The CFP Board’s Duplicitous Dance

On Tuesday, June 20th, the CFP Board of Standards released a draft of proposed revisions to its Code of Ethics and Standards of Conduct for a 60-day public comment period. The draft and the pronouncements surrounding the release are merely the latest in the Board’s long history of feigning interest in consumer advocacy in order to advance the organization’s own ambition to seize control of the financial planning industry. Its actions serve as a sterling example of why the CFP Board should never be entrusted to be the standard bearer for the profession.

As explained in a five-minute, awkwardly scripted video “interview” between Senior CFP Board Ambassador Jill Schlesinger and the organization’s general counsel, Leo Rydzewski, the most substantive proposed change involves amending the Board’s current ethical standard that requires CFP certificants to act in a fiduciary capacity only when providing financial planning guidance to a new standard that requires CFPs to act in their clients’ best interests at all times. This revision is seen by some as closing a controversial, self-serving loophole that permits non-fiduciary commission-based brokerage registered representatives and insurance agents to obtain the CFP designation and use the CFP marks on their marketing materials, so long as they do not overtly state or imply that they actually provide financial planning guidance.

For many financial planners and industry observers, the current standard, which was instituted in 2009, never passed the “smell test.” While the existence of this loophole enabled the CFP Board to cast a broad membership net that provides the monetary fuel for its advertising and lobbying efforts, it is directly in conflict with, and hypocritical to, the “client-first” standards the Board so zealously purports to promote. On one hand, the Board is constantly preaching about the need for regulatory authorities to create stronger rules that place the interests of the client above those of the financial advisor, while on the other it has been encouraging non-fiduciary advisors to use the marks to gain credibility. Critics have rightly argued that this policy has added to confusion among consumers and has made it more difficult to differentiate between advisors who are held to the lower brokerage and insurance suitability standards that require only limited disclosure of commissions and conflicts of interest and advisors who must adhere to the strict client-first fiduciary standard that is applied to financial planners operating under the Investment Advisers Act.

Although the June 20th initiative has been lauded by some industry observers, the proposed standard of conduct revisions for CFPs comes on the heels of the Department of Labor’s legally mandated fiduciary standard for all financial advisors (including brokerage and insurance reps) who service retirement accounts. Far from taking a leadership role on the fiduciary issue, the Board’s proposal to expand the reach of its fiduciary standard comes after years of foot-dragging. To paraphrase a famous quip from Winston Churchill, the CFP Board can always be counted on to do the right thing…after it has exhausted all other possibilities.

Further, a close reading of the amendment finds that it is carefully and subjectively worded to allow commission-based reps to continue to use the marks and to allow the Board to continue unabated in its recruitment commission-based sales reps to the CFP ranks. The proposed new standard is being presented as an improvement insofar as it does indeed require commission-based certificants to disclose how they are paid, their obvious conflict of interest in selling commission-based products to prospects and customers, and to (subjectively) agree to place their clients’ interests first. What is conspicuously lacking in the proposal, however, is a specific requirement of upfront disclosure of how much (i.e., the dollar amount and/or % of commission) the advisor will receive on commission-based transactions.

Under the proposed amendment, a CFP advisor is not required to specifically disclose the amount of compensation he/she will receive from a client’s purchase of an annuity contract, life insurance policy, non-traded REIT, or other “alternative investment.” Commissions on these products are generally opaque to investors. Supporters of the SEC’s existing, stricter fiduciary standard would likely argue that this is very much material, relevant information that must be disclosed, but the Board’s amendment carefully tiptoes around this 800 lb. gorilla, presumably so as not to offend its legions of dues-paying, commission-based wirehouse brokers and insurance agents. Instead, the abstruse language of the amendment merely leaves it up to the CFP to determine if he/she is acting in the client’s best interest and is sufficiently disclosing material information. The absurdity of this approach is compounded by the fact that the CFP Board has no real capacity to enforce the new “tougher” fiduciary standard on its members until after a consumer complaint is made.