After announcing earlier this year the final approval of its new Code of Ethics and (fiduciary) Standards of Conduct for CFP certificants, the CFP Board recently announced that it was creating a “Standards Resource Commission” – a new assemblage of 13 industry leaders formed for the purpose of providing formal guidance and supporting resources for the CFP certificant community to better understand how to comply with the new CFP fiduciary standard.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why this was a good and needed move by the CFP Board, why it’s necessary for even simple “principles-based” fiduciary regulation to have formal guidance on how to comply, and how the industry tends to wind up with very long and very complex regulations to support fiduciary regulation – not because a fiduciary rule is complex, but because the industry is a complex beast to which even simple fiduciary regulation isn’t simple to apply.
To understand why the CFP Board’s new Standards Resource Commission is a good idea, though, it’s important to recognize that one of the key issues that many raised in Public Comment letters when the Board’s Standards were proposed was its heavy reliance on the notion of “reasonableness”. For instance, the Standards of Conduct stipulated that advisors should act in a “reasonable” manner when addressing everything from data security to avoiding material conflicts of interest. Yet unfortunately, the very definition of “reasonableness” can potentially be quite subjective… which is why the new Standards Resource Commission is so important; their job will be to determine from the advisor community, and more importantly communicate back to the advisor community, what are our generally accepted professional practices that are recognized as industry standards and therefore “reasonable”.
For some, though, frustration remains that there is a need in and of itself to define what it means to be “reasonable” in the first place. Why isn’t the fact that CFP professionals are required to act in the best interest of their clients enough? What’s so hard about that? Why do we need all this other guidance stuff?
The answer is that in reality, simple concepts, as appealing as they are, aren’t always easy to apply to a complex system… and there aren’t many industries more complex than the financial advice industry! For example, fiduciary advocates often suggest that advisors should be banned from using only proprietary products, so that they can implement a potentially-lower-cost alternative like a Vanguard fund if it’s in the clients’ best interests. But what happens if the advisors works at Vanguard; would the Vanguard advisor be banned from using best-in-class Vanguard funds because they happen to be a proprietary product for the Vanguard advisor?
The sheer complexity of the industry means that simple rules aren’t always so easy to apply to the multitude of situations… and that’s exactly why we end up some very long and complex regulations.
However, it’s crucial to recognize that while the regulatory guidance can be quite long, the actual fiduciary and best-interests standard rules that the regulators have proposed in recent years are quite short. The Department of Labor’s fiduciary rule was not actually a 1,023 page rule; the actual rule that applied directly to advisors was just 3 simple pages… followed by 800 pages of guidance for a complex industry. Similarly, the SEC’s advice rule is not actually a 917 page rule, but a 7 page rule with over 900 pages of guidance for a complex industry. And even the CFP Board’s new 16-page Standards of Conduct is actually a half-page fiduciary rule (that’s it!), and 15+ pages of guidance regarding the Code of Ethics and conduct that is expected to comply with that rule.
And unfortunately, this tendency for long regulatory guidance for a complex industry will likely continue, until and unless the financial services industry is forced to actually become less complex – for instance, by separating out the different business lines – so that companies that create and sell financial products aren’t allowed to own advisory businesses, as is the case in the medical industry where doctors aren’t paid by drug companies to sell specific products, and is now being considered in Australia in the aftermath of their initial fiduciary regulation several years ago.
Until then, the key point remains that the complexity of regulatory guidance doesn’t stem from the fiduciary rules themselves… it stems from the complexity of the industry trying to follow them. Because being a fiduciary isn’t confusing in and of itself… but it does start getting a little messy when you begin to apply simple concepts to the real-world complexity of the financial services industry.