How do you explain the profession of financial planning so that it's clear in regulators' minds?
Ever so carefully.
With the imminent release of a 75-plus page white paper that discusses the profession's current state of labyrinthian regulation and examines alternatives, the Financial Planning Association is officially embarking on what is likely to be a long and arduous campaign to create a regulatory framework and possibly even a new regulator. The goal?
To give planners the same type of distinction that the accounting and legal professions have, complete with their own standards and regulations. "If we don't craft the regulation ourselves, it will be done for us," says Curt Weil, chairman of the FPA's Government Affairs Committee and president of Weil Capital Management LLC, Palo Alto, Calif.
Separating planners and their regulation from the larger financial services scene is a necessary step toward creating a true profession Weil and others at the FPA maintain. "The point is that a consumer readily recognizes what a doctor is and what a CPA is," says Duane Thompson, the FPA's director of government affairs. "Defining a financial planner, what they do and what standards they have is fuzzy, and I suspect for consumers, hard to define."
At the same time, the regulatory framework that has evolved is sometimes an onerous one for advisors. Frequently, it is designed to address the subsets of planning, like brokerage, investment management and insurance, rather than planning itself. The worst-case scenario, says Thompson, "is the typical one where a planner must maintain triple licenses, one as an advisor, one as a registered representative and a third as an insurance agent."
The white paper the FPA is preparing is a springboard to discussion to see how, if at all, planners want this system to change. "After looking at the pros and cons of these various scenarios, planners may say, 'I think we're better off with the status quo,'" says Thompson. "That's fine if that's what our members really want. Either way, it will help the FPA in the advocacy area to understand what members want. Are they happy being regulated as brokers, investment advisors and insurance agents? Or would they like to see something that identifies them with the more holistic approach of their profession and provides that regulatory framework?" the FPA lobbyist asks.
Up until now, that decision has been made largely by people outside of the financial planning world. "Regulatory agencies have said: 'We have these people, and I don't know how they fit into our regulatory framework,'" Thompson maintains. "Essentially, it's been outsiders who defined what financial planning is. If you look at other professions, they've done it themselves. There is actually very little regulation that is planning-centered," says FPA President Guy Cumbie. "One of the things that continues to haunt and impede the emergence of planning as a profession is the fact that we're regulated based on these subsets. That confuses consumers and continues to perpetuate the myth that planning is all about brokerage or other things. These are important, but planning is about the relationship of all of these things and the space and connection between them. The purpose of our discussions with planners now is about what is, what isn't and what could be [in terms of regulation]."
Like Cumbie, FPA officials and staff are quick to point out that the white paper is just the beginning of the dialogue the association expects to have with its nearly 30,000 members. The document is not being written to make recommendations, Thompson and Cumbie say, but rather to outline the current patchwork regulatory scenario planners live with and explore various alternatives and models that exist or could be created, it is hoped in lieu of, not in addition to, what exists.
One possibility is the transformation of the CFP Board of Standards into a self-regulatory organization with the same types of powers that the National Association of Securities Dealers enjoys in its capacity as overseer of broker-dealers and their registered reps. While the CFP Board operates as a professional regulatory organization, its governance is limited because a minority of practitioners who call themselves planners have obtained their CFP license. As a result, the group does not have regulatory authority over the industry or the ability to stop someone from practicing planning. Experts also note that professional regulation for the legal and accounting professions, for example, takes place at the state level.
That doesn't mean the CFP Board and the practice standards it has created won't play a role, even a major one. But there are stumbling blocks. Foremost is the fact that other regulators, including the SEC, the NASD and state insurance and securities regulators, would need to give up their functional oversight of planners. Their willingness to give up their authority and a part of their fiefdom may be hard to come by. It's also worth noting that the establishment of a planning self-regulatory organization would take an act of Congress.
As part of the FPA's efforts to get a better read of what planners want, the group has retained regulatory expert Jonathan Macey, a law professor from Cornell University. Macey has been conducting focus groups with FPA members for more than four months to synthesize their thoughts on current regulation and their regulatory ideal for the future.
FPA President-elect Bob Barry says the focus groups and white-paper analysis are just a beginning. "It's a dialogue that's needed and important and one that people have a lot of opinions about. In its best incarnation, the white paper serves as a beginning for legislative and regulatory people and the profession as a whole to begin a discussion about what the most appropriate regulation is."
To say the initiative is timely might be an understatement. Right now, everyone seems to want to be in the advisory business-they just don't want to live by the rules. So at the very same time that regulators are rewriting rules that impact planners, industry groups are aggressively pressing for exemptions. And in some cases-the Securities and Exchange Commission's proposal to permanently exempt brokers who offer advice from having to register as investment advisors is an example-competitors seem to be making inroads.
It's not a drive to keep competitors out of planning that is prompting the organization to hold the line on minimum standards, FPA officials and staff maintain. Rather, it's a concern that regulation be uniform, as it is with lawyers and CPAs. "Our members have no illusions that by suggesting qualifications or higher ethical standards that they're setting barriers to entry," Thompson says. "But to have a profession, you need recognized standards. When other groups act as financial planners, we want to see them subject to the same uniform rules."
Right now, there are a number of threats to that uniformity. Both savings and loans and credit unions are vigorously lobbying the SEC, requesting exemption from the Investment Adviser Act. Banks and their representatives already are exempt, so mammoth institutions like First Union can operate planning shops without SEC oversight. Broker-dealers, as noted previously, may be winning the war at the SEC to make their exemption from advisor regulation permanent.
That creates an uneven playing field of fairly dramatic proportions, not to mention a quagmire of investor confusion. Planning clients don't know that the bank reps down the street have lower regulatory hurdles than the independent advisors across the way. "If these industries were advocating standards similar to the CFP code, we'd be tickled, but there is no mention of that," says Thompson. "They're simply looking for regulatory relief without any mention of planning standards. If someone is doing the same thing as our members, we want to see the same accountability."
The same attempt to make an end-run around advisor rules is taking place in Congress, where a bill (The Retirement Security Adviser Act of 2001, HR 2269) to allow "financial consultants" to provide advice to retirement-plan participants, is gaining ground. The problem? It fails to require bank, brokerage and insurance consultants to register as investment advisors. So, unlike planners, they would not have to provide clients with material information such as the rep's disciplinary history or even the methods of analysis and investment strategies used to arrive at recommendations.
The FPA's letter to Congress doesn't mince words when it comes to the potential for abuse: "We ask whether the Department of Labor has adequate enforcement capacity to monitor the new ERISA advice market by industries that are not regulated by the SEC or the state securities administrators." In other words, the FPA asks, when folks other than highly regulated investment advisors market their advice, who is overseeing them?
At the same time, the states are attempting to rewrite a uniform advisor law for the first time in decades. "It's a marathon and incredibly challenging to overhaul a law written a half century ago when stockbrokers were the only advisors," Thompson says. "Our goal is to ensure the definitions of financial planner and advisor not get too muddied up because they are not synonymous terms."
Still, it pays to remember that defining the future of planning, both from a professional and regulatory perspective, won't always be pretty or quick. It will take realism, perseverance and the stomach to do what might not always be popular. Do FPA officials have the mettle?
Weil tells the story of his early days as a stockbroker in the 1970s when he asked a mutual fund executive what he thought of the new practice called financial planning.
"Oh that," Weil says the fund executive smirked. "That's where you sell one of everything in your briefcase." The practice has come a long way, but still has miles to go, Weil says. "Until the last of the sales-oriented practitioners retires and there are only client-centered practitioners left, we won't fully be a profession. But we can get the ball rolling now."