As plans to tighten rules of conduct for Certified Financial Planners were announced on Tuesday, several champions of the fiduciary standard voiced their support.
The Certified Financial Planner Board of Standards issued a request for public comment on sweeping revisions to its code of ethics and standards of conduct that would broaden the application of a fiduciary standard for advice among CFP professionals.
Where previous versions of the CFP standards for conduct have required that all recommendations rendered when planning be held to the fiduciary standard, the proposed changes would apply the stricter standard to any kind of financial advice.
“Extending the fiduciary standard to the financial advice component of the relationship helps clarify a CFP professional’s position with respect to the standard of care extended to investors throughout the engagement, and it further raises the standard of care for investors, who deserve to know the CFP professional is acting in his or her best interest not just when providing financial planning services, but also when implementing the plan via financial advice,” Skip Schweiss, managing director for retirement plan services and advisor advocacy at TD Ameritrade Institutional, said in an email.
The broader definition essentially eliminates a “two-standard” approach for CFP professionals that allowed a looser standard of care for advice rendered to clients outside the context of a financial plan.
Critics of the existing standard, including Knut Rostad, president of the Institute for the Fiduciary Standard, have argued that the CFP Board failed to clearly delineate when each standard should be applied, and that it is difficult to determine what, if any, advice occurs outside of the context of financial planning.
The board’s revisions cut through this debate by presuming that any advice rendered by a CFP certification holder to be in the form of financial planning.
Harold Evensky, former CFP Board CEO and current chairman of Evensky & Katz/Foldes based in Coral Gables, Fla., and Lubbock, Texas, noted that the proposed revisions could create conflicts between some CFP licensees at big companies and their employers.
"This is an extraordinary and gutsy move by the Board, and it will have a huge impact on the CFP universe," Evensky said in written comments on Tuesday. "Basically, it eliminates the 'safe harbor' in the current standard that allows CFP-registered brokers and insurance agents sell product and remain held to the suitability standard. If implemented, the new standards will hold a CFP licensee to a fiduciary standard under almost any condition. It will be interesting to see how wirehouses handle this."
Indeed, some question how far the CFP Board will go to enforce the expanded rule, particularly if it creates some potential conflicts between wirehouses and their key employees. In the past, the CFP Board has displayed deference to large institutions in certain specific situations.
For example, the CFP Board removed its chair, Alan Goldfarb, in 2013 for labeling himself "fee-only" while he owned a small stake in a brokerage firm. At the same time, it warned wirehouse brokers to change their status from fee-only without any consequence or penalty.
The new standards would require that CFPs are responsible for disclosing and clarifying rules for compensation to their clients, even in cases where their employers may obfuscate or misrepresent compensation methods. CFPs who receive compensation from commissions cannot continue to use the term "fee-based" if it could lead clients to believe that they are providing fee-only advice, according to the revisions.
The National Association of Personal Financial Advisors (NAPFA), a professional organization representing fee-only planners, applauded the CFP Board’s broad application of the fiduciary standard.
“Working in the best interest of the client is the most transparent, and we think the most objective, way of serving the public,” said Geoffrey Brown, NAPFA CEO, in comments released on Tuesday. “Consumers have recently come to expect advice delivered in their best interest and now, because of the broadening of the CFP Board’s fiduciary requirements, will be able to count on CFP professionals to act as a fiduciary when providing financial advice to a client.”
Brown said that NAPFA would withhold comment on other changes to the CFP Board’s standards until it had reviewed their implications for its membership of 3,000 fee-only planners, a position echoed by the Financial Planning Association (FPA).
FPA President Shannon Pik nevertheless voiced support for the broader fiduciary standard in comments released Tuesday.
The CFP Board’s revisions present a new definition of financial planning, describing it as a collaborative process that maximizes a client’s ability to meet life goals through advice that integrates a client’s personal and financial circumstances.
The revisions also create a clear definition of conflicts of interest and delineates rules for when and how conflicts need to be disclosed to clients,
Along with the substantial changes to its standards, the CFP Board has also changed its process for dealing with bankruptcies, which will be handled through the body’s customary disciplinary process.
The CFP Board announced a series of public comment sessions on Tuesday and a process for finalizing and implementing the new standards.
The changes further bolster the momentum towards conflict-free advice created by the Department of Labor’s fiduciary rule, which went into effect earlier this month.
“We applaud the CFP Board for its new Code of Ethics and Standards of Conduct,” wrote Schweiss. “With the Department of Labor’s conflict of interest rule taking effect, and now with the CFP Board’s new proposed standard, along with action we’re seeing in the states, the fiduciary standard is on the march across the land.”