Tumult At CFP Board's Ethics Commission
After the Certified Financial Planner Board of Standards enacted changes to both the member selection process and the oversight of the organization's Discipline and Ethics Commission (DEC), five of the nine commission members resigned in protest on March 8 and were joined by others in denouncing the changes as damaging to the peer review process, and, potentially, to the credibility of the CFP designation itself.
The DEC is an all-volunteer body of nine board members and four additional volunteers that meets three times a year to hear cases of possible infractions by CFP designees. During their gatherings they break up into four groups of three to hear cases, with one member acting as a floater. After the hearings, the 13 members meet to discuss the cases and render disciplinary decisions, if needed. Previously, DEC chose its own members, who were approved by the CFP Board of Directors.
Under the new system, CFP Board CEO Kevin Keller will oversee the selection and election process of DEC members. In addition, a CFP Board staffer will be present when DEC ratifies its disciplinary decisions. The staffer will "hear discussions, provide advice and get the whole context," says David Strege, Chair of the organization's Board of Directors, who adds that the staffer won't be involved in disciplinary decisions.
But some CFP Board insiders aren't buying it. "The CEO of the CFP Board has given staff unfettered control of the DEC process," says Harv Ames, former DEC Co-Chair and one of the five members (along with the other Co-Chair and the Chair-Elect) who quit the commission in protest. "In doing so, he has done profound violence to the integrity of the whole disciplinary and ethics review process."
Others railed against the way the changes came about-the Board of Directors made the changes in January, but didn't tell the DEC members until they met on March 8 and didn't make any public comment about it until four days later when they issued a press release. "I think the Board kept this quiet because they knew their decision would not be well-received," says Marty Kurtz, a former Chair of the Board of Professional Review, the DEC's former name. "I used to be a big supporter of the CFP Board, but I am not happy with the decision."
Strege acknowledges that the Board of Directors could've done a better job on the communications front. "We probably didn't give them enough ramp up time to let the changes be absorbed," he says.
Strege says the Board of Directors made the changes to the DEC because they believe the stakes will be higher after the CFP Board's strengthened ethical standards take effect this July. "We will be establishing even more critical case law going forward," he says. While praising the talents and efforts of the volunteer DEC members, he said the Board of Directors wanted the CEO and other full-time staffers to be accountable for this area because it's difficult for a volunteer group to oversee a volunteer group.
"The whole responsibility of the CFP Board is placed on the Board of Directors," Strege says. "We decided to give full-time staff the oversight function to make sure it improves and guarantees a valid, defensible process that benefits the public."
Some people take that as a slap in the face to the volunteers who oversaw the DEC. "Strege talks about best practices in the press release," says Ben Tobias, another former Board of Professional Review member. "Do best practices include blind siding the DEC and the volunteers instead of being up front about the changes?"
Strege insists that the DEC panels will continue to deliberate autonomously. In addition, the CFP Board announced in its press release that it retained independent legal counsel to act in an advisory role to its Appeals Committee, the body that reviews challenges to DEC decisions.

FPA Says No To FINRA Or SEC Oversight
Regulators are kicking around the idea of a self-regulatory organization (SRO) for all investment advisors under the auspices of the Financial Industry Regulatory Authority or the Securities Exchange Commission, but the Financial Planning Association doesn't want any part of it.
Instead, FPA executives say they prefer creating a state-based professional regulatory organization (PRO) that encompasses only financial planners, not the entire investment advisory industry.
With FINRA reportedly already asking a task force to explore its capacity to become an SRO for advisors, and with SEC staff looking at the issue after it lost a court case last year to the FPA that required it to even the playing field between broker and advisor regulation, sources say the debate over an SRO for the advisory industry isn't going away any time soon.
"We don't want an SRO for advisors," says Duane Thompson, managing director of the FPA's Washington, D.C., office. "We've always taken the position that FINRA is for the regulation of the markets, for brokerage activities and sale of products, and not appropriate for financial planners. Instead of an SRO, we're interested in exploring a professional regulatory organization [akin to a state medical board] so you're not just self regulating, but have public representation as well. Our position hasn't changed. This would be for planners, not for advisors. We'd encourage the SEC to explore the PRO concept in terms of cost and accountability."
FPA Executive Director Marv Tuttle and President Mark Johannessen say the matter is being put before the group's 28,200 members in a new survey. "We want to know what members are thinking before we put a stake in the ground," Tuttle says.
FPA executives say they might push to create a PRO in one state as a trial balloon, with Delaware as a possibility.
Some observers worry that the FPA's explanations for preferring a PRO over an SRO will leave investment advisors vulnerable to a FINRA-based SRO. "This really is a source of anxiety for me," says one longtime securities attorney. "In the debate that is developing, the nuances between a PRO and SRO will be lost entirely. There is no interest from the SEC or FINRA-which wants to expand its empire-in a PRO."
An FPA staffer admitted, "There could be confusion if people don't realize what we're saying." Part of that potential confusion rests with FPA's desire to limit its proposed PRO to just financial planners, and not investment advisors overall. Sources say that's unlikely to happen because if the SEC does create a regulatory oversight body, they'll almost certainly want to cover the entire advisory industry. Most securities attorneys believe that transferring regulatory responsibility from the SEC to FINRA would require an act of Congress.
An industry attorney-lobbyist who asked not to be identified said he has heard from three separate sources that FINRA has a task force in place for developing a strategy to create an SRO for advisors. A spokeswoman from FINRA said no such task force exists.
The attorney-lobbyist also said it was likely that SEC staff would advance the notion of an SRO in May when they deliver their staff response to the Rand Report, which found that investors are confused about advisors and broker regulation. SEC spokesman John Heine said the regulator does not comment on ongoing projects.
Thompson from the FPA says the CFP Board of Standards in the past said it would consider becoming the industry's SRO. "After many management changes, I don't know if they have a new position. I don't think they are off the list if there is a serious effort to look at this," he says.
Others say that the continuous management turnover and publicized policy blowups at the CFP Board leave it less prepared to handle the task. The CFP Board would not comment.

Client Loyalty Counts For Only So Much
All financial advisors want loyal clients, but loyalty doesn't always translate into productive relationships for advisors, according to "The Economics of Loyalty," a study done by Advisor Impact Inc., a practice management consulting firm in Toronto.
The firm contacted 1,000 investors in the U.S. who use financial advisors, and included a significant number of high-net-worth individuals with $5 million or more in investable assets. It delineated between four different types of client attitudes toward their advisor, and how that translates into client loyalty and its potential impact on the health of an advisory practice.
Among respondents, 33% identified themselves as "engaged" in their relationship with their advisors and 31% were "content." Another 19% fit into the lukewarm "complacent" category, while 17% identified themselves as "disgruntled."
"We keep talking about client loyalty as if it's the ultimate goal," says Julie Littlechild, president of Advisor Impact. "Loyalty is a bit of a hollow indication of the quality of the relationships." She doesn't suggest that loyalty doesn't matter, but her research finds that clients who are only somewhat satisfied-or worse-often stick around for a long time and can be deemed loyal even as they act as a drain on the advisor's business because they're not enthused about the relationship and are less likely to refer family and friends to the advisor.
As a result, Littlechild says there's a risk for advisors who believe that perceived loyalty equates to a sound relationship. She says the idea is to identify clients who don't appear to have a deep level of commitment and to work more closely with them to make sure their expectations are being met and that they're updated on investment decisions. The survey shows that clients who are more engaged in the investing process have a higher comfort level with risk, use more added services from the advisor, and have a higher level of satisfaction that the investments are meeting performance expectations.
For advisors, that means intimately understanding their clients' goals, proactively managing their relationships and clearly explaining difficult financial concepts. Littlechild says these steps enable clients to feel they are receiving good value for their fees. They'll also be more confident in the skills of the advisor's team and will have a strong personal relationship with the advisor. And a satisfied customer is more likely to pass along referrals.

Investors Flock To Socially Responsible Investing
Critics of socially responsible investing (SRI) contend that it's a great way to underperform the markets, but investors evidently aren't paying heed. According to a report published by Social Investment Forum, SRI assets jumped more than 18% from 2005 to 2007, while total investments under management grew by less than 3%.
Reasons for the increase range from growing institutional investor interest and rising demand for renewable energy alternatives to the emergence of new products and concerns about the Sudan humanitarian crisis. The upshot is that nearly one out of every nine dollars currently under professional management in the U.S. pertains to socially responsible investing, or 11% of the $25.1 trillion in total assets under management, as tracked by Nelson Information's Directory of Investment Managers.
The report says there are $2.71 trillion in total assets under management using one or more of the three core SRI strategies-screening, community investing and shareholder advocacy.
Assets in all types of socially and environmentally screened funds-including mutual funds and exchange-traded funds-rose 13%. Assets in community investing institutions leaped nearly 32%, while the $1.9 trillion-plus in socially screened separate accounts managed for institutional investors and high-net-worth individual clients jumped 28%. The latter group represented the bulk of SRI assets tracked in 2007.
Meanwhile, the average level of shareholder support for resolutions on social and environmental issues increased to 15.4% in 2007, up from 9.8% two years ago.
"Shareholder resolutions on environmental, social and related corporate governance questions are now enjoying major mainstream acceptance and the vote totals that go with that," says Walden Asset Management Senior Vice President Tim Smith. "Part of that is due to widespread investor concerns about such issues as climate change, the Sudan crisis and CEO compensation."
Of the approximate 6,800 mutual funds, only about 70 are SRI funds. Some critics knock the SRI concept because it excludes potentially profitable sectors such as alcohol, gaming and tobacco, or companies involved in countries with questionable human rights records. But some SRI fund families-such as Bridgeway and Pax World funds-that adhere to various forms of SRI standards have consistently topped their benchmarks.
"That belies the myth that you can't beat the benchmarks if you limit your universe," says Joshua Humphries, a Harvard University lecturer on philanthropy and director of the Center for Social Philanthropy. "Like with non-screened mutual funds, it's all about management selection."

Sanders Morris Buys Half Of Leonetti & Associates
Sanders Morris Harris Group Inc. in March expanded its wealth management practice by buying a 50.1% interest in Leonetti & Associates, a fee-based independent firm with a strong niche in serving specialty physicians.
The deal is the fourth acquisition over the past year and the 10th since 2000 for the wealth management arm of Sanders Morris, a publicly traded Houston-based financial services holding company with roughly $17 billion in assets under management.
Leonetti & Associates is based in the Chicago suburb of Buffalo Grove, Ill., and manages roughly $400 million in assets from a client base of about 460 families. Neurosurgeons constitute the largest group within its medical focus that also includes a number of orthopedic surgeons and anesthesiologists from around the country.
Michael Leonetti says his firm got a lot of calls in the past regarding possible deals, but he never found the right match. He says the link-up with Sanders Morris makes sense for various reasons ranging from succession planning to the ability to tap into the resources of a larger partner. He also cites Sanders Morris' track record of helping to grow its acquired wealth management firms, and its hands-off approach that keeps Leonetti's 19-person staff intact and lets it continue to operate as it always has.
Sanders Morris bought the stake in Leonetti & Associates in exchange for mostly cash, along with some stock.