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CFP Certification, Financial Planning, and Fiduciary: Doing Versus Being

Posted by Michael Kitces on Monday, December 10th, 12:01 pm, 2012 in Planning Profession

As financial planning continues its march towards being a recognized profession, a fundamental tenet is that it must hold itself to a fiduciary standard - just as is required of every other profession that functions in the public's interest in a position of expert trust. Five years ago, the CFP Board took that step with its adoption of a fiduciary standard for CFP certificants who deliver financial planning, declaring that doing financial planning (or even just material elements of financial planning) would trigger the standard. Nonetheless, by attaching the fiduciary standard to doing financial planning, the CFP Board's standard also implies that there are situations where a CFP certificant may not be subject to the fiduciary standard - and this "loophole" has recently come under heavy criticism. Although in practice the loophole may be a fairly narrow one - how common is it really for someone to spend years and thousands of dollars to study and obtain a CFP certification only to not deliver any actual financial planning whatsoever? - it nonetheless raise the question: is it time for the CFP Board to take the next step forward, and advance the fiduciary standard from applying when one is DOING financial planning, and instead simply attach it to BEING a Certified Financial Planning professional in the first place?

The primary issue in the controversy is the fact that, under the CFP Board’s fiduciary standard, the fiduciary duty of care doesn’t apply until someone is actually doing financial planning or material elements of financial planning, which is determined by examining the facts and circumstances of the engagement. By contrast, Rhoades and others have suggested that it is misleading to the public to suggest that CFP certificants will always act in the interests of their clients – an implied fiduciary duty – if there are in fact situations where CFP certificants may not actually be fiduciaries.

The Fiduciary Duty for Doing Financial Planning

When the fiduciary standard was added for CFP certificants in 2007, the CFP Board essentially declared that the fiduciary duty applies when one is doing financial planning – thereby ensuring that all financial planning is delivered with a fiduciary duty. This represented a significant advance in the standard of care for consumers receiving financial planning, and is something the CFP Board has not backed away from.

The caveat, of course, is that if the fiduciary standard applies [only] when someone is doing financial planning, the standards need to clarify when someone is doing financial planning, and how to determine whether it is being done - versus just providing more basic advice, general education, or merely determining non-advice suitability. Further guidance on this has come out over the past several years, most recently in the form of the aforementioned multimedia presentations on various scenarios where the fiduciary standard does and does not apply, as the CFP Board has tried – in good faith, I believe – to help practitioners understand when the fiduciary duty does and does not apply.

Although some have suggested this is a form of “two hat” standard – a reference to the situation where advisors may be wearing the fiduciary hat to provide advice and recommendations, and then take it off and wear the lower-standard suitability hat to implement those recommendations with products – in reality the CFP Board's rules are not a two-hat standard. The CFP Board’s fiduciary standard still declares that once financial planning is done and the fiduciary hat is on, it can’t be taken off. The point of the rules is simply to acknowledge that if a CFP certificant gives no advice, does no financial planning, and simply happens to be an order taker that executes a client request without ever putting the fiduciary advice hat on in the first place, that the fiduciary duty shouldn’t attach to a purely non-advice order-taking function (or some other not-doing-financial-planning scenario, like a CFP certificant teaching a financial planning class full of college students).

Doing Versus Being 

The fundamental issue at hand is whether the fiduciary duty should apply when a practitioner is doing financial planning – the CFP Board’s current position – versus whether the fiduciary duty should apply simply by being a CFP practitioner – the position that Rhoades and several others have taken. And I have to admit, when looking at the history and principles of the fiduciary duty, I think the answer is quite clear: the fiduciary duty should attach the moment someone holds themselves out in an advisory capacity, which means if you hold yourself out as a Certified Financial Planner professional, the fiduciary duty should immediately (and irrevocably) apply.

In other words, there should be no such thing as someone who holds themselves out as a pure non-fiduciary order-taker, while also holding oneself out as a fiduciary CFP certificant. Just being a CFP certificant and holding out that way should attach fiduciary status. By analogy, doctors cannot escape their clients-first duty by simply being a doctor who prescribes drugs without giving medical advice; in fact, because the doctor is a professional first and foremost, from the moment the patient recognizes him/her as a doctor, it’s actually considered malpractice to recommend and implement solutions (drugs) without doing the appropriate medical evaluation and diagnostics first!

Extending the analogy, this suggests not only should CFP certificants not be allowed to escape the fiduciary duty by being mere order-takers and not doing financial planning after holding themselves out as financial planners and/or CFP certificants, but in fact it should be a breach of fiduciary duty to be such an order-taker after holding out as a fiduciary professional in the first place! And in point of fact, this is the exact duty that would apply to a financial planner, if the CFP Board appropriately attached the fiduciary duty to simply being a CFP certificant and holding out as one, rather than waiting to apply it until that practitioner actually does financial planning.

What About The Order-Takers?

Notwithstanding my preceding statements, I think it’s important to note that I do believe consumers should have access to so-called “order-takers” when they want one. There are perhaps some financial services products that are so complex or potentially dangerous that we should only allow them to be implemented after consulting a professional (as we do with dangerous prescription drugs). However, the reality is that most financial services products today are considered the equivalent of “over-the-counter drugs” that do not require an evaluation and prescription from a professional before use. And although we can argue about whether there should be a few more products on the “prescription” rather than “over-the-counter” side of the line, it nonetheless remains true that many people know what they want, and should be allowed to work with someone to simply help them complete the transaction, without going through the time and cost of a comprehensive financial planner and the financial planning process if they don't want or need to.

Accordingly, as I have written earlier on this blog, the ultimate regulatory divide should be between those who provide advice, who are subject to the fiduciary duty (because there’s no such thing as true advice that isn’t in the client’s best interests!!) and are subject to a minimum competency standard like CFP certification, versus those who sell products, who are subject to a suitability standard, simply implement products, and are barred from holding themselves out as an advisor or providing any actual advice. This, ultimately, is the best way to “fix” the problems of improper advice in financial services, while still preserving choice and maintaining lower cost options for those who just want to buy their financial services products, where a caveat emptor suitability standard can appropriately apply because consumers will truly, clearly understand the person implementing the transaction is not there to give advice (just as we’re already familiar when we purchase cars or clothing).

In the context of the CFP Board's fiduciary standard, this would simply mean that if someone wants to be an order-taker and not a fiduciary, that's fine, but they should not hold themselves out as a CFP certificant and imply a financial planner advice relationship if the relationship is merely that of an order-taker. Similarly, if the fiduciary standard is applied to simply being a CFP certificant by default, the CFP Board can still put forth a list of limited scenarios where legitimate exceptions to the fiduciary standard would apply (such as CFP certificants teaching a class). Nonetheless, it makes the point that the fiduciary standard for financial planners would not be "off" until financial planning is done; it means the fiduciary standard would be "on" until proven otherwise with an applicable exception (which, notably, is exactly how the fiduciary standard applies for investment advisers under the '40 Act).

How Big Is This "Loophole" Really?

Although Gluck, Rhoades, and others have implied or outright suggested that the CFP Board is causing rampant harm to the public by being “misleading” to the public regarding the clients-first standards to which CFP professionals are subject to, I think it’s important to note that in reality the actual amount of public harm from the CFP Board’s fiduciary (or rather, non-fiduciary in some situations) standard may be quite limited and almost negligible. The reasons for this are two-fold.

The first is that by the CFP Board’s own guidance, determining whether one is "doing" financial planning is based on the facts and circumstances of the situation, and one aspect of that test to determine whether the fiduciary duty applies includes “the client’s understanding and intent in engaging the certificant” – which means if the client thought or expected that he/she was receiving financial planning advice, the fiduciary duty will still apply. And arguably, as noted earlier, the mere fact that an individual holds themselves out as a CFP certificant already implies a certain level of professional client-centric advice will attach to any interaction. Which means in reality a CFP certificant may, even under the CFP Board’s current fiduciary standard, become subject to the fiduciary standard merely because he/she held out as a CFP certificant and/or as a “[Certified] financial planner” professional. In other words, it may not even matter if the CFP certificant didn't actually do comprehensive financial planning, and/or was just working in a single focused subject area; if the certificant held out in a manner that implied to the client that he/she was going to get financial planning, then a financial planning fiduciary duty can apply under the rules as already written. Those who believe they can avoid the CFP Board's fiduciary duty by holding out as a CFP certificant but just applying their advice in a single area of financial planning may just be fooling themselves.

In addition, it’s notable that as the rules are written, a CFP certificant essentially can only avoid fiduciary duty by not applying any of his/her knowledge and skillset as a financial planner, not doing financial planning, and not even providing material elements of financial planning (and perhaps not even holding out as a CFP certificant in the first place). And in practice, I seriously question the frequency of such scenarios, for the simple reason that virtually everyone goes to study for their CFP certification specifically because they want to be able to offer better, more comprehensive advice and solutions to clients (whether to be paid for the advice itself, or for the products implemented pursuant to that advice), and they want to hold themselves out as CFP certificants.

In other words, how many people actually take several years of time and spend thousands of dollars to train in financial planning, just so they can not do any financial planning whatsoever, nor hold out as a comprehensive financial planner? I suppose it probably happens in rare scenarios, but I suspect the answer is "not many" really do this. Perhaps there are some who consider the path initially because they simply want the CFP certification for “marketing value” alone, but after receiving the comprehensive education of the CFP educational curriculum, in practice I find most of them start offering more comprehensive advice as well. They can’t help themselves; they’ve spent years learning how to do it and their clients want it! Which means in reality, it may be quite difficult to find any CFP certificant who went through all the trouble to get the CFP certification, yet actually does not do any actual financial planning, or material elements of financial planning, such that he/she would not be subject to the CFP Board’s fiduciary standard.

Moving The Fiduciary Standard Forward?

Of course, if the reality is that nearly all financial planners may be subject to the fiduciary duty already, simply by virtue of the fact that they hold themselves out to the public as comprehensive financial planners, and/or because they can’t help but do financial planning or material elements of financial planning because that’s what they spent years and thousands of dollars learning, then arguably there would be little impact for the CFP Board to simply take the next step and declare that just being a CFP certificant and holds one's self out to the public as a “[Certified] Financial Planner/Advisor/Consultant” and/or as a “CFP professional” means the fiduciary standard will apply.

Clearly, the history of the fiduciary duty outside of financial planning would suggest that this is where the fiduciary standard within financial planning needs to go anyway, as traditionally the fiduciary standard applies as soon as a trust advice relationship is established, simply based on how the professional holds themselves out and the kind of relationship that implies to the client. 

So perhaps it is time for the CFP Board to take the next step forward, and formally shift the fiduciary standard from applying when someone is doing financial planning, to simply applying when someone is being a financial planner by holding themselves out to the public that way (and create a list of appropriate and legitimate exceptions, if necessary). And for those who really do just wish to be an order-taker and not provide advice and financial planning to the public, they’re welcome to continue to do so as salespeople. They just need to step away from their CFP certification, and don’t say they’re a financial planner or a CFP certificant if they’re not really interested in actually being one and being held to the fiduciary standards that would and should apply.

  • http://www.alfredstate.edu Ron Rhoades

    Michael, a well-written article, and a sound conclusion.

    I have both been a fan of the CFP Board, and its critic. I applaud many things the CFP Board has done, including establishing a de facto standard of baseline competence for financial planners. In addition, I am grateful that, in 2007, a group of leaders of the CFP Board embraced the fiduciary standard of conduct, and especially that the rejected the notion of "two hats" and the ability to remove the fiduciary hat once it was on the head of the advisor.

    I also appreciate the CFP Board's advertising campaign, as a means of raising awareness of the CFP mark.

    I support NAPFA's recent decision to require CFP certification as one of its many requirements for membership. I hope that the CFP Board will reach out to the CFA Institute, CPA/PFS (AICPA), and others to find ways that their designees can attain the CFP certification, perhaps through a more targeted exam regime which focuses on areas on which they may not have been previously adequately tested.

    At the same time, I worry.

    I am concerned that the CFP Board, through some of its advertisements, is creating the impression in the minds of consumers that all CFP Certificants practice as fiduciaries, when such is not the case.

    I am concerned that the "material elements of financial planning" test, in which some CFP Ethics Course trainers have stated that fiduciary status could be avoided by the Certificant if only one practice area (such as "retirement planning") is implicated, is out of line with state common law application of the fiduciary standard of conduct. I believe it is a larger hole than Michael Kitces suggests, and that far too many Certificants seek to rely upon this "exception." In my mind they do so at their peril.

    I am concerned that the CFP Board's Standards of Professional Conduct, in their only passing reference to the fiduciary duties of due care, loyalty, and utmost good faith, do little to educate and inform CFP Certificants as to the extent of their fiduciary obligations.

    The financial advisor community has come a long way in its understanding of the fiduciary standard, its importance for consumers (and for America itself), and its application to those who either hold themselves out as advisors or who actually provide professional advice.

    I suggest that it is now time for the CFP Board's Standards of Professional Conduct to be revised. To abandon the "one area of financial planning" exception (which remains even then a facts and circumstances test), as it has little basis in state common law and unduly puts Certificants at risk. To more carefully delineate the fiduciary standards of conduct.

    I also suggest that the CFP Board, which has been such a strong advocate of the fiduciary standard before Congress and before the SEC, adopt the fiduciary standard for all of its Certificants, at all times when they are providing advice (as such term is broadly construed), or when they hold out as a CFP Certificant. This would be leading the profession forward, as the CFP Board should.

    It is time for evolution. It is time for us to move forward toward a true profession. Like it or not, the CFP Board has a position of leadership. If the CFP Board desires to enhance the prestige of the designation, obtain the respect of the media, professionals and consumers alike, a full embrace of the fiduciary standard of conduct is required.

    I encourage the Board of Directors of the CFP Board to accept the challenge, and lead, so that we may all become members of a respected profession, and proud to call each of our peers a professional colleague. Thank you.

    • Michael Kitces

      Ron,
      Thanks for the comment.

      On a minor note regarding the "material elements of financial planning" and its associated "one area of financial planning" exception, I do think it's worth emphasizing - as you point out - that this is a facts and circumstances test, and that there ARE other elements to the evaluation, including how the planner held out, the expectations of the client, etc.

      Accordingly, while I share some of your concerns about these tests, they are not the bright line safe harbor that many have implied them to be. Which means, simply put, that if some planners are suggesting they're not fiduciaries solely because they only do one element of financial planning, without looking to the other aspects that are also evaluated, they may well be mistaken about their own fiduciary status and fooling themselves to think they have escaped it when they haven't.

      If that's the case, the real problem is that some planners don't understand how the fiduciary rule DOES apply, not the idea that CFP certificants are serving clients outside the scope of fiduciary.

      Respectfully,
      - Michael

  • Dan Bauer

    I'm sure we could all write a book on this topic...but here are my three big points:

    1. I think your term of "order-taker" is misleading, as it implies that the advisor is giving a consumer what they ask for. In reality, product salespeople are telling consumers about products they've never heard about, then recommending that the consumer buy them. While this doesn't fall under the "Financial Planning" hat, almost any consumer with a limited knowledge of the CFP designation would believe they are receiving financial planning advice.

    2. I'd like to know how the CFP Board handles situations where an advisor IS doing financial planning, but is limited by their B/D firm from actually acting as a fiduciary. For example, many B/D's prohibit reps from recommending products held away from the B/D, suh as no-load 529 plans, even if a financial planning agreement exists through the B/d-owned RIA. An advisor who is not allowed to consider the full scope of available products can't possibly be acting in a fiduciary capacity.

    3. If a financial planning agreement is in place between advisor and client, then doesn't the advisor fall under the '40 Act, and isn't the advisor required by law to act as a fiduciary? If so, isn't it the case that the CFP Board's rules merely echo actual law, rather than delivery any sort of enhanced fiduciary status on its certificants?

    - Dan

    • JT in Tampa

      Dan,

      I understand where you are coming from and agree for the most part on what you say. However, I think it is important to remember that fiduciary care doesn't mean that an advisor needs to be able to sell no load 529's or mutual funds. If the client understands/ disclosed that a financial advisor is limited to what their offering is and they still choose to work with them I still think there is room for good fiduciary work. The fiduciary work in this case is to know the client, and prepare a plan for that client that is in the clients' best interest (not best product in the world, which will always be debatable). If fiduciary means that the client needs to be in the best no load, low fee this or that then we are in for a world of hurt. There are thousands upon thousands of options when it comes to investments and insurance, if fiduciary means that we need to put the client in the absolute, best fund or product of any kind, then we will all be sued because there will always be another product that will perform better than the one implemented.
      Financial planning is knowing your clients and writing a plan that takes all the variables of the client into consideration in developing a plan that helps the client achieve their financial goals. This is where the majority of fiduciary is, when someone desires to save for college it is a fiduciaries responsibility to show the different strategies (not the best no load fund) to pay for college and recommend the strategy the advisor thinks will be best for the client. As for implementation, the client needs to know what limitations there are for the advisor and they can choose to implement with the same advisor, with another advisor, or on their own.
      My case in saying this is that unfortunately when I started with a big insurer, the district manager and another advisor went to push an annuity as a college savings plan and to purchase some fixed UL to a newly widowed woman. This obviously is not fiduciary work but if they went and showed the client the state pre-paid fund vs 529 and told her that they are limited in offerings but the strategy was sound then the fiduciary role could have been met.

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