A Path Forward for the CFP Board

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives. The following is taken from a webinar on this topic, which was presented on March 8. To view a replay of that webinar, go here.

“No thinking man can believe that an economy built upon a business foundation … can permanently endure without some loyalty to that (fiduciary) principle.”

Justice Harland Fiske Stone, Harvard Law Review, 1934

The late Dick Wagner, a pioneer in our industry, admonished us in his seminal essay, To Think Like a CFP. In his spirit, I frame this discussion, “To Think Like a Consumer.” That is, what do consumers want to know about their CFP? My reply, “Tell me why you’re qualified, what you do and why. Tell me the costs I pay. Your conflicts. Tell me plainly. And please, no legalese. No BS.”

Certainly, this sounds too simple to be true. Wrong. The CFA Institute’s 2016 research publication, From Trust to Loyalty, suggests it’s on target. It finds clarity and transparency on fees and disclosing and managing conflicts ranked very high among investors – so much so that fee transparency beat competitive returns as a concern.

Here’s the rub. CFPs mostly work in brokerage sales organizations where these things, like transparency and disclosure, are hard – if not impossible. An Institute survey released on March 8 revealed that just 15% of CFPs are fee-only. A full 85% reported full or partial commissions or no methods. This is fairly consistent in different parts of the country.

The CFP Board set out in its proposed standards fiduciary duties for all advice. Its statements are clear and strong. This is an important step. But alone, it falls very short. Why?

It’s about conflicts. The duty of loyalty is about avoiding conflicts. Professor Arthur Laby notes conflicts and conflicted sales dominated much thinking of the framers of the Investment Advisers Act of 1940.

Carlo V. di Florio, then director of the SEC Office of Compliance and Inspections, said in 2012, “Conflicts of interest can be thought of as the viruses that threaten the organization’s well-being. … and if not eliminated or neutralized, even the simplest virus is a mortal threat to the body.” A mortal threat, like the Monkeypox virus.

The importance of conflicts underscores why the CFP board’s core premise on conflicts and compensation matters.