By Knut A. Rostad
Originally posted on ThinkAdvisor, June 28, 2017
CFP Board’s revisions to its Standards of Professional Conduct are out. The Institute for the Fiduciary Standard applauds the CFP Board for making this proposal.
Make no mistake. The proposal is a good first step. Two provisions regarding fiduciary duties stand out.
- One, all CFPs who render “financial advice” are deemed fiduciaries. The proposal states that a CFP must “act as a fiduciary when providing financial advice to a client, and therefore, act in the best interest of the client.” Financial advice seems to be defined broadly and completely, and this is good.
- Two, conflicts of interest start to be put under control. Disclosure and management is required – but not well defined. Also, any dispute over informed consent between a CFP and a customer will be “interpreted in favor of the client” by CFP Board.
The provision on conflicts especially matters. It’s a start in the right direction. It can reverse current standards that implicitly support conflicted advice — that is, if followed by explicit requirements that urge conflict avoidance and, for conflicts not avoided, impel meaningful mitigation. Without such additional explicit requirements, the intent to curb conflicts will fall short.
The Institute has identified three areas of particular concern and recommended action steps. Did CFP Board agree?
Issue: Ambiguity over when CFPs are fiduciaries persists.
Answer: Require that all CFPs meet a single rigorous fiduciary standard that is plainly written.
Action step: Eliminate CFPBOS “two-standard” standard whereby CFP registrants have different conduct standards depending on whether they are offering financial planning advice. Communicate this standard in plainly written language.
Yes, CFP Board did it!
Issue: The Board appears to view conflicts of interest as ubiquitous and unavoidable — and benign.
Answer: Adopt a rigorous standard on conflicts of interest that discusses the well-recognized risks and potential harm to clients that conflicts create. Clearly urge avoiding or eliminating those conflicts.
Action step:
- Insert a robust discussion on why CFPs should avoid conflicts. Explain in terms of history, law and plain commonsense.
- Provide guidance on how conflicts not avoided must be managed and outline the burden advisors must overcome.
- Include guidance on disclosure and informed consent.
- Replace a “general summary of likely conflicts of interest” with the SEC policy requiring written disclosure with “sufficiently specific facts so the client is able to understand the conflicts of interest … and can give informed written consent.”
- Honor the principle that, though no one can be free of all conflicts, everyone can avoid most conflicts. Conflicts cannot be taken lightly or accepted as a norm.
No. Except for improved disclosure (D), CFP Board fell short and did not adopt provisions to set a new policy (A, B, C, E). CFP Board can still do so.
Issue: Compensation and expense disclosure requirements reflect a minimum standard.
Answer: Require transparency and clarity in fee disclosure.
Action step: Stop allowing a “general description of compensation arrangements” and “information related to costs upon request.” Instead, require clear disclosure in AUM percentage or dollar amount of what the client will pay in underlying investment costs, and what the CFP registrant and the firm will be paid as a result of the advisor’s advice or product recommendation. Or, at minimum, provide a good faith estimate of these fees and costs.
No, CFP Board fell short.
Additionally, the Institute adds the issue of enforcement. Our paper focuses on provisionsthat either strengthen or weaken the standards’ fiduciary imprint, and the issue of enforcement was not addressed. It needs to be. This issue is also not addressed in the CFP Board proposal, as noted by Bob Clark and Michael Kitces. It deserves to be seriously addresses. Without credible enforcement, CFP Board relies on the honor system.
Serious shortcomings in the CFP Board standards remain. They should and can be remedied before the new standards are finalized. Fiduciary advisors should make their voices heard. They should attend one of the public forums scheduled July 24-27 in eight cities, or they should send in written comments to by August 21.
The overriding message to CFP Board: Think big. The opportunity in this review of standards, as the regulatory and market stars align, stands out. It parallels 1940, when the Investment Advisers Act of 1940 was enacted. The crafters of the ‘40 Act worked away as Europe fell into WWII. They got it right and probably never imagined their work would become so vital over the next 77 years. CFP Board has a parallel opportunity in 2017. Think big.
