After two years of regulatory, legal and media scrutiny on financial advisors, the CFP Board of Directors is tightening its already tough standards.
The new standards of the professional regulatory organization (PRO) essentially require that CFP licensees act as fiduciaries in many situations. Exceptions may arise when a client requests a specific action, typically an asset sale, purchase or other transaction.
The CFP Board announced on Tuesday proposed changes to its Code of Ethics and Standards of Conduct that implement a more stringent application of fiduciary best interest for all certification holders.
The proposal rewrites the CFP Board’s Code of Ethics, narrowing it from seven to six requirements for certification holders:
- Act with honesty, integrity, competence and diligence
- Act in the client’s best interest
- Exercise due care
- Avoid or disclose and manage conflicts of interest
- Maintain the confidentiality and protect the privacy of client information
- Act in a manner that reflects positively on the financial planning profession and CFP certification
The proposal also completely rewrites the CFP Board’s Standards of Conduct to further clarify its commitment to a fiduciary standard for advice. According to the new standards, the first duty owed to clients by a CFP professional is the fiduciary duty, defined by loyalty, care and the duty to follow client instructions.
CFP Board CEO Kevin Keller called the new standards "a bold change." But over the next few weeks the board will be discussing the proposed changes with industry groups in the insurance and brokerage businesses who have resisted fiduciary requirements in the past as well as pro-fiduciary RIAs who may question if the rules go far enough.
One advisor who briefly studied the proposal said his reading of the new standards wasthat they only required an advisor to act as a fiduciary if he or she engaged in two or more aspects of the financial planning process.
While the old standards applied to financial planning clients, the new standards do expand an advisor's responsibility when providing advice on a specific issue. "If a clients asks what 529 plan would you buy and you recommend Virginia, you are a fiduciary," explains Leo Rydzewski, general counsel at the CFP Board.
In addition to restating a CFP professional’s duty to act with integrity and to diligently provide sound, objective judgment, the standards now also require competence. If a CFP is to provide recommendations or advice on a topic, the Standards now require that they have relevant knowledge and the skill to apply that knowledge. If a planner’s knowledge and skill fall short, the Standards now explicitly require them to seek the assistance of a third party, obtain the knowledge, or terminate the client engagement.
The new standards also delineate rules for disclosing conflicts of interest and compensation methods and clarify the difference between “fee only” and “fee based.” Most notably, the CFP Board is cracking down on the use of “fee-based” compensation and offering “fee and commission” as an acceptable alternative. The new standards forbid the use of “fee-based” advice in a manner that might suggest a CFP offers fee-only advice, and now require that CFPs using the term “fee-based” to describe their compensation also clearly state that they are earning both fees and commissions, or that they are not really providing fee-only advice.