CFP Board willing to lose thousands of CFPs, if necessary, over fiduciary issue

Under pressure from the brokerage industry to follow the SEC's decision to downgrade the legal standard of client care for RIAs, the CFP Board will move forward with its own more rigorous fiduciary standard on Oct. 1 as planned, the board says — and will do so even at the risk of losing tens of thousands of brokers who are CFPs.

"We're just not going back on the standards," CFP Board Chairwoman Susan John tells Financial Planning. "We are not delaying and we are not changing the standard. … This is the right thing to do and we are going to do it."

Jeffrey Sauers

Representatives from the brokerage industry have been holding meetings with CFP Board officials seeking to persuade it to match its standards to those of the SEC’s new Regulation Best Interest rulemaking package, according to both John and brokerage industry lobbyist Kent Mason.

Despite her insistence on staying the course, John says the board may offer brokerage firms an "accommodation" to help them adapt. But she says that would not slow implementation or alter the standard itself. John would not speculate on what kinds of accommodations are possible until the full board meets.

"We do want to help firms live into it," she says.

After requests from firms, trade organizations and the FPA, the board will consider extending its enforcement date past the Oct. 1 effective date, CFP Board CEO Kevin Keller says.

"While the Board of Directors will not consider changing the new code and standards to align with Reg BI, we have been hearing [from firms] they would appreciate more time, as part of a transition period, to fully comply," Keller says. "The board, as it has always done, will take into consideration their input and concerns as it makes a final decision, which will be communicated far in advance of the Oct. 1, 2019, effective date.”

While an exodus of a large number of the more than 84,000 CFPs — caused by brokerage employers ordering them to drop the designation — is unlikely, John says, the board has considered the possibility. For good reason: last year eight brokerage firms threatened the board with that prospect in a letter, in which they argued against a stronger standard.

"We really hope it doesn’t come to that, but we did scenario planning based on different levels of loss," John says. "In the terrible event that that happens, we are fully prepared to deal with it.” She declined to elaborate.

The board should not force brokers to adhere to a standard that differs from that of the SEC, says Mason, a partner with Davis & Harman, a law firm and one of the top lobbyists representing the brokerage industry. His firm has been working for BDs in their efforts to quash efforts by states, including Nevada and New Jersey, to pass fiduciary laws for brokers.

"Compliance with the SEC rule should, in my view, constitute compliance with the CFP Board requirements," Mason says. "These are issues that I know have been raised with [the board]."

Equating the board’s standards to those of the SEC — regardless of how the language may differ — is a “safe harbor” provision that brokerage firms are now pushing the board to put into place, board officials tell Financial Planning.

The board's conflict with the brokerage industry stems from the large number of CFPs who are brokers. Of the 84,380 CFPs, 38,666 or nearly 46% have reported that they are brokers by virtue of being licensed by FINRA, the board says.

Some of the 2,000 CFPs at one large brokerage, Edward Jones, are wondering if they could be compelled to sacrifice their CFPs this year. There is precedent for such a move: When the board last revised its standards, in 2009, insurer State Farm stopped allowing its approximately 400 brokers to use their CFP credentials. That departure didn’t halt the board’s growth in the decade since. Last year, nearly 5,000 professionals became CFPs.

Last year, long before Reg BI passed, eight brokerage firms (representing 18,200 CFPs) — including LPL Financial, Edward Jones, Wells Fargo and Ameriprise Financial — wrote a letter to the board raising the specter of such an exodus.

“If CFP Board moves forward as planned,” the firms wrote in February 2018, they might respond in a variety of ways, including, “no longer reimbursing CFP certificants for training, testing and membership costs, to exploring alternate designations and certifications.”

This year, Charles Schwab, Morgan Stanley, TD Ameritrade and Wells Fargo all vowed to take their business out of Nevada, which is preparing a fiduciary requirement for brokers there. They argue that the liabilities and compliance costs would prevent them from offering low-cost transactional brokerage services to middle-class investors in that state.

The CFP Board began a multiyear process of examining its standards of conduct for CFPs in 2015. It now requires CFPs to be fiduciaries only when they are providing comprehensive financial planning, which can be difficult to define. Last year, the board voted to require CFPs to act as fiduciaries whenever they are providing financial advice, an arguably broader interpretation.

At the time the board began reviewing its standards, two large federal regulators were also preparing to weigh in. The Department of Labor was nearing the end of a lengthy process of approving a new fiduciary rule to require advisors and brokers to act as fiduciaries when advising on retirement accounts. It implemented the rule to great fanfare from investor advocates in April 2016, only to see the brokerage industry challenge and eventually defeat it in court.

Subsequently, the SEC, which for nearly 80 years had required RIAs to act as fiduciaries under the Investment Advisers Act of 1940, finalized an update of its own rules. Last month, it approved a rulemaking package collectively known as Regulation Best Interest. The new rules hold brokers to a higher standard, according to SEC Chairman Jay Clayton. However, many in the industry, including one dissenting SEC commissioner, claim it does the opposite.

The new rules also contain guidance about RIAs that downgrade the legal definition of the word fiduciary as it applies to investment advisors, according to the SEC's investor advocate. A group of securities law professors released a statement this week pointing to language in Reg BI that reduces RIAs’ relationships to their clients to that of brokers. They highlight the following quote from the commission: “The duty of loyalty requires that an advisor not subordinate its clients’ interests to its own.”

The choices the board makes with regard to Reg BI will define whether it really serves the public, as it must to preserve its nonprofit status, says industry consultant Tim Welsh of Nexus Strategy.

"Now it's the day of reckoning, which I think is fantastic,” he says.

The conflict has given the board a new and prominent role that few could have anticipated it playing as recently as a couple of weeks ago, says Richard Salmen, John's predecessor as CFP Board chairman.

"It actually makes the CFP more valuable," says Salmen, president of the RIA Family Investment Center, which has offices in Lenexa, Kansas, and St. Joseph, Missouri. He joined the board in 2015, the year that the standards review process got underway.

"I applaud them for sticking to their guns," Salmen says of the board's leadership under John, the founder of Financial Focus, an RIA in Wolfeboro, New Hampshire, that she sold to F.L. Putnam Investment Management earlier this year. John is set to be succeeded on Jan. 1, when her one-year term expires, by retired Vanguard executive Jack Brod.

Regardless of who serves as chair, Welsh, a longtime CFP who’s a former board member of the Financial Planning Association, thinks the board's CEO, Kevin Keller, should take a hard line with any firm that refuses to comply with the higher standard.

"Everyone who is a CFP holder like myself should jump and say, 'Hey, Kevin, take their CFPs away,' " he says.

The board does find itself at an inflection point, says Evelyn Zohlen, president of the FPA, which has 24,000 members.

"There's a critical question for the CFP Board to answer, which is, 'What is our priority?' " Zohlen says. "Is the number of certificants our priority and potentially considering changing the standards that we spent so much time putting together? Or are we at peace that we may lose some certificants because there is potentially some misalignment with [Reg BI] and what we have put in place?"

Editor's note: This story was updated to include additional information from the CFP Board.