The August CFP CE quiz is now available in the Members Section!

In the ongoing effort to differentiate, many financial planners are engaging in a "race to the top" to assert themselves as delivering the best quality advice subject to the highest standards. At the same time, the financial planning membership organizations are similarly competing to attract more quality members by implying their existing members are of the highest quality due to the organization's high Standard of Care. Yet the reality is that most of the major financial planning organizations now have an almost identical standard of care... and as a result, the real differentiation is not what the standard of care is, but whether the members really adhere to it, even though most associations have no feasible way to monitor the activity of their members. Which raises the question - what's the point of even claiming a standard of care as a differentiator, if the organizations can't enforce those standards to deliver on the promise anyway?

The inspiration for today's blog post comes from a series of communications I've received recently from several financial planning organizations/associations, all of which insist that one of their primary competitive advantages is the quality of their members due to the high standard of care to which their members must adhere. Yet the reality is that in today's world, these Standards of Care are not really that unique; as you can see by following the links below to the standards for the major financial planning organizations:

FPA Standard of Care and Code of Ethics

NAPFA Standard of Care and Code of Ethics

SFSP Code of Professional Responsibility

AICPA PFP's Statement on Responsibilities in Personal Financial Planning Practice

If you read through these various standards of care and codes of ethics and professional responsibility, the trend becomes apparent immediately. They all define the behavior of professionals (since they are, after all, professional membership associations). They stipulate that professionals must act with objectivity and integrity and put their clients' interests first; they must be competent; they must respect their clients' confidentiality; they must deliver their services diligently and professionally. In fact, the bottom line is that aside from some relatively minor wording differences, virtually every organization's standards could be swapped interchangeably with another! Even the Codes of Ethics for other overlapping organizations in the professional financial services space fit the same mold (e.g., the IMCA Code of Professional Responsibility or the CFA Institute Code of Ethics and Standards of Professional Conduct). It appears the one of the only meaningful differences amongst any of the organizations is that NAPFA in particular requires its members engage in a fee-only arrangement with clients to ensure their definition of Objectivity.

Enforcing The Standard Of Care

Yet the strange reality is that while all the organizations have virtually identical standards of care, they are also almost virtually identical in their total inability to enforce it. Granted, if a planner got into severe trouble with their regulators, and lost their requisite license(s) or were barred from the industry, they would probably stop paying membership dues and would disappear from the membership rolls. But what about the merely incompetent, inept, or "marginally moral" planner? The one that isn't doing anything overtly illegal, but would make you flee running from a membership meeting if you found out that this person was your "professional peer"?

Which raises the question: If you can't make THAT kind of bad member disappear from your membership by enforcing your standard of care, what's the point of having and claiming a unique standard of care in the first place? I don't mean to suggest that professional associations shouldn't have any standard of care; the point is simply that trying to claim a unique standard of care begins to lose its meaning when there's no means to enforce it. The reality seems to be that many questionable planners could find a home in almost any of the membership associations; even if the individual fails to adhere to the standard of care, until/unless there's a gross violation with legal consequences, it's virtually impossible to be held accountable to the organization's standard of care anyway!

Standards To Join And Barriers To Entry

On the other hand, while all the organizations have remarkably similar stated Standards of Care, and remarkable similarity in their inability to enforce it, the same cannot be said for the consistency of their members themselves. As someone who has spent a great deal of time at events with FPA, NAPFA, AICPA PFP, and the SFSP, I can confidently say that while each organization has some fantastic planners that often rise to the top, the consistency of the member experience and quality of the "average" member met varies greatly from one organization to another. And while there is some variability from one chapter/state to another, simply put, it seems that you tend to meet a lot more "bad" - or at least, not-so-serious - planners in the FPA and SFSP.

So what accounts for the difference? Why can't the FPA and SFSP seem to cull the bad apples from their midst (or avoid them in the first place) the way that NAPFA and AICPA PFP seem to have done? While all of the organizations have ongoing standards of care that they can't enforce, the difference is that NAPFA and the AICPA PFP do have significant minimum standards to join in the first place, that create barriers to entry for those who aren't really serious about doing financial planning.

In the case of the AICPA, the requirement is the CPA license itself, which necessitates a certain level of serious study and professionalism to achieve in the first place. In the case of NAPFA, the barriers to entry include not only a requirement for the CFP certification (which also provides some enforcement mechanism as the CFP Board itself ramps up the enforcement of its own Standards of Professional Conduct), but further standards in addition to CFP certification, including the requirement to submit an actual sample financial plan from the firm to be reviewed by the organization - significantly increasing the likelihood that anyone who is a NAPFA member must be fairly serious about their craft to be willing to go through the trouble.

These differences in turn feed into a difference in the cultures of the organizations, and the kind of members that culture attracts - far more than the actual standard of care the organization espouses (even in the case of NAPFA, it appears that the quality of their members is as much about the kind of people that NAPFA's culture attracts, than the actual fee-only-for-ethical-objectivity requirement).

Organizational Culture As A Means Of Enforcement

In fact, the upshot of the strength of culture for some of the membership organizations is that it serves as a form of social enforcement of its standards. Good luck being an unprofessional CPA in the midst of the AICPA, or a planner that sells suitable-but-questionable products to your clients as a NAPFA member. The standards of care become enforced socially and culturally, long before any overseer would actually kick a member out for failing to follow the standard. Which is fortunate, because the actual enforcement mechanisms are limited.

In the case of the SFSP and the FPA, on the other hand, the organizational cultures are far less consistent, in large part because there are so few barriers to entry. While the SFSP does require some professional designation, their standards have increasingly widened over the years, and the majority of their membership are not financial planning practitioners anyway, but affiliated professionals. In the case of the FPA, the standards to join are actually the lowest; anyone can join the FPA, regardless of whether they do comprehensive financial planning or are simply loosely attached to it, having studied for the CFP certification or eschewing any professional course of study whatsoever. As a result, while the FPA includes some good planners, there is also no barrier whatsoever for those who just want to join for the FPA's brand name without embracing its professed values, and there is also no organizational culture that would drive away those who don't uphold or honor the standards. As a result of the open door policy, the quality of the average member declines, which in turns makes the organization less appealing for those who are serious about financial planning, while it continues to be open to those who are not - an iterative process that brings down the average member quality even further. And notably, if a planner were stripped of his/her CPA license or CFP certification, the planner would not longer meet the membership requirements to remain in the AICPA PFP or NAPFA, either, while that planner would likely still remain an FPA member!

The bottom line is that in the long run, a standard of care that cannot be enforced cannot succeed. Ultimately, the standard loses its value and reputation when it becomes clear that members aren't actually adhering to it. And ironically, the more positive the perception of the standard is, the more appealing it will be for people to associated with it even (or especially) if they do not actually honor it, and the more rapidly it will be denigrated. In fact, a weaker standard of care that's actively enforced can result in better membership than a higher standard of care that remains unenforced. Which raises the question of whether there is such a thing as a high standard of care if there is no enforcement mechanism in the first place.

So what do you think? How do you compare the standards of care amongst the various membership associations? Is it meaningful to have a standard of care that is separate from the standards of the underlying licenses or certifications? Which matters more - who the organization is willing to accept as a member for meeting the standards of care, or whether they will reject members for failing to do so?

  • S. Johnson

    What an honest post. NAPFA is able to create a higher standard because of the criteria to join the organization. In addition to submitting a plan that is reviewed by peers, they check to see if you hold any licenses to sell, and if you do, you are denied membership. (This is a very good thing, because it bars entry by salespeople right from the start.) It creates a standard that can be monitored right from the beginning.

    FPA has no such standard. I was a member of FPA for a good number of years, but aside from wanting to be a lobbying group, I could find no vision from the organization. Many of the members in my particular chapter were annuity salesman, with no understanding of planning whatsoever. Then they created a fiasco with the “Merrill Rule” law suit, angering a certain segment of their membership when FPA won at the detriment to some of it’s membership. It was, and I assume still is (I left the organization years ago) a sub-par association trying to collect membership dues from anyone that will pay them.

    You can not serve advisors, brokers, and insurance agents within one organization. NAPFA serves only advisors. The AICPA serves only CPA’s. Both of these associations have a clear vision of the type of members they want to attract, and the standards those members will be held to.

    I joined NAPFA years ago, and for a while was a member of NAPFA and FPA, so I have been able to compare the two organizations side by side.

    I love NAPFA. While not perfect, they have a core belief, and attract those members. The NAPFA members I have met are the gold standard of the industry and I would have no reservation referring a client who was moving to a new location, and wanted a local advisor.

    FPA and SFSP need to decide who they want to represent…brokers, insurance agents or objective advisors. With NAIFA representing the insurance community, and NAPFA representing advisors, maybe FPA should represent brokers, and change their name to the FSA Financial Sales Association.

  • Clark M. Blackman II

    Interesting piece Michael. Thanks for opening up a topic that is worth discussion. I’ll be interested in reading the comments as they pour in.

    First of all, all the actual “professions” I am aware of require the professionals involved to take an active role in protecting the public’s interest (and thereby their profession’s interest) by notifying their organization when a violation comes to their attention. In fact, it is a violation of most ethical standards to not do that. Doctor’s can lose their license to practice medicine, lawyers their license to practice law and CPA’s their license to practice public accounting. Even in these cases, it is necessary that a problem be discovered, either by a patient or client complaint, or by a professional who views part of his responsibility as a professional to report “unprofessional” behavior (i.e. behavior that is harming a client and/or is in violation of the profession’s or the organization’s rules).

    With the exception of the CPA’s peer review program, I am unaware of any other profession sending out auditors or examiners to make certain the ethical standards of behavior established by the profession are being followed, and even in the event of peer review, the end result is to find and draw attention to inappropriate behavior for correction and share best practices, more so than to do a regulatory review ala the SEC or FINRA to levy fines and punishment. And yet all of these professions do very well as a general rule. But to further reinforce your point, I believe at least part of the reason is the high standards established upfront for entry. Because the harder it is to get in, the more precious membership becomes.

    So the issue in my mind isn’t the degree to which organizations enforce their standards by sending out examiners to ensure and enforce compliance, but rather what their members do when violations by a fellow member are discovered, and what the organization does when a complaint is filed.

    I’ve bandied about the term profession and professional quite freely here, and yet most of us in the business realize financial planning and investment advice giving is not a profession in the true sense of the word. If one uses professional to describe a person who gets paid for doing a job, say like a football player in the NFL, then I guess we are all professionals; but then who isn’t that has a job, and now the word becomes synonymous with “employed.” But isn’t it also true that we all know that financial planning and investment advice giving SHOULD be a profession? At least through membership in our “professional” organizations we can establish the appropriate behaviors that a professional should follow.

    The hope of all the organizations you mentioned, and I’ll add IMCA and the CFA Institute to the mix, is that members will value their membership enough, and their “profession” enough, and respect their organization enough to help police the industry for the conmen, miscreants and ne’re-do-wells that prey upon their unsuspecting clients. Sadly, by the time clients figure out what has been done to them, if they ever do, much time has lapsed and many others have been damaged, including the reputation of the organization this so-called “advisor” belongs to. We, as aspiring professionals, need to take a proactive role in monitoring our industry.

    If we want our designations to mean anything, we each individually have to be part of the solution. One can’t blame the organizations for not spending the huge dollars it would take to police their membership themselves. To suggest that a standard of care that can’t be enforced cannot succeed presumes that that the maniacs are running the asylum and no one is following the rules. That is contrary to reality. The vast majority of members of these organizations follow the standards, care about the standards and behave accordingly. True, in most cases enforcement does not entail a large fine or prison term, but it does mean disclosure to state and federal regulators if you give investment advice. That is no small penalty for someone trying to build a business. And if in fact fraud is discovered and clients are being harmed, the organization will necessarily need to involve law enforcement.

    So let’s not downplay the importance of our industry’s organizations’ codes of conduct. Of course not everyone will follow them, but not everyone follows the laws of the land either (see Madoff and Stanford as examples). But as to your last question in particular, a high bar does go a long way to ensuring at least competent and capable members, if not ethical ones; yet ultimately it is the quality of the members that get involved, the community they create and the volunteerism and leadership that ensues that ensures a quality organization worth being a member of. All the jack-booted examiners in the world can’t do more to ensure quality membership than that.


    Disclosure – I am a long time member of the AICPA, CFP Board of Standards, CFA Institute and Investment Management Consultants Association and believe they all do an outstanding job of creating, and enforcing when necessary, a professional environment.

  • Pingback: | Nerd's Eye View()

  • Michael Kitces

    Thanks so much for the feedback.

    Indeed, I do agree that “sending out enforcers” is not the only means of enforcement possible. In fact, the reason I highlighted the cultures of a few organizations was to emphasize that in those organizations, enforcement by peer and culture is arguably at least as powerful a force as any site audit enforcement might be. Anyone who’s even been involved with NAPFA has noticed that their standards are so deeply embedded in their entire organizational culture that someone who didn’t adhere to those standards wouldn’t last long (and I mean that only as a compliment to NAPFA).

    But I do think that ultimately, it requires some combination of culture – where the community upholds its standards and ‘enforces’ against those who do not – and more traditional enforcement to achieve a bona fide standard.

    At the most basic level, there must be SOME realistic, actual means by which a member can be ejected from the community for failing to uphold the standards, in order for the standards to mean anything. The AICPA has one means to accomplish that, and NAPFA has a slightly different mechanism, but I find from personal experience that both do a pretty good job. By contrast, I still find little in the actual operations and culture of the SFSP or the FPA that actually allow for a member to be stripped of membership for failing to uphold the organization’s standards. They SAY they have standards, but there’s no means to even determine whether anyone follows them, nor is there even any means to file a complaint to report a planner who is failing to do so. The CFP Board does at least have the means to facilitate reporting of professionals by other professionals, but notably neither the FPA nor SFSP have an actual mechanism to remove someone from membership even if they had their CFP marks stripped for bad behavior!

    But indeed, I do not mean to imply that enforcement-by-examiners is the only means of enforcement. Community and culture play a part too. But as you point out, that often still requires at least a mechanism for practitioners to report other practitioners… a mechanism that some associations notably lack, especially when they don’t also require that the practitioner have a ‘license’ or certification to practice in the first place.

    – Michael

One Tweet / Trackback

  • Monday, July 23rd, 2012
    Choosing a financial advisor is difficult, and as a result it's helpful to provide the public with guidance about how to select one. ... | Nerd's Eye View

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

For ConsumersFor Advisors

Blog Updates by Email

Nerd’s Eye View Praise

@MichaelKitces Twitter

Out and About

Wednesday, September 9th, 2015

*Future of Financial Planning in the Digital Age *Modern Portfolio Theory 2.0 @ FPA San Diego

Thursday, September 17th, 2015

*Future of Financial Planning in the Digital Age *Social Media for Financial Planners *Understanding Longevity Annuities and their Potential Role in Retirement Income @ FPA Colorado

Monday, September 21st, 2015

*Cutting Edge Tax Planning Developments & Opportunities @ MetLife