As a public comment period about proposed standards for certified financial planners comes to a close, advisors have expressed support, opposition and more than a little confusion.
On June 20, the CFP Board revealed sweeping conduct code revisions that would broaden the application of the fiduciary standard among CFP professionals, opening a public comment period slated to close Monday.
As of August 14, many of the written comments by CFPs were in support of the proposed changes to the CFP Board’s standards of professional conduct. However, the Financial Planning Association, the largest membership organization for CFP professionals in the U.S., argued that advisors need more clarification from the board before the new rules are formalized.
“It’s clear that CFP professionals require more clarity,” said the organization in a released statement. “While we asked our members for their opinions on the proposed standards, many were unable to do so because they remain unsure of what is being proposed, what the changes will mean to them as practitioners, and how the proposed standards will be implemented and enforced.”
Previous versions of the conduct code required that all financial planning recommendations be held to the fiduciary standard. The proposed changes would apply the stricter standard to any kind of financial advice.
The FPA recommended that the CFP Board tell advisors what changes they will need to be make to their practices to remain compliant with the new rules, possibly through educational sessions, additional documentation and a longer comment period.
The Consumer Federation of America, among the most vociferous proponents of the Department of Labor’s efforts to implement more stringent fiduciary standards for advisors who handle retirement accounts, applauded the CFP Board’s efforts in its comment letter.
“The CFP Board’s own experience shows it’s possible to comply with a broad and strong fiduciary standard regardless of business model or compensation structure,” wrote Micah Hauptman, financial services counsel for the Consumer Federation of America. “We have no doubt that these revisions will continue to set a model for what advice standards should look like throughout the financial industry.”
Hauptman’s also supported the CFP Board’s proposal to require the disclosure of information about the advisors and their firms to prospective clients, including methods of compensation, services provided, potential conflicts of interest and information about the advisors’ public disciplinary history and bankruptcies.
While he supported the proposals in his comment letter, Michael Kitces of Pinnacle Advisory Group called on the CFP Board to clarify which elements of compensation must be disclosed to clients and to consider all financial planning recommendations as elements of financial advice.
“I am in full support of seeing some version of the proposed standards of conduct moving forward,” said Kitces. “That being said, the writing of new rules of conduct always introduces the potential for new areas of confusion for CFP professionals."
Kitces asked the CFP Board to consider the comments it has received, revise and re-issue a new version of the standards, and open an additional comment period.
The CFP Board’s definition of “sales-related” compensation should consider salary and bonuses as potential sources of third-party compensation at firms offering proprietary products, argued Kitces, as the firm’s ability to pay and reward its advisors may depend on the advisors’ ability to recommend proprietary products to their clients. Kitces also wrote that the CFP Board needs to further clarify the “duty of loyalty” to clients because of potential conflicts with an advisor’s obligations to their employer.
CFPs who receive compensation from commissions would not be able to 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.
Rather than defining and re-defining terms like “fee-only” and “fee-based,” the CFP Board should create standardized compensation disclosures with a standard nomenclature, said Kitces.
“The advisory community will simply keep coming up with new terms that may or may not be deemed misleading,” wrote Kitces. “A standard nomenclature—such as fee-only, commission-and-fee, fee-and-commission, and commission-only—eliminate any room for innovating new questionable terms.”
Financial “advice” should imply that advisors are working with clients in a formal business engagement for compensation, said Kitces, so that CFPs are still free to render advice in informal relationships with friends or colleagues, in an ad hoc conversation with a stranger or on a pro-bono basis without creating a fiduciary financial advice relationship.
On the CFP Board website, many certification holders were concerned that the proposals added too much complexity to a profession already beset by regulation.
“While the intent of the new standards is good, I think the wording is ambiguous in some areas and misguided in others,” wrote CFP certificant Doug Noble on Aug. 1. “There is an abundance of regulations issued by different entities trying to outdo one another. If the CFP Board passes this standard, it will compete directly with the DOL, and new SEC fiduciary standards, as well as with some states’ fiduciary standards. This will lead to confusion as well as contradictory guidelines in some cases.”