frontier will be to establish a unified standard that incorporates both the client-centric focus of fiduciary and the requirement for professional competency.
Without competence validation proxy, fiduciary status is doing the right thing wrong.
Born in sin – continuing in sin is the CFP mark. Michael go back to Meaningless Label a Forbes story way back when, as well as the monkey passing the CFP test cover, and of course Bad Math; Bad Advice – not to mention the cover up for the CFP of its interlocking directorates and product liability.
Of course, then there was the higher degree (forget now what it was called – Registry I believe – that was grandfathered – IF you exempted the CFP Board and the College then of any liability). Note of disclosure – I had this higher designation – and was refused grandfathering (which would have meant I couldn’t continue the disclosures – which I was vindicated by Forbes, Barron’s, Consumer Federation op America and John Allen Poulous’ work.
And who looked the other way, NAPFA and its chairman that sat on the CFP Board!
Further vindication of born in sin – still living in the sin – 15+ years later – the cost of the CFP is the same or much less – proving the use of tax exempt status for structural barrier to trade by the old College for Financial Planning and its captured CFP Board
Of course, there are those who will play the Clinton card ‘that’s old news’ as if that answers the question.
The question is rightfully so – competence and its delivery and quality control.
jim schwartz
NAPFA requires plan submission and review as a part of their membership requirement. I think it would be good to have to submit a plan or pass some competency exam on an ongoing basis (like every 5 years) similar to what medical doctors have to do to stay certified in their area.
True. Standards are shamefully low in many cases. Imagine becoming a doctor or lawyer with 6 months of self study. Proof is in the pudding. Many planners aren’t too smart or educated.
Thanks for this thought-provoking post and comments. Skill is more important than a fiduciary standard. The challenge is showing that the skills are relevant and current.
Credentials that look impressive mean little if the “Best Before” date passed long ago. Standardized testing doesn’t show if the skills are being applied in real life.
Teaching reinforces learning. Advisors can show their current skills by blogging, podcasting or creating videos — for free. They just need the will.
Michael,
In public policy discussions advocates and opponents of the fiduciary standard tend to focus on the duty of loyalty, and in particular the requirement to avoid or properly disclose and manage conflicts of interest. Indeed, the distinguishing feature of the fiduciary standard is the duty of loyalty.
Yet this does not mean that the “fiduciary battles” are all about conflicts of interest. It is also, in my view, they are also about the standard of due care.
All professionals have a standard of due care. Unfortunately, the standard for brokers (and their registered representatives) remains (per FINRA rules) at the low suitability standard (at least for brokers not in relationships of trust and confidence with their clients). And the suitability standard has failed, for decades, to keep pace with developments in investment theory. Additionally, suitability has not, by and large, incorporated considerations of costs, fees, and taxes – all of which have been shown to pose significant drags on individual returns.
Turning to registered investment advisers, who already possess a fiduciary duty of due care, I believe the bar needs to be raised substantially as to what “due care” constitutes – both in terms of financial planning, as well as investment portfolio design and management.
There exists substantial academic evidence out there as to “what works” and “what does not work” in terms of investment management. I have previously opined that nearly all clients have an EXPECTATION that the investment strategy chosen for them will be “prudent” (i.e., meet the requirements of the Prudent Investor Rule, or PIR). Yet, in actuality, very few investment strategies would be able to be supported as “prudent” by expert testimony (applying the Federal Rules of evidence to the admissibility of expert testimony, which requires either academic writings in support of the investment strategy or extensive back-testing). This does not mean that investment advisers are not permitted to deviate from those few strategies which possess such academic or data-driven support. Rather, if an investment adviser pursues another strategy (as many do, such as through the exercise of their own qualitative judgments on market timing, individual security selection, selection of active managers, etc.), then in my view (under the relatively new Form ADV rules) the risks attendant to that investment strategy (including possible poor qualitative judgments) need to be disclosed, and the fact that the strategy does not necessarily meet the requirements of the PIR need to be disclosed.
As to due care involving financial planning, like you I am a fan of the book, The Checklist Manifesto. This complex field of financial planning is ripe for the greater application of checklists. The use of such checklists involves, by necessity mastery of the many financial planning subject areas.
However, I would suggest that the implementation of checklists be undertaken as a suggested “best practice” at first. We have a long way to go, as a profession, before mandating that certain steps be undertaken in connection with diagnosis and treatment of financial disorders (as now exists, in many instances, within the medical community for medical disorders).
In summary, I concur that we, as a profession we need to focus more on due care. But I suggest to you that the fiduciary movement is a move in that direction.
And yet, while these fiduciary battles are going on in DC and in state capitals and courtrooms across the country, work continues on efforts to enhance financial planners’ due care. With each year I sense that the education provided at various financial planning conferences is getting better. Work was completed on the ISO 22222 standards in 2005, and many organizations have enhanced their own professional standards with regard to expectations of due care in recent years (although more needs to be done).
On April 1, 2013, Wiley Finance will release the CFP Board Financial Planning Competency Handbook ($71 at Amazon), which no doubt will serve as a baseline reference manual. Additionally, informational and educational services such as Forefield Advisor provide a host of potential resources which advisors can access in researching financial planning issues and delivering answers back to their clients. Other web-based resources, and “apps,” are appearing.
Of course, technical knowledge is not enough. Understanding clients’ behavioral biases, and knowing of techniques which can influence (and/or change) client behaviors, are just as paramount. As you’ve written in the past, this is a primary manner in which financial advisors can add value.
In conclusion, I concur with your thinking that we tend to concentrate too much on the fiduciary duty of loyalty, and in particular conflicts of interest. Yet, the fiduciary battles are also about the fiduciary standard of due care and its application.
I look forward to the day when all financial planners are regarded as professionals. I look forward to the day when, was professionals, we all subscribe to a bona fide fiduciary standard of conduct. And, I look forward to the day when we can focus more greatly on improving the competency of our fellow professionals, including educational efforts for our fellow financial advisors (rather than ongoing educational efforts directed at policy makers in DC). In the interim, I see progress being made – by you and others – in raising the bar on financial education, and helping to (eventually) define and enhance the baseline level of competency for all financial planners. Thank you.