Kitces: Will the CFP designation become a requirement?

Historically, the competency standards to become a financial advisor have been very low. All someone really needed to do was pass a three-hour regulatory exam that required a week or so of preparation. This low barrier for entry has meant that even licensed insurance salespeople who technically can’t be paid for dispensing advice can call themselves advisors.

Not surprisingly, the disconnect sows confusion among consumers, which in turn degrades our skill set and knowledge. And given the SEC’s lax enforcement of the Investment Advisers Act of 1940, there’s not a strong regulatory partner in this fight.

It may be time then to shift CFP certification from a trademark into an actual license — e.g., the advisor’s equivalent of a CPA.

There would be substantial hurdles to clear, particularly on the regulatory front. Yet despite only being held by about 30% of all advisors, the marks may be the best tool we have to set a baseline competency for dispensing advice, and ensure we’re producing individuals who can represent our profession well.

To understand the potential path forward, we need to be clear that CFP certification, whether from a legal or a regulatory perspective, is not on the same level as a CPA license. Simply put, you cannot do certain functions as an accountant, particularly around auditing and attesting an audit, if you are not licensed to do so.

How do you know if a self-described accountant is licensed? Those three capital letters. They’re awarded by state certifying bodies that affirm every CPA who is going to fulfill those accounting functions has met certain examination, education, experience and ethics requirements. And more importantly, if you don’t have a CPA license, you legally cannot perform some of those key accounting functions and get compensated for it.

In the case of CFP certification, there is in fact a similar requirement to those aforementioned four E’s. But CFP marks are not granted by a sanctioned regulatory body, whereas CPAs’ commitment to the four E’s is enforced by a regulator. Instead, we as advisors voluntarily bind ourselves to the four E’s as a private deal with the CFP Board in exchange for being allowed to license and use its trademark.

In other words, the CFP marks literally aren’t a license. The CFP Board just happens to be a 501(c)(3) charity that owns a trademark and has created an agreement with advisors that says we can license its trademark in exchange for an annual payment of $355 and an agreement to honor the Terms and Conditions set forth by the CFP Board to license their trademark — hence, CFP “marks.”

That’s why we have to market ourselves as “CFP professional” or “CFP practitioner,” rather than simply “CFP.” Unfortunately, that also means you can be an advisor without the CFP marks, because the only actual licensing requirement is the very basic industry exams: Series 65 to become an RIA or Series 6 and 63 to sell mutual funds and variable annuities for a broker-dealer, and Series 7 if you want to sell stocks as well. None of those have much of anything to do with the four E’s of education, exam, experience and ethics required of bona fide professionals who are paid to give advice and not just sell products or manage portfolios.

THE REGULATORY HURDLES
So what does it take for CFP certification to become a license? This can go one of two routes: federal or state regulation.

Most professions today are regulated at the state level, with professional certifying bodies like state boards of accountancy and state bar associations endowed by the states with the power to both grant the license, oversee the professionals who have the license and take action against those who practice without it.

The challenge is that more and more professions serve clients across state lines, especially in the domain of advisors, where most of the issues we help clients with are not really state-specific. Furthermore, advice is increasingly a domain where technology is used to serve clients virtually. This means there’s a huge risk that we end up with different rules in different states resulting in a patchwork of nightmares for those advisors serving clients across state lines.

Insurance agents have experienced at least a little of this today. Every time you acquire a client in a new state, you must get appointed with the insurance company in that state. And state-registered RIAs with clients across state lines ought to become even more acutely aware of this challenge, especially because these days two regulators in two states may have two views about a single advisor’s Form ADV, where State A says something is permitted that State B won’t allow, and then State B requires a change that State A won’t abide.

And while organizations like the North American Securities Administrators Association try to facilitate coordination and create model rules to promote uniformity across state lines, state regulation is rarely uniform.

This is one of the primary reasons why even the CFP Board came out recently against pursuing state regulation for financial planning because it’s so hard in the real world to get uniformity across state lines in a profession that entails many or even most practitioners having clients across state lines.

So the alternative path is federal regulation. This typically means an organization would be designated by Congress to operate across state lines at the federal level and would set regulation from the top. Examples here would be organizations like the SEC, or FINRA, which is technically a self-regulatory organization of broker-dealers that has federal authority to regulate the broker-dealer community.

The downside to this approach is that federal regulation battles are typically very public and very challenging. No regulator ever wants to cede any jurisdiction in the first place and make themselves smaller.

So when we talk about the potential for federal regulation of financial planning, the question becomes exactly what kind of regulator would we advocate for? FINRA was designed to be the self-regulatory organization for broker-dealers and doesn’t actually have much knowledge around planning and the practice of financial advice. In fact, when brokers are sued for bad advice and go to FINRA arbitration, they typically make the case that they weren’t even giving advice. Rather, they were operating solely as a brokerage salesperson.

The SEC could gain authority to regulate planning, but the SEC is already struggling just to examine the RIAs it currently oversees with an exam rate so low that the typical RIA isn’t seen more often than once about every six to eight years. So adding a bunch of new planners to the SEC’s purview, when the SEC can’t even get a budget increase for what it currently oversees, is not very likely.

We could potentially create a new standalone regulator, which I think in theory is the ideal path. This would be an organization that actually understands planning, and that would oversee all planners giving advice — regardless of what channel they’re in — and require them to have CFP marks to prove they have the training, education and experience to function as a planner.

But that would potentially mean moving those advisors from their current product-based regulators to a new federal planning regulator. It would give that regulator the opportunity to oversee insurance agents giving advice, brokers giving advice and RIAs giving advice, which would mean taking jurisdiction away from 50 state insurance regulators, FINRA and 50 state securities regulators, not to mention the SEC. None would necessarily want to see their own regulatory purviews shrink.

That’s not to say we can’t get there someday, but regulating advice one product channel at a time instead of holistically may not be the way to do it.

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Here we’ve stumbled on one of the reasons people who advocate for higher standards for planning prefer the state regulation route. You don’t have to fight a million different regulators and lobbyists all at once. You just have to convince a few state legislators to pass a law in their state and then try to get that law duplicated in some other states. Then it’s a matter of building a nationwide movement toward state regulation — except again, not all 50 states necessarily enact the same law.

From a practical perspective, it’s difficult for planners to organize a state-level, grassroots effort to move the needle in all 50 states at once. Not only is there the expense of marshalling the resources, but the product manufacturing and distribution side of the industry still has more resources and more lobbyists to fight in each and every one of those 50 states.

That means ultimately, opening the door to state regulation and facing that much potential lobbying opposition could inadvertently push standards lower than they already are. Just look at how weak the SEC’s proposed Regulation Best Interest and the new Form CRS would be. Imagine if the profession had to fight 50 versions of that dreadful rule in 50 different states, all at the same time.

So there’s better odds of getting something done at the state level, but it probably won’t be uniform and we may not like what we get. At the federal level, we could potentially achieve wide-reaching uniformity, but it’s more likely to be a pitched battle not just against the product industry, but also against many of the regulators themselves, who may find their own turf threatened by the potential changes.

THE S-CURVE
All this being said, I don’t think we should give up hope.

Because while it is difficult to get proper regulation of advice, planning itself and CFP certification is on the rise. The FP50 survey last year showed that among the top 50 broker-dealers, the majority of revenue is now fee-based. Even among commission-based broker-dealers, revenue primarily comes from fees.

And even when we look at the CFP marks more broadly, CFP certification first launched in 1973 with the first class, and it took 27 years — until 2000 — for us to finally reach the point that CFP certificants were 10% of all advisors. But it only took another 11 years, until around 2011, for us to go from 10% to 20%.

And now, just seven years later, we’re about to cross the 30% threshold.

So if we continue this rate of acceleration, a decade from now I suspect we will find more than 50% of all advisors are CFP certificants.

And this phenomenon of accelerating adoption isn’t unique. It’s actually known as the S-curve of adoption. The time it takes to go through that lower part of the S, to get from 0% to 20%, is often equal to the time it takes to get from 20% to 80% as adoption ramps up. Then things slow down getting the last 20% on board.

I think we’re actually entering the second phase, where a slow ramp-up segues into sustained, significant growth.

Not only do we see it growing in the independent RIA community, but CFP certification is now a standard part of the Merrill Lynch wirehouse training program. And it’s also standard for Vanguard’s Personal Advisor Services platform. The reason this matters is that at some point in the future, the marks will no longer be the gold standard of planning anymore, they’ll be the minimum standard.

That’s the point at which we can expect a new lobbying coalition form, comprised of organizations like the CFP Board itself, FPA and NAPFA, Vanguard, Merrill Lynch, Schwab, Commonwealth and Ameriprise. They’ll all come together to lobby for a federal regulator for financial planning.

By today’s standards, that’s certainly a bizarre coalition. We’re talking about a fee-only membership association, a wirehouse, two independent broker-dealers and an asset manager who right now have some very opposing views on certain regulatory proposals. But while they may come for different product routes, they’ll all be doing planning.

At that point, they’ll have the motivation and internal alignment to say, “We believe it’s crucial to enshrine CFP certification and regulation to stamp out that rogue minority of advisors who are giving advice to the public without any education, training or experience to do so.”

This is currently unimaginable. Statistically speaking, CFP certificants are still the rogues. Even at almost 30% penetration, it’s just not feasible for a vocal minority to convince a regulator to completely change the rules for the majority of the industry.

But with the continued growth and adoption of CFP certification, disparate industry players will eventually come together to protect their common interest. Indeed, it is in their interest to lift the standards — if only to push out the rest who haven’t stepped up.

And as adoption of the CFP marks continues and the more you see firms both large and small adopt planning and start doing it, the closer we move toward that end goal.

Michael Kitces holds the following designations: MSFS, MTAX, CFP, CLU, ChFC, RHU, REBC, CASL.