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Legions of Certified Financial Professionals (CFPs) face a choice: either act as a fiduciary, as their CFP certification will require as of October 1, or surrender their credentials in order to work for firms that push products upon their customers that meet the weak “suitability” standard.
To put the significance of this decision in context, consider what a planning client recently asked me: “My current financial consultant told me he is a fiduciary. And that he acts in my ‘best interest.’ Can I trust him? Is he doing a good job for me?”
As I reviewed this new retiree’s investment portfolio, several things became clear. The financial consultant was, in fact, a “fiduciary” to the client – but only for a small portion of the client’s portfolio. Fully 80% of the portfolio was managed under the low standard of “suitability” – which permitted the financial consultant to sell highly expensive variable annuities and costly mutual funds to the client. In fact, the client was paying total fees and costs in excess of 2% a year – more than double what she should be paying for a $2 million portfolio. In fact, some of the investment products had annual fees in excess of 3.5% a year.
The portfolio had no structure designed to minimize taxes. The client was paying far too much in taxes relating to her investments.
An investment policy was absent, despite the need to ensure a disciplined approach to risk management. Following years of sustained advances in the valuations of the equities market it was readily apparent that the client was assuming too much risk.
The retiree’s financial consultant and his firm were receiving a huge amount of compensation – via various hidden fees. These included “payment for shelf space” arrangements in which the brokerage firm was incentivized by variable annuity and mutual fund companies to sell higher-cost investments. And, in the world of investments, the academic research is clear – the higher the costs, the lower the long-term returns for the individual investor. Simply put, fees and costs matter.
In essence, it was evident from the advice rendered that the financial consultant had little to no education and experience in the design and management of investment portfolios, nor in undertaking the appropriate due diligence on investment strategies and products.
Sadly, this client’s situation is not an isolated incident. The client placed her trust in this financial consultant. The financial consultant in fact stated that he acted in her “best interests.” And the client’s trust was betrayed – via conflicts of interest that were neither avoided nor properly managed to keep the client’s interests paramount to those of the financial advisor.
Federal regulation goes askew
This situation – repeated hundreds of thousands of times each year in the United States – is about to be exacerbated. The U.S. Securities and Exchange Commission is about to enact a rule stating that all brokers act in the “best interests” of their customers – when in fact all that is really required under the rule is mere disclosure of conflicts. The S.E.C. has also recently opined that the Investment Advisers Act of 1940 fiduciary standard only requires disclosure of conflicts, rather than informed consent (as no truly informed client would ever consent to be harmed).
Of course, as anyone who works in financial services knows, customers largely do not read disclosures, and even those who do seldom understand them. Conflicts of interest impair the ability of the customer to attain his or her financial goals.
What is a consumer to do? How can a consumer of financial and investment advice locate, and work with a personal financial advisor they can truly trust?
The Certified Financial Planner™ advantage – Trusted, expert advisors
Fortunately, effective October 1, 2019, the Certified Financial Planner (CFP) Board of Standards, Inc. will be raising the bar. It will require all CFPs to be true fiduciaries to their clients – at all times. Not only will CFPs be required to possess substantial education, pass a strenuous exam and attain a minimum of two years of financial industry experience (all of which have always been prerequisites for the CFP certification), but they will also now be required to observe a strong duty of loyalty to their clients. The new “Code of Ethics and Standards of Conduct” for CFPs will require, come October, that all CFPs “place the interests of the client above the interests of the CFP® professional and the CFP® professional’s firm.”
In essence, consumers who choose to work with CFPs will be assured that their personal financial and investment advisor (and that advisor’s firm) will: (1) be an expert, and act with that expertise; (2) possess the duty to maintain the consumer’s interests paramount, at all times; (3) receive only reasonable, professional-level compensation; and (4) be required to be completely candid and honest with the client, always.
Some firms may push back – and will ask their representatives to surrender the CFP® certification
Unfortunately, some firms are pushing back against the CFP Board, prior to the October 1 implementation of these new standards. Those firms are unwilling to abandon the high fees received from acting as representatives of the seller, rather than as representative of the purchaser. Even when they hold out as acting in their customers’ best interests, and even though they utilize titles for their sales representatives such as “advisor,” “consultant” or “manager” that imply a relationship of trust and confidence.
But, if these firms begin to force their employees to drop their CFP® certifications (as some have already threatened), then those firms will be subject to two compelling forces. Their best employees – those committed to professionally serving their clients– will depart the firm for other firms that will adhere to the CFP Board’s higher standards.
The second major force is having the customer walk – to find individual advisors and their firms who will act as representatives of the client, rather than as a distributor of expensive investment products. This has already been occurring over the past two decades, as product distributors have been losing market share and fee-based accounts have been increasing.
Even as brokerage and product-pushing firms, via their lobbying in Washington, D.C., stop the imposition of fiduciary standards, these same firms continue to lose in the marketplace. Neither high-quality personal financial advisors, nor informed consumers, desire the business model of the past. Quality advisors and a far greater number of consumers aware of the choices now available are choosing the path of bona fide fiduciary advice, regardless of the adoption or interpretation of applicable laws and regulations.
Some advisors face a choice
Advisors should inquire whether their firm will permit them to continue to be a CFP on October 1, 2019. If the firm’s answer is “no” or “we are uncertain,” advisors will face a difficult choice.
They may be forced by their firm to surrender the CFP® certification they studied long and hard for, in addition to passing the tough CFP® exam and meeting the two to three years’ experience requirements. These advisors will also be confronted with the risk that consumers, already much more informed of the CFP® mark as a result of the CFP Board’s highly prominent marketing campaign, will simply say “no” to working with non-CFP so-called “advisors.”
New clients increasingly ask tough questions when they interview advisors. Imagine how the conversation will go when trying to explain to a prospective client why you gave up your CFP certification – or whether you are permitted to keep the client’s best interests paramount to those of the CFP® and his or her firm.
Alternatively, individual advisors will choose to continue their CFP® certification, even if it means switching firms. These advisors will recognize that – not only do new clients increasingly ask for CFP® credentials – but those same clients will be on the lookout for advisors who eschew conflicts of interest.
Those advisors will recognize that the CFP Board will likely continue its highly successful marketing campaign, with an increased focus on the obligation of CFPs to keep their clients’ best interests paramount. Those in the consumer media will understand this evolution – and will increasingly direct their readers to insist upon CFP® certification as a means of not only assuring competency, but as an essential consumer protection against the harm often caused by the existence of multiple conflicts of interest.
Ron A. Rhoades, JD, CFP® is director of the personal financial planning program at Western Kentucky University, and a frequent writer and speaker on the fiduciary duties of personal financial advisors and their due diligence requirements. This article represents his own views and are not necessarily those of any institution, organization or firm with whom he is associated.
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