This article originally appeared on Advisor Perspectives.

The CFP Board had noble intentions with its new standards that became effective last month. However, its handling of conflicts falls so short that absent significant new guidance the credibility of the standards is in serious doubt. This is clear from the recent publication of a major insurer’s eye-opening disclosure intended to address conflicts.

The CFP Board established the Commission on Standards in December 2015 to recommend changes to the CFPB standards. After an extensive process involving subsequent public forums, proposals, re-proposals and comments, the CFP Board approved new standards in March 2018 that became effective October 1, 2019.

CFPB is providing guidance on what they mean. This includes commentary, a roadmap and case studies. Some case studies are already out (see here). Other case studies are in process.

The case studies aim to give the standards meaning for CFPs, investors and consumers, and how the standards will be interpreted and applied. They will be a “roadmap” for compliance that can be understood by an ordinary investor.

Compliance gives conduct standards meaning. State securities administrators and NASAA pointed this out in regard to the SEC’s Regulation BI. According to Andrea Seidt, Ohio commissioner of securities and chair, noted, “If (Reg BI) is going to mean anything, if it’s really going to be a step up from suitability. The way that that’s going to happen is from regulatory examination and enforcement.”

This is especially true of material conflicts of interest that are not avoided or eliminated and remain central to a CFP’s product recommendations. Financial Planning magazine recently reported on such a case in its coverage of Northwestern Mutual’s (NM) disclosure document that was crafted for CFPs. The six-page document is called “My Commitment to you as a CFP Professional.”

The document describes in detail how NM’s jungle of material conflicts that face a CFP who is a NM representative or insurance agent. Those include, for example, the contractual relationship with NM, the compensation-related conflicts, increasing-payout percentages … known as a grid, how “I am incentivized to sell more expensive products and services, ” and that “I have an incentive to recommend an NM variable annuity product for purchases below $50,000, which is a material conflict of interest…”

This is an extraordinary document. It plainly describes the magnitude of the incentives aimed to make NM a powerhouse product distributor. It describes a rep’s relationship of three: NM on one side, customers on another and the agent as the third piece. It openly tells the basic story that reps don’t “advise.” They are hired, trained and incentivized to sell.

NM then argues that, notwithstanding this infestation of material conflicts, CFPs need not mitigate or manage them. The reason? NM conflicts are designed to be self-mitigated or self-managed. How? The disclosure states, “For more than 160 years, NM has been helping individuals, families and businesses, (so that I know) in the long run I will benefit you most by serving you well…. This in itself helps to mitigate the material conflicts …. ” (The emphasis is mine, as is the case in the next paragraph.)

It continues, “The nature of NM and its insurance products also helps to manage material conflicts of interest,” and “My conflicts are further mitigated by NM ‘s compensation practices … specific programs were designed intentionally to minimize compensation that could incent sales behavior that is in material conflict with a client’s best interest. All of these steps help mitigate my conflicts” in selling NM products to you.

CFP Board General Counsel Leo Rydrewski wrote this about the Northwestern Mutual disclosure,

CFP Board appreciates the steps that firms, including Northwestern Mutual Life Insurance Company, are taking to support CFP® certification and allow CFP® professionals to comply with the Code of Ethics and Standards of Conduct. CFP® professionals recognize the importance of disclosing conflicts of interest that could affect the professional relationship. Where the disclosure provides sufficiently specific facts, a reasonable client is able to understand the conflicts and the underlying business practices, and either give their informed consent to the conflicts or reject them. But disclosure and consent is not all that CFP Board’s Code and Standards requires A CFP® professional also must manage the conflicts by adopting and following business practices reasonably designed to prevent the conflicts from compromising the CFP® professional’s ability to act in the Client’s best interests.

The question becomes does the disclosure allow informed consent and can a CFP’s business practices separately mitigate the conflicts?

The SEC sets out a heavy burden an advisor must overcome “to infer or accept” client informed consent. This includes being aware that the client “understands the nature and import of the conflict.”

NM is in a bind. It knows the disclosure doesn’t meet this burden. It also knows a NM CFP cannot just create its own business practices and work independently as a NM rep. This puts a CFP in a tough position. The CFP can neither reconcile his duties to serve customers’ best interests with the restraints of NM nor can he merely let the NM disclosure stand by itself.

The NM disclosure is a case study that underscores that CFPs need greater guidance. Referencing business practices and a duty to overcome conflicts isn’t enough. Guidance is needed that is practical and specific describing what must be done to gain informed consent and to mitigate material conflicts.

It has been four years since CFP Board started the process that culminated in the promulgation of its standards, which became effective October 1. CFPs should know what to do about conflicts to comply with the standards.