With the deadline fast approaching for adhering to the expanded fiduciary standard included in the CFP Board's new code of ethics, pressure is heating up on broker-dealers and their reps to decide how to comply.
The standards, which require that the CFP Board's 63,000 credentialed professionals act in the best interests of their clients at all times when providing an investor with “financial advice,” go into effect on October 1, although the CFP Board has announced it will not enforce the new requirements until June 30, 2020.
“Broker-dealers and advisors will want to begin considering whether they should take any action to help ensure that their associated persons who are CFP professionals comply with the new fiduciary standard,” Clifford Kirsch, a partner with the law firm of Eversheds Sutherland, said in a new legal alert. Kirsch advised some of the most prominent U.S. dual-registrant broker-dealer regarding investment product sales and compliance.
What is clear is that the standards’ broad definition of financial advice gives reps and their broker-dealers much less wiggle room when it comes to side-stepping fiduciary duty.
“If you’re a CFP and you don’t abide by this fiduciary standard, you’re going to be in a lot of trouble if you land in arbitration,” said Adam Gana, director of the New York City-based securities litigation firm Gana Weinstein.
“These standards are putting CFPs on notice that they better put their clients’ interest above their own and stop chasing commissions [and] selling products that aren’t in the client’s best interest,” Gana added.
The revised standards define “financial advice” broadly as any recommendation to purchase, hold or sell any financial asset, Kirsch said.
In effect, any recommendation by a CFP professional can subject them to the code’s fiduciary duty, unless they specifically attempt to create an investor disclosure that states the professional is limiting the engagement to the transaction and not acting as a fiduciary or doing financial planning.
Even then, it may be an uphill battle for brokers and advisors if regulators or aggrieved investors file a claim since the new standards define an engagement as any “oral or written agreement, arrangement or understanding.” What is simply a one-off commission-based sale to a broker may well be the oral promise of retirement planning to an investor and his or her attorney.
It is likely that aggrieved investors and their attorneys will use the new CFP standards and the fiduciary duty in particular in claims citing negligence or breach of fiduciary duty, attorneys said. “Therefore, any deviation from that fiduciary standard of care may be able to be used to show a violation of the CFP professional’s duty,” Eversheds Sutherland said in its legal brief.