The CFP Board kicked off the new year with three additions to its growing collection of resources for professionals looking to comply with the board’s ethical dos and don'ts.
Guides on
CFP Board General Counsel Leo Rydzewski said through these guides, the CFP Board aims to help advisors gain a deeper understanding of the rules and regulations that govern them.
“When we developed our code of ethics and standards of conduct, we put several years into putting it together … and as you might imagine, it takes some time for the profession to adjust to new standards,” Rydzewski told Financial Planning. “We recognize that one of the key elements of the fiduciary duty has to do with the duty of loyalty, and the duty of loyalty is critically important because we know that so many advisors in the profession do have conflicts of interest. I mean, the fact you're being paid presents a conflict of interest. And it was really important for the CFP board to address it.
“Our code of Standards is largely a principles-based document. It’s principles-based because there are so many different ways a CFP professional is providing advice to a client, and there are so many myriad situations that might arise that we need a standard that can cover all of them, and a principle is the best way to do that.”
But some critics and fiduciary advocates say with the additional clarity comes the need for redefining core principles of the profession and, in some cases, the very essence of what it means to be a financial planner. Not all conflicts are the same, they say.
“In some ways these guides do provide clarity, but I think it's clarity in the wrong direction,” said Knut A. Rostad, co-founder and president of the
The three new guides explain different elements of the code and standards via step-by-step processes; a case study that illustrates how a financial advisor might provide ethical financial planning to a client through the use of a hypothetical circumstance; and tips about how to implement best practices to remain compliant.
The
The board’s financial planning process guide is a
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The guide goes on to say CFP Board’s code and standards do not require advisors to eliminate conflicts of interest. Instead, the code says a CFP professional must either avoid or disclose and manage conflicts of interest.
If conflicts are not avoided, the advisor must fully disclose material conflicts of interest; obtain the client’s informed consent to the conflict; and manage the conflict by adopting and following business practices reasonably designed to prevent material conflicts of interest from compromising the CFP professional’s ability to act in the client’s best interests.
Common conflict scenarios identified in the guide include rollover from an employer plan to an IRA, using assets to invest versus paying off debt and recommending an asset allocation strategy.
“In each of these circumstances, a CFP professional can manage the material conflict of interest by relying on a prudent process to determine which alternative is in the best interests of the client based on the client’s goals, risk tolerance, objectives, and financial and personal circumstances,” the guide says. “That process must reflect the practices of a prudent CFP professional. The process may be proportional to the size of the conflict. The greater the conflict of interest, the more carefully CFP Board will scrutinize the conflict management process.”
Rydzewski adds that more resources are on the way as CFP Board leaders and the 13-member Standards Resource Commission is working to develop additional materials to join the dozens of guides, articles, FAQs, case studies and videos already populating the
“We've been hard at work. Our Standards Resource Commission is composed of leaders in the professional community, individuals with regulatory experience, CFP professionals of all business model backgrounds, individuals who are speaking up on behalf of the public and looking out for the public interest,” he said. “We've already developed more than 30 case studies with hypothetical, factual circumstances that we believe are relevant to the practices of all CFP professionals. So if I’m a CFP professional working on my own practice and a situation arises, I can go and look at these case studies for guidance … it may not be my exact fact pattern because you know there's so many fact patterns out there for you to evaluate, but these case studies can be used to learn from CFP Board's perspective how the situation should be handled.”
Rostad, a former regulatory and compliance officer, said he “absolutely applauds” the CFP Board for providing guidance in the issue of conflicts of interest.
But the guides, he said, move the industry further away from its roots, a path Rostad said the CFP Board has intentionally walked for more than decade since imposing fiduciary duty on all financial advice and
For him, the redefinition of conflicts is the biggest deviation, noting that guidance to disclose and manage conflicts instead of outright eliminating them is at odds with history. He said in the
“There's no question in my mind that this change was intentional and with a clear purpose. I don't know how you could suggest otherwise because the guides released in January follow the trend in terms of looking at the background of the CFP Board on the issue of standards,” Rostad said. “The CFP Board came out and said that if you are engaged in financial planning, which not all CFPs are, you must hold yourself to a fiduciary standard. And then the part that becomes very complicated in a sense is, ‘as we define it.’ And so going back to 2008, they sort of reject the SEC’s view of fiduciary as defined for investment advisors, and they do so purposely.”
Rostad said after making that change and expanding the fiduciary standard, the CFP Board in his opinion did not provide any guidance about how it defined fiduciary for many years.
“It was sort of a major issue in terms of not saying what it means, except for saying it doesn't mean what the SEC says it means for investment advisors,” Rostad said.
Rostad also remains critical of the amount of time spent by the CFP Board in going over the updated stance on conflicts in the new guides. He applauds its mention that material conflicts may be too great to be managed, and that conflicts may be managed through compensation models that place less emphasis on flat, AUM or hourly fees. But he said those key points should have more than a few sentences of explanation dedicated to them.
“Over the last three or four years I have written on a regular basis that the CFP Board needs to provide CFPs definitions for what it means they have to do. And over the last year or two they have started providing that definition, and this new paper is one of the papers that they have provided,” Rostad continued. “But they put themselves in a very difficult position that is not sufficiently looked at, and that is the CFP Board standards don't apply to the firm. They apply to the individual representative.
“Be it a wirehouse, be it an independent B-D, be it an investment advisor … can't just go to their compliance people and say ‘what do I need to do?’ Because it doesn't apply to the firm. This is a complication that in my view still has not gotten sufficient attention. It's in that context that, again I look at this paper and point out that the definition that they provide is fundamentally different as opposed to the definition provided in law for investment advisors starting in 1940.”
