Col­umns Not-sodis­tant Fu­ture

The CFP Board’s new code of ethics em­braces the fidu­ciary con­cept, but will it be strength­ened later on?

Financial Planning - - CONTENTS - BY BOB VERES

I hope I’m not the only one who feels en­thu­si­asm to­ward the CFP Board. I feel they should get a pat on the back for em­brac­ing the fidu­ciary con­cept in their new, up­dated code of ethics and stan­dards. The changes are wel­come at a time when oth­ers seem to be in re­treat. First, the court sys­tem va­cated the U.S. De­part­ment of La­bor’s fidu­ciary rule and, ear­lier this month, the SEC pro­posed its own wa­tered-down ver­sion of a best-in­ter­est stan­dard. Re­quir­ing all who hold the CFP des­ig­na­tion to act in the best in­ter­ests of their clients when­ever they pro­vide fi­nan­cial ad­vice, and us­ing the “f” word in mixed com­pany, is an im­por­tant step for­ward for the pro­fes­sion. The last up­date was 11 years ago, when there was enor­mous con­tro­versy around any sort of fidu­ciary stan­dard. The first few ver­sions put out for public com­ment didn’t in­clude the word “fidu­ciary” and I was one of the peo­ple in the streets, torch and pitch­fork in hand, who hon­estly thought the CFP Board would back down from the most ba­sic way to pro­tect the public. Even­tu­ally, the com­mit­tee draft­ing the stan­dards re­quired those with the CFP mark to ad­here to Rule 1.4: “A cer­ti­f­i­cant shall at all times place the in­ter­est of the client ahead of his or her own. When the cer­ti­f­i­cant pro­vides fi­nan­cial plan­ning or ma­te­rial ele­ments of fi­nan­cial plan­ning, the cer­ti­f­i­cant owes to the client the duty of care of a fidu­ciary as de­fined by CFP Board.“The ob­vi­ous ob­jec­tion was, what about when a bro­ker is giv­ing in­vest­ment ad­vice and maybe a needs-based evaluation that falls short of the CFP Board’s rather strict def­i­ni­tion of a fi­nan­cial plan? Af­ter avoid­ing this is­sue for sev­eral drafts, the com­mit­tee made this loop­hole much smaller by adding a foot­note: “In de­ter­min- ing whether the cer­ti­f­i­cant is pro­vid­ing fi­nan­cial plan­ning or ma­te­rial ele­ments of fi­nan­cial plan­ning, fac­tors that may be con­sid­ered in­clude, but are not lim­ited to: The client’s un­der­stand­ing and in­tent in en­gag­ing the cer­ti­f­i­cant …”

Re­quir­ing all who hold the CFP des­ig­na­tion to act in a fidu­ciary ca­pac­ity with clients when­ever they pro­vide fi­nan­cial ad­vice, and us­ing the “f” word in mixed com­pany, is an im­por­tant step for­ward.

In other words, if the client be­lieved that he or she was in a fi­nan­cial plan­ning en­gage­ment, then the CFP Board could con­clude that the in­vest­ment ad­vice ren­dered should be held to a fidu­ciary stan­dard. But of course, most of the ter­ri­ble ad­vice that peo­ple re­ceive from bro­kers is not given in the con­text of a fi­nan­cial plan; it’s in­vest­ment ad­vice and rec­om­men­da­tions, usu­ally with a com­mis­sion that may or may not be dis­closed to the con­sumer. CFPS could still sell ter­ri­ble stuff, and did. They just made sure clients didn’t think they were get­ting a fi­nan­cial plan while they did so. The point of this les­son is to show how far the pro­fes­sion has moved in 11 short years. This time around, the com­ments sup­port­ing a strict fidu­ciary stan­dard greatly out­num­bered those that op­posed it, but there

was still a real dis­agree­ment of opin­ion held by a sig­nif­i­cant num­ber of cur­rent CFP hold­ers. SIFMA of­fered a re­sponse that reads like a hostage ne­go­ti­a­tion, con­clud­ing that “the bur­dens of the CFP Board’s pro­posal, cou­pled with the CFP Board’s fail­ure to ad­dress our mem­ber firms’ most sig­nif­i­cant con­cerns about it, may cause firms to reeval­u­ate their re­la­tion­ship with the CFP Board, in­clud­ing, with­out lim­i­ta­tion, con­sid­er­ing dis­con­tin­u­ing their prac­tice of re­im­burs­ing CFP cer­tifi­cates for the costs of train­ing, test­ing, con­tin­u­ing ed­u­ca­tion and mem­ber­ship, and ex­plor­ing al­ter­nate des­ig­na­tions and cer­ti­fi­ca­tions.” Now that this process is be­hind us, it would be fun to look 11 more years into the fu­ture and imag­ine what the next it­er­a­tion of the stan­dards will look like. By then, the bro­ker­age firms will have fig­ured out a way to com­ply with the un­for­tu­nate idea that their bro­kers should give ad­vice in the best in­ter­ests of their clients. True fidu­cia­ries, mean­while, will have moved on to even higher ground.

It would be fun to look 11 more years into the fu­ture and imag­ine what the next it­er­a­tion of the stan­dards will look like.

What will the stan­dards com­mit­tee write in its up­dated ver­sion in that very dif­fer­ent cli­mate? There’s room for im­prove­ment in one area. The cur­rent ver­sion of the code and stan­dards is truly com­pen­sa­tion­neu­tral, mean­ing that it talks about con­flicts of in­ter­est — such as com­mis­sions, rev­enue-shar­ing fees and other temp­ta­tions to rec­om­mend in­vest­ments that might be more ben­e­fi­cial for the bro­ker than the con­sumer. It re­quires cer­ti­f­i­cants to dis­close th­ese temp­ta­tions in de­tail, and there's a short sec­tion en­ti­tled "man­age con­flicts," which im­plies that this is an al­ter­na­tive to avoid­ing them. This is where the bro­ker­age firms and in­de­pen­dent BDs find so­lace, and why they will even­tu­ally make peace with the cur­rent ver­sion when im­ple­mented. They can still sell their prod­ucts. But fast-for­ward yet an­other 11 years and I think a new ver­sion of the code and stan­dards will fol­low the fidu­ciary con­cept to its log­i­cal con­clu­sion and say that one can­not act as a fidu­ciary when one is ac­cept­ing pay­ments from cer­tain in­vest­ment com­pa­nies. In the late 2020s, CFP cer­ti­f­i­cants will have to go fee-only or drop the mark. In that fu­ture day, I ex­pect ful­mina-

tion from the di­min­ish­ing wire­house com­mu­nity, who will still be won­der­ing why they've been los­ing the hearts of con­sumers to pro­fes­sion­als who have c client-first at­ti­tude, and are will­ing to embrace a true fidu­ciary stan­dard. What about 11 years af­ter that? By then, the de­bate will be over fee com­pen­sa­tion struc­tures. By then, the AUM rev­enue model — so ubiq­ui­tous to­day — will be in full com­pe­ti­tion with fixed quar­terly fees, hourly com­pensa-tion struc­tures and gen­er­ally a much bet­ter match­ing of costs and value to what clients are pay­ing.

The Fi­inall Fron­ti­ier

The com­mi­it­tee rrewr­ri­iti­ing the CFP Boarrd’’s code and stan­dar­rds wi­il­lll take a lot of heat from tra­di­tion­al­ists who will ar­gue that AUM best aligns the in­ter­ests of the ad­vi­sor and client. And it will ul­ti­mately re­ject those ar­gu­ments and de­clare that, when a client asks how much a cer­ti­f­i­cant will charge, the cer­ti­f­i­cant will no longer be able to re­ply: “I’m not sure. How much have you got?”

The SEC will al­ways be miles be­hind the pro­fes­sion in its timid crawl to­ward mean­ing­ful reg­u­la­tory re­quire­ments.

My crys­tal ball starts to get a lit­tle bit fuzzy beyond this. About all I can see are thriving hu­man colonies on Mars and the moon, as­ter­oid min­ing, a lot of dan­ger­ous in­vest­ment hype about cryp­tocur­ren­cies and peo­ples’ brains wired di­rectly into their smart­phones. But I’m will­ing to pre­dict that the fi­nan­cial world, and a tax regime that ex­tends to other plan­ets, will be more com­plex than it is now. The bro­ker­age firms will still be scratch­ing their heads as they con­tinue to lose busi­ness to real fi­nan­cial plan­ning firms. Mean­while, the SEC will al­ways be miles be­hind the pro­fes­sion in its timid crawl to­ward mean­ing­ful reg­u­la­tory re­quire­ments. Per­haps in that fu­ture day peo­ple will be re­quired to achieve saint­hood to be­come a CFP. Maybe not, but I be­lieve that the trend to­ward re­quir­ing fewer con­flicts of in­ter­est will likely go on for­ever.

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