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:
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?