In December of 2015, the CFP Board announced that it was beginning a process to update its Standards of Professional Conduct for all CFP certificants, the first such update since the last set of changes took effect in the middle of 2008. And on this past June 20th, the CFP Board published proposed changes (including an expanded fiduciary duty) to its Standards of Conduct, with a public comment period that would last until August 21st.
And so as the CFP Board’s Public Comment period closes today, I have published here in full my own comment letter to the CFP Board. And as you will see in the Comment Letter, I am overall very supportive of the CFP Board advancing the fiduciary standard of care for CFP professionals, and view this as a positive step forward for the financial planning profession.
However, the CFP Board’s proposed changes do introduce numerous new questions and concerns, from key definitions that (in my humble opinion) still need to be clarified further, to new wrinkles in what does and does not constitute a fee-only advice relationship (and whether and to what extent certain types of compensation must be disclosed), to uncertainties about how CFP professionals are expected to navigate important conflicts of interest, and how CFP professionals should interpret the 29(!) instances where the CFP Board’s new standards are based on “reasonableness”… with no explanation of how “reasonable” is determined, and a non-public CFP Board Disciplinary and Ethics Commission that doesn’t even allow CFP professionals to rely on prior case histories for precedence.
Ultimately, I am hopeful that the CFP Board will end up moving forward with its proposed changes to expand the scope of fiduciary duty for CFP certificants, but only after publishing another round of the proposal for a second comment period, given the substantive nature of both the changes themselves, and the concerns that remain.
In the meantime, I hope you find this public comment letter helpful food for thought. And if you haven’t yet, remember that you too can submit your own Public Comment letter to the CFP Board by emailing [email protected] – but today (August 21st) is the last day to submit!
Michael Kitces Comment Letter to CFP Board On Proposed Changes To Standards Of Conduct
Dear CFP Board,
I am writing to share my comments and feedback on the newly proposed Code of Ethics and Standards of Conduct for CFP professionals.
Overall, I want to commend the CFP Board and the work of the Commission on Standards in crafting new rules that represent a positive step forward for the professionalism of CFP certificants, especially including the expansion of the CFP professional’s scope of fiduciary duty to capture all types of financial advice, and not just applying a fiduciary duty in a full-scope comprehensive financial planning engagement or when providing material elements of financial planning. More generally, the Commission on Standards clearly took steps to close some of the perceived gaps and “loopholes” from the prior/existing rules. As a result, I am in full support of seeing some version of the Proposed Standards of Conduct moving forward.
That being said, the writing of new rules of conduct always introduces the potential for new areas of confusion for CFP professionals that must adhere to those standards, and the risk of creating unintended consequences along the way. Accordingly, in this Comment Letter I’d like to focus attention on several areas in the proposed standards where I believe further clarity is necessary, either to give CFP certificants clear(er) guidance about how to properly conduct themselves in compliance with the new rules, or to limit the risk of adverse unintended consequences.
I hope that the CFP Board will take this (and other stakeholder input), and re-issue a second version of the Proposed Standards of Conduct for further comment.
Clarifying Definitions In The Proposed CFP Code Of Ethics And Standards Of Conduct
The CFP Professional’s Firm Vs A Related Party
A substantial portion of the guidance under the proposed Professional Standards hinge on various duties of, and disclosures on behalf of, both the CFP Professional and the “CFP Professional’s Firm”.
In this context, the CFP Professional’s Firm is defined as:
Any entity on behalf of which a CFP professional provides Professional Services to a client.
Where Professional Services are defined as:
Financial Advice and related services that are provided or held out as being provided, including, but not limited to Financial Planning, legal, accounting, or business planning services.
These definitions, as constituted, raise a number of important questions and clarifications.
First and foremost is the nature of the relationship between a registered representative and their independent broker-dealer, who for tax purposes are commonly classified as “independent contractors”. Does the nature of the independent contractor status of a CFP professional’s affiliation with an independent broker-dealer mean an IBD is treated as the Professional’s Firm, or as a Related Party (given that the scope of disclosures and CFP professional duties are not the same for Related Parties as the individual’s own Firm)? What about the case of an independent insurance agent who is appointed with (but again treated as an independent contractor) with one or more insurance companies? Is it even feasible for independent brokers and agents affiliated with multiple broker-dealers or appointed to multiple insurance agencies to provide the depth of disclosures and fully comply with the other obligations of the CFP Board’s proposed standards, given the extremely limited control an (independent) agent or broker has over the actions of his/her broker-dealer or insurance company (especially when affiliated as an independent contractor)?
The distinction of where to draw the line between the Professional’s Firm and Related Party is also especially important because the definition of “Fee-Only” prohibits sales-related compensation to a CFP professional or his/her firm, but does NOT prohibit sales-related compensation to a Related Party as long as the compensation is not in connection with services the CFP professional provides. Thus, if a CFP professional has a corporation, partnership, or LLC business entity that provides services to the client, and maintains a broker-dealer affiliation or insurance company appointment, but does NOT direct any client business to that broker-dealer or insurance company, he/she WOULD be fee-only if the B/D or insurance company is a related party, but NOT fee-only if the broker-dealer or insurance company is treated as his/her “firm”.
Simply put, the definition of the professional’s firm is based on whether the CFP professional provides Professional Services “on behalf of” the entity – yet in the case where the CFP professional is a registered representative or an appointed agent but also an independent contractor, it is not clear which status controls for the purposes of determining the professional’s “firm” (and in the case of an insurance agent appointed with multiple companies, whether the insurance agent must treat all insurance companies with which they’re appointed as Firms or Related Parties).
Notably, a clear line on the definition of a “Firm” is also germane to the CFP professional’s ability to separate and “compartmentalize” lines of business. How might a CFP professional sufficiently distance themselves from a relationship with an entity that receives sales-related compensation (but NOT in connection with their own clients’ services) such that it may be treated as a Related Party, and allow the CFP professional to hold out as Fee-Only with only a Related Party (but not a “Firm”) affiliation?
This concern is highly germane to a substantial number of CFP professionals whose current services with clients entail only the deliver of Fee Only financial planning, but who maintain “affiliations” to entities (e.g., prior broker-dealers with parked licenses, or insurance companies with prior-but-still-active appointments) who may wish to characterize their compensation with clients as fee-only without being forced to fully terminate their connections to other entities. (For instance, the now-fee-only financial planner who maintains an appointment with prior insurance companies to remain the Servicing Agent of Record on the client’s previously-purchased life insurance policies.)
Key Point: Clarify what relationships between a CFP professional and a financial services entity constitutes the CFP Professional’s “Firm”, given a world where advisors can be employees, registered representatives, appointed agents, and independent contractors.
Narrowing The Definition Of “Family Member”
The Related Party rules under the proposed Standards of Conduct include a rebuttable presumption that any family members, or business entities that family members control, will be treated as a “Related Party” for the purposes of both compensation disclosures, and the potential determination of the CFP Professional’s status as being “Fee-Only”.
However, “Family Member” is simply defined as:
A member of the CFP® professional’s family and any business entity that the family or members of the family control.
In practice, this raises numerous questions.
First and foremost, to what depth in the “family tree” is it necessary to look to determine “member of the family” status. Parents, siblings, and children? Grandparents and grandchildren? What about aunts, uncles, nieces, and nephews? Do cousins count? Only 1st cousins? What about 2nd or 3rd cousins? Do the family members of the CFP spouse’s family count, if the spouse is not themselves a CFP professional (such that the family members are “only in-laws”)?
Similarly, what constitutes “family control” of an entity? Must it be controlled by a single family member? What if multiple family members each own a minority share, but their combined ownership constitutes a majority ownership? Does “control” mean ownership of voting shares that actually control the entity? Does that mean a CFP professional could avoid “Related Party” status by owning a 99% limited partnership interest in the entity but NOT the 1% controlling general partner interest? (And does that distort the original intent of these Related Party rules, since the CFP professional would not control the entity, but would receive the bulk of the financial benefits of the entity?)
Notably, Internal Revenue Code Section 318 provides substantial guidance about where these dividing lines are drawn with respect to family members, family attribution, and constructive ownership of stock, and may serve as a guiding template for the CFP Board.
But the nature and scope of “family” and “control” must be clarified further, lest CFP professionals simply direct (without being required to fully disclose) a substantial portion of their compensation to entities in which they own 99% limited partner interests but no controlling interests to avoid the Related Party rules!
Key Point: Clarify the scope of “family member” (how much of the family tree counts?), what constitutes “control” of a business entity as a Related Party, and whether a non-controlling but majority financial interest should also be deemed a Related Party.
Disclosing How An Advisor Is Compensated, or What An Advisor Is Compensated?
A key aspect of the fiduciary duty is to fully disclose conflicts of interest to the client (to the extent they cannot be avoided), and is articulated as such in the CFP Board’s required Duty of Loyalty to clients.
However, the actual disclosures required in Sections 10 and 11 (Introductory Information to the Prospect, and Disclosure Information to the Client) regarding compensation merely require that the advisor disclose “how the Client pays, and how the CFP professional and the CFP Professional’s Firm are compensated, for providing services and products.” Notably absent is a requirement to disclose what, exactly, the CFP professional and his/her firm will be compensated for providing services and products.
This may have simply been an unintended error of wording, but sections 10(b)(ii) and 11(a)(ii) of the final rules should be updated to clearly require the CFP professional to not merely disclose how they are compensated – e.g., “with fees” or “with commission” or “by my company” – but disclose what the CFP professional is compensated: i.e., disclosing to the client the actual compensation arrangements for what, exactly, the CFP professional is compensated (and not merely “how”).
Notably, if/when compensation disclosures are required that explain what, exactly, the CFP Professional and the CFP Professionals firm are paid, an additional distinction may need to be made between what the CFP Professional is paid, and what the CFP Professional’s Firm is paid, given that not all CFP Professionals are privy to the details of all revenue sources of their Firms (particularly in the case of a broker-dealer, if a broker-dealer is deemed the CFP professional’s “firm”). This may include (for firms) revenue-sharing or shelf-space agreements, 12b-1 or sub-TA fees, conference sponsorships based on sales volume, commission overrides (in the case of certain annuity and insurance products), etc. Consider whether additional clarifications are needed to specify the exact scope of compensation disclosures for the CFP profession as distinct from the CFP Professional’s Firm, especially given the breadth of some firm’s overall business models.
Key Point: Does the CFP Board expect the CFP professional to merely disclose how they are compensated (fees or commissions or both?), or what they are compensated (disclosure of actual compensation arrangements)? And to what extent must the CFP Professional determine the prospective compensation relationships of the CFP Professional’s Firm?
Financial Advice Outside The Scope Of A Financial Plan
In the glossary, Financial Advice is defined as follows:
A communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the Client take or refrain from taking a particular course of action with respect to:
- The development or implementation of a financial plan addressing goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a Client’s personal or financial circumstances;
Technically, this would suggest that any suggestion that a client take or refrain from a particular course of action not pursuant to a [comprehensive] financial plan would not be deemed advice. In other words, if the CFP professional simply gives direct advice to the client regarding budgeting, risk, wealth, taxes, retirement, etc., but not specifically pursuant to the “development or implementation of a financial plan”, it would not be financial advice subject to a fiduciary duty (unless captured in one of the other subclauses of Financial Advice regarding the investment of Financial Assets or the selection of other professionals).
Given that many forms of financial advice are given more modularly, and not necessarily as a part of a comprehensive financial plan (nor is what constitutes a “financial plan” even defined in the proposed Standards), this section should be modified to simply recognize that the subjects themselves are what trigger financial advice, not specifically the creation of a financial plan.
The most straightforward resolution would simply be to remove the words “development or implementation of a financial plan addressing”, such that the section would simply read:
A communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the Client take or refrain from taking a particular course of action with respect to:
- The goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a Client’s personal or financial circumstances;
Notably, in the context of this change, the word “goals” should be also modified, to stipulate “financial goals” (as otherwise, even advice about a client’s “goal to lose weight” could be treated as a financial advice goal under this definition!), or alternatively the final clause could be adjusted to state “…or other relevant financial elements of a Client’s personal or financial circumstances”).
In addition, advice regarding loans, debt, and other mortgages (or more generally, “liabilities”) should be included in the list of topics which are treated as “financial advice” in this section (as the remaining subsections defining Financial Advice all pertain to a client’s Financial Assets, and not his/her Financial Liabilities).
Key Point: The delivery of financial planning advice should be treated as financial advice, regardless of whether it is actually delivered pursuant to a financial plan.
New Issues Created By Proposed Compensation Disclosure Rules
Beyond the aforementioned definitional issues regarding the Proposed Standards, a number of unique new issues arise in the CFP Board’s new approach to compensation definitions, including its “negative framing” approach to fee-only (where a “fee-only” advisor is not one who “only” receives fees, but one who does not receive any form of Sales-Related Compensation), the labels that advisors use (or may potentially use in the future) to describe their compensation methodologies.
RIA Solicitors And Outsourcing Investment Management
Section 14(b) of the Proposed Standards defines Sales-Related Compensation, which is stated as:
Sales-Related Compensation is more than a de minimis economic benefit for purchasing, holding for purposes other than providing Financial Advice, or selling a Client’s Financial Assets, or for the referral of a Client to any person or entity. Sales-Related Compensation includes, for example, commissions, trailing commissions, 12(b)1 fees, spreads, charges, revenue sharing, referral fees, or similar consideration.
The fact that revenue-sharing and referral fees, along with any other kind of compensation for the referral of a Client to any person or entity, constitutes “Sales-Related Compensation”, presents substantial potential difficulties for a number of common investment arrangements that would otherwise, to an objective observer, appear to constitute a Fee-Only advisory relationship (were it not for this new compensation definition).
For instance, many financial-planning-centric CFP professionals choose to outsource their investment management implementation, rather than hiring a CFA to assist with it internally. If the advisor wants to retain operational responsibilities and “just” have a third party help with investment models and implementation, the advisor might use a Separately Managed Account. However, for advisors who want to fully outsource investment management responsibilities, it is common to use a TAMP (Turnkey Asset Management Platform), which handles both the investment management and other operational tasks of the investment portfolio, including billing.
In some cases, TAMPs will apply two tiers of fees to the advisory account – one for the TAMP’s portion of investment responsibilities, and the other for the CFP Professional’s fees. But more commonly, the TAMP will simply conduct the entire fee sweep, and then remit a portion back to the CFP professional in the form of either a revenue-sharing or solicitor fee.
The end result of this arrangement is that the CFP Professional that uses a TAMP for investments in order to focus on financial planning would be deemed to receive sales-related compensation and not be fee-only (due to the fact that the TAMP swept the fees and remitted them to the advisor), whereas if the advisor retained billing responsibility and remitted a portion of the advisor’s fee to the TAMP as an expense, he/she would be treated as fee-only. This seems to create a substantial distinction in compensation disclosure arrangements, without any actual substantive difference in what the client pays, or the nature of any conflicts of interest (particularly where the advisor retains advisory authority to hire/fire/change the TAMP manager).
Furthermore, the irony is that if the CFP professional was not independent, and instead worked for the TAMP, and was paid compensation directly by the firm for which he/she worked (even if it was a percentage of revenue), the compensation disclosure rules would (correctly) recognize that the client is paying only a fee to the CFP professional and his/her firm. Thus, an independent CFP professional who objectively chooses a third-party TAMP (for which the TAMP handles billing and shares the CFP professional’s share of the fee back to him/her) is treated as receiving sales-related compensation, yet an employee of the TAMP who only solicits for that TAMP, and receives a share of the fee revenue (a classic salesperson arrangement) would not be sales-related compensation (because as an employee, the employee’s compensation within the firm is not treated as revenue-sharing, even though it functionally is).
In other words, the CFP Board’s Proposed Standards have (perhaps unwittingly) created a substantial distinction between “first-party” revenue-sharing (CFP professional is internal to a firm), and “third-party” revenue sharing (CFP professional is external from the firm), even though the actual services rendered, fees paid by the client, and compensation paid to the CFP professional, are exactly the same… and in fact, the external advisor would be more independent and less prone to sales-related conflicts of interest!
While in theory, it might be ideal to try to “require” all advisors to structure third-party investment management agreements in certain ways – such as requiring that the advisor’s fee and the TAMP’s fee always be billed separately, or that the advisor always sweep fees and remit the TAMP’s portion to the TAMP, rather than the other way around – from a practical perspective, such changes would be substantial operational changes for many TAMPs, and not feasible to implement in a timely manner in accordance with the CFP Board’s Proposed Rules. Even though, again, the end result to the client is still that he/she is paying only fees and no actual sales-related compensation.
Accordingly, the CFP Board should consider amendments to this definition of “Sales-Related Compensation”, to more accurately reflect the underlying substance and economic reality of the arrangement for the client, and not recharacterize fees as sales-related compensation simply due to operational implementation decisions.
Reasonable safe harbors to further modify this rule might include:
- If the CFP professional receives a referral or solicitor fee from another firm, and that firm itself receives no sales-related compensation in connection with services rendered to the client, then the CFP professional’s participation in a portion of the fee-only relationship does not convert it to sales-related compensation (i.e., participating in a portion of the fees in a fee-only relationship is still a fee-only relationship);
- In order to be deemed a permissible fee-only revenue-sharing agreement, the CFP professional should retain discretion to hire or fire the third-party manager (to affirm that the CFP professional is in an independent relationship, and not operating as a captive salesperson); and
- In order to not be deemed Sales-Related Compensation for participating in the sharing of a client fee, the CFP Professional’s share of the compensation should not materially vary by the assets of the client or total assets of the relationship (to avoid sales incentives for directing client investment fees towards a particular provider)
Key Point: Treat CFP professionals who outsource to third-party managers the same as CFP professionals whose firms hire internal investment staff, if the client is actually paying the same fees either way.
Internal Employee Sales-Related Compensation In The Form Of Bonuses
Continuing the prior theme, it’s also notable that all forms of “Sales-Related Compensation” implicitly assume that payments will come from third parties, without recognizing that for advisors who work directly for product manufacturers, “sales-related compensation” comes in the form of direct bonuses from their employer for certain levels of sales production.
In other words, when an independent advisor is paid to sell a third-party product, sales-related compensation is typically in the form of a commission. When a captive advisor is paid to sell his/her company’s own proprietary product, sales-related compensation is typically in the form of bonuses (which firms assign based on sales targets, the profitability of products, etc.). Yet the CFP Board’s current definition of compensation would not characterize the compensation of the latter as sales-related compensation, even if the bulk of the advisor’s compensation actually was tied directly to sales (and paid in the form of employee bonuses, rather than product commissions).
Accordingly, CFP Board’s definitions for sales-related compensation need to consider the types of internal compensation bonuses paid to employees for business development and production, including common practices such as paying advisors a percentage of revenue they bring in (an indirect form of solicitor fee), and paying bonuses based on total products implemented (an indirect form of commissions). And to the extent such compensation arrangements would be deemed sales-related compensation in a third-party independent context, they should be reflected as sales-related compensation in a first-party context as well.
Otherwise, a firm could operate entirely as “fee-only” simply by manufacturing all of its own proprietary products, and rather than paying commissions to third-party advisors, simply pay its own CFP professionals a salary plus bonus (or a share of revenue) to sell its products (even though the nature of the advisor’s role is purely sales).
Key Point: Treat RIA solicitors of a fee-only firm the same as employees of a fee-only firm, given that both may be paid the exact same way (a percentage of revenue). And recognize for captive employees of firms that manufacturer proprietary product, even salary and bonus compensation can constitute sales-related compensation (even if there are no direct commissions, because the company is distributing its product directly through its own salaried salespeople).
Advisors Who Change Methods Of Compensation To Fee-Only (For Future Clients)
One of the greatest challenges that may arise from the proposed definitions for fee-only and sales-related compensation is for advisors who wish to change to become fee-only, even though they previously operated as a commission-and-fee advisor who received sales-related compensation.
The reason is that, under the proposed definitions, a fee-only CFP professional cannot hold out as such if they receive any “sales-related compensation”, including trailing commissions and 12b-1 fees, even if 100% of the CFP professional’s ongoing relationships with new clients involve no new sales-related compensation. In other words, any CFP professional who wants to operate on a fee-only basis in the future still cannot actually be fee-only unless they terminate all ongoing 12b-1 and other trailing commission payments to themselves.
Yet from a practical perspective, this is neither positive for the client, nor the advisor. To the extent the client has already purchased a commission-based product in the past, with a 12b-1 or other commission trail built into the existing pricing of the product, even if the advisor terminates the trailing commission relationship, the client will still pay the trail anyway. It will simply be collected by the product manufacturer as a “house account”, instead of being paid to the original CFP professional who sold it.
In addition, a CFP professional who terminates their commission trail relationship is required to remove themselves from being the broker-of-record or agent-of-record on the investment or insurance product, which eliminates the advisor’s ability to actually provide basic service, and answer ongoing financial planning questions, of the client.
All of which means compelling newly-fee-only CFP professionals to actually terminate their trailing commissions and 12b-1 fees results in a decrease in the ability of the advisor to service the client and address their financial planning needs, without even saving the client the cost of those trailing commissions or 12b-1 fees in the first place!
And notably, even the SEC characterizes a 12b-1 fee as a combination of a “distribution fee” (i.e., a commission, of up to 0.75%/year), and a “shareholder servicing fee” (which FINRA caps at 0.25%/year). In other words, a 12b-1 fee of up to 0.25%/year isn’t actually even “sales-related compensation” in the first place; it’s a servicing fee. (The same is true for many insurance commission trails as well, though the split between [levelized] commissions and servicing trails are not always delineated explicitly.)
Thus, given that ongoing 12b-1 and commission trails are typically for servicing anyway, and advisors who retain servicing relationships with products previously sold to clients maintain better ability to render financial planning advice on those products, a more appropriate definition of “fee-only” (or limitation on sales-related compensation” would recognize a distinction between receiving servicing 12b-1 fees and commission trails on prior transactions, from new commissions generated from new transactions (which would clearly be sales-related compensation).
Accordingly, the CFP Board should consider adding an additional exclusionary condition under Section 14(b) of its proposed rules (i.e., a new paragraph iv), which stipulates that the mere presence of 12b-1 servicing fees (in an amount no more than the FINRA-capped 0.25%), and ongoing commission trails (for servicing previously sold products), will not be treated as sales-related compensation, as long as no new sales-related compensation is introduced going forward.
Conversely, though, the CFP Board should also consider amending the rules to stipulate that if an advisor’s compensation status changes, all prospective and existing clients must be notified of the change. Otherwise, the limitations on “sales-related compensation” and the definition of “fee-only” also risks being rendered moot by an advisor who claims to be “fee-only”, then “temporarily” changes their compensation to be commission-and-fee for one client (who does a purchase of a large commission-based product), and then switches “back” to fee-only after the purchase has occurred. In other words, CFP Board needs to consider introducing some provision to clarify whether or how quickly an advisor can change their status to/from fee-only, to minimize any risk of routine “hat-switching” from one client to the next. (A notification requirement to all clients of the change in compensation methodology would likely be sufficient to reduce any advisor incentive for making regular client-by-client changes.)
Key Point: Provide clear guidance about how CFP professionals who previously received sales-related compensation, and still receive ongoing 12b-1 servicing fees and insurance commission trails for servicing, can transition to fee-only status, without being required to terminate their broker-of-record and agent-of-record affiliations that are necessary to ensure previously-sold contracts can be properly serviced by the advisor.
Standardizing Terminology In Compensation Disclosures
One of the “unintended consequences” of the changes to compensation disclosures in the last update to the CFP Standards of Conduct was that, once the definition of “fee-only” became more clearly defined, advisors who wanted to market on a “similar” basis began to adopt the label “fee-based” instead.
To address this issue, the CFP Board’s new rules would require, in Section 14(a)(ii), that:
A CFP® professional who represents that his or her compensation method is “fee-based” must: a) Not use the term in a manner that suggests the CFP® professional or the CFP® Professional’s Firm is fee-only; and b) Clearly state that either the CFP® professional earns fees and commissions, or the CFP® professional is not fee-only.
While this is a reasonable way to address the concern of CFP professionals who use the label “fee-based” to imply something similar to “fee-only”, it fails to recognize the underlying challenge: that given currently favorable media coverage of the “fee-only” label, there is a substantial marketing advantage for non-fee-only advisors who can come up with a fee-only-like similar label.
Which means even if the CFP Board cracks down on “fee-based”, it’s only a matter of time before a new, alternative term arises instead. Advisors who receive fees and commissions, but want to accentuate the fee aspect of their advisory relationships, may simply instead adopt terms like “fee-oriented” or “fee-compensated” or “fee-for-service” (without acknowledging they’re also commission-compensated). Which leaves the CFP Board in the unenviable position needing to update its compensation disclosure rules every few years just to try to crack down on the latest “innovative” fee-related marketing term.
The alternative, which the CFP Board should seriously consider instead, is to standardize the terminology in compensation disclosures – a path the organization had started down previously with its 2013 “Notice To CFP Professionals” regarding compensation disclosures, with its specific disclosure types of “fee-only”, “commission-and-fee”, and “commission-only”.
In a world where those options are the only options that advisors are permitted to use – or at least, where those disclosure types must be stated first, before any other compensation labels – there is little risk of alternative compensation labels arising. Or at a minimum, if a CFP professional chooses in the future to call themselves “fee-oriented” or “fee-compensated” or “fee-for-service” but first must acknowledge they are commission-and-fee advisors, the risk of consumer confusion over compensation labels is greatly diminished.
Notably, though, the one caveat of this approach is that in practice, it means most advisors will end out in the “middle” category of being commission-and-fee, and that advisors will be in that category regardless of whether they receive 99% of their compensation in commissions, or 99% of their compensation in fees (even though, in practice, those are substantively different business models, with substantively different potential conflicts of interest to disclose to the client). Accordingly, to avoid rendering the “commission-and-fee” label meaningless (even as it’s used by the majority of CFP Professionals), CFP Board might consider at least adjusting to four categories: fee-only, fee-and-commission, commission-and-fee, and commission-only (where the difference between fee-and-commission versus commission-and-fee is determined based on which compensation type formed the majority of the advisor’s compensation over the prior calendar year, or some other stipulated measuring period).
Nonetheless, the fundamental point is simply this: in order to prevent the “creative” use of potentially misleading compensation labels, the CFP Board needs to standardize a fixed nomenclature of compensation models (as it has for “fee-only”, but including all the other possible categories as well), and require those labels of the first/primary explanation of compensation for the CFP professional. Anything less simply invites a never-ending oversight challenge of adapting new rules to ever-changing terms and labels in the marketplace.
Key Point: Standardize a series of required compensation disclosures, rather than merely defining “fee-only” and limiting “fee-based”, or the advisory community will simply keep coming up with new terms that may or may not be deemed misleading in the future. A standard nomenclature – such as fee-only, commission-and-fee, fee-and-commission, and commission-only – eliminates any room for innovating new questionable terms.
Limiting An Advice Engagement To A Compensated Engagement
One of the biggest practical caveats to enforcing a fiduciary duty for any professional service provider is being clear about when a professional service engagement actually begins. This helps to ensure not only that “general education” is not unwittingly treated as a fiduciary professional service, but also that “free” services (which may or may not constitute a formal professional services engagement) aren’t subject to professional standards when they shouldn’t be.
Fortunately, the flush language of the definition of “Financial Advice” in the Glossary of the proposed standards does clearly state that “…the provision of services or the furnishing or making available of marketing materials, general financial education materials, or general financial communications that a reasonable person would not view as Financial Advice, does not constitute Financial Advice.” This helps to limit any concern that a practitioner would have that general financial education will not constitute fiduciary financial advice.
However, Section 1 of the Standards still require that a fiduciary duty applies to any “Client”, where a Client is defined as “any person… to whom the CFP professional renders Professional Services pursuant to an Engagement”, and an “Engagement” is defined as “a written or oral agreement, arrangement, or understanding”. Yet at no point is there an actual requirement that such an engagement be a formal business relationship for compensation.
As a result, the delivery of “free financial advice” – e.g., on a pro bono basis, in an informal relationship with a friend or colleague, or even just ad hoc in a conversation with a stranger – could potentially constitute a fiduciary financial advice relationship. The conversation merely needs to start with an informal statement “Hey, let me ask your advice about something…” and if the advisor responds, an oral understanding that advice is about to be delivered exists, which attaches the advisor’s fiduciary duty.
Notably, such an (investment) advice relationship would not exist for that advisor under the Investment Advisors Act of 1940, because Section 202(a)(11) of that law stipulates that one is only an investment adviser if he/she engages in the business of advising others for compensation. Similarly, the Department of Labor’s recently introduced fiduciary rule also limits the scope of fiduciary duty to situations where the advisor “renders investment advice for a fee or other compensation…”
Accordingly, the CFP Board should adjust its definitions to clarify that “free” advice, or other non-compensated informal advice arrangements, do not (and cannot) rise to the level of being fiduciary financial advice, if the advice is not provided for consideration (i.e., for compensation). Practically speaking, this is probably best handled by adjusting the definition of a Client to be:
Client: Any person, including a natural person, business organization, or legal entity, to whom the CFP® professional renders Professional Services for compensation pursuant to an Engagement.
Key Point: A financial planning “engagement” should be limited to one where the CFP professional renders professional services for compensation, to avoid the risk that “free advice” is deemed an advice relationship.
What Does It Mean To “Manage” Conflicts Of Interest
One of the fundamental principles of a fiduciary duty is the recognition that advisors have a duty of loyalty to their clients, to act in their clients’ best interests, such that conflicts of interest must be managed, and unmanageable conflicts of interest must be avoided altogether.
Accordingly, the Investment Advisers Act of 1940 (and subsequent SEC guidance over the years) provides an extensive series of rules regarding what kinds of conflicts of interest are prohibited for investment advisers. Similarly, the Department of Labor’s new fiduciary rule (and the prior/existing rules under ERISA) prohibit a wide range of unmanageably-conflicted activities, subject to various Prohibited Transaction Exemptions if certain safe harbor stipulations are met.
When it comes to the CFP Board’s requirements, though, Section 9 of the Proposed Standards merely requires CFP professionals to disclose conflicts of interest, with a brief paragraph (out of a 17-page document) directing that “a CFP® professional must adopt and follow business practices reasonably designed to prevent Material Conflicts of Interest from compromising the CFP® professional’s ability to act in the Client’s best interests.” And while Section 1(a)(ii) does go a bit further in stating that a CFP professional should “Seek to avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict”, this still constitutes the entire guidance of the Proposed Standards of Conduct.
Thus, the questions arise: what, exactly, are CFP professionals expected to do to manage their conflicts of interest, what constitutes an “insufficient” business practice that fails to reasonably prevent Materials Conflicts of Interest from compromising the CFP professional, and what types of conflicts are CFP professionals actually expected to “avoid” versus merely “manage”? Will the CFP Board publish a list of prohibited transactions, akin to the Department of Labor, or create further regulations limiting CFP professionals from certain (highly conflicted) activities (as the SEC does)?
Without any guidance from the CFP Board, the risk to the CFP professional is that they will be found “guilty” of failing to manage their conflicts of interest, in a ruling from the Disciplinary and Ethics Commission that only explains what was “impermissible” behavior after the fact.
CFP professionals should not be left to wonder what will turn out, after the fact, to have been deemed an unacceptable or improperly managed conflict of interest. At a minimum, the CFP Board needs to provide additional, supplemental guidance. And the CFP Board should seriously consider whether certain especially-conflicted arrangements with clients are “so conflicted” that the Standards of Conduct should simply bar them altogether (as the Department of Labor did with its fiduciary rule).
Key Point: Provide further clarity about what it really means to “manage” conflicts of interest, and what types of conflicts the CFP Board expects CFP professionals to avoid. Don’t force CFP professionals to find out what is deemed unacceptable after the fact with an adverse DEC ruling.
Navigating Conflicting Duties Of Loyalty Between CFP Professionals And Their Broker-Dealer Or Insurance Company
The first requirement of the CFP professional’s Duty of Loyalty in the proposed Standards of Conduct is that the CFP professional must “Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm”.
Yet the reality is that for a substantial number of CFP professionals, they operate as a registered representative of a broker-dealer, or an agent of an insurance company, and legally have an obligation (a bona fide agency relationship) to represent the CFP professional’s firm first and foremost, and not the client.
Clearly, it is often “good business” for firms to act in the best interests of their clients, regardless of the scope of relationship, but CFP Board’s proposed Standards of Conduct are nonetheless placing a large subset of CFP professionals in a potentially untenable conflict between the requirements of the Standards, and their legal employment agreement and relationship to the Professional’s firm.
At a minimum, the CFP Board should provide additional guidance about how, realistically, CFP professionals are expected to navigate this particular conflict of interest, and in what situations a CFP professional is expected to decline a business opportunity, or outright terminate their employment relationship, if a conflict of interest emerges where the CFP professional cannot effectively fulfill both his/her duty of loyalty to the client, and his/her agency relationship and employment agreement with the firm.
Key Point: With an explicit duty of loyalty to the client for the CFP professional, clarify how CFP professionals working at a broker-dealer or insurance company, where the CFP professional has a legal employment contract that requires him/her to operate as an agent of the company and represent the company (not the client), is expected to navigate prospective conflicts of interest.
Anonymous Case Histories And Setting Precedents For Reasonableness
The final concern worth recognizing in the CFP Board’s Proposed Standards is the fact that substantial portions of the rules are based on subjective standards – beyond just the question of what is a “manageable” conflict of interest vs one to avoid – such that CFP professionals may not even know which behaviors and actions are safe and appropriate until it’s too late.
For instance, the word “reasonable” or “reasonably” is used a whopping 29 times in the Proposed Standards, pertaining to the everything from the aforementioned issue of whether a conflict of interest is Material (based on whether a “reasonable” client would have considered the information material), to whether a related party is related based on whether a “reasonable” CFP professional would interpret it that way, to requirements that CFP professionals diligently respond to “reasonable” client inquiries, follow all “reasonable” and lawful directions of the client, avoid accepting gifts that “reasonably” could be expected to compromise objectivity, and provide introductory information disclosures to prospects the CFP professional “reasonably” anticipates providing subsequent financial advice to. In addition, the entire application of the rules themselves depend on the CFP Board’s “determination” of whether Financial Advice was provided (which triggers the fiduciary obligation for CFP professionals), and CFP professionals with Material conflicts of interest will or will not be found guilty of violating their fiduciary duty based on the CFP Board’s “determination” of whether the client really gave informed consent or not.
In other words, the CFP Board’s new Standards of Conduct leave a lot of room for the Disciplinary and Ethics Commission to make a final (after-the-fact) subjective assessment of what is and isn’t reasonable in literally several dozen instances of the rules.
Of course, the reality is that it’s always the case that regulators and legislators write the rules, and the courts interpret them in the adjudication process. And using “reasonableness” as a standard actually helps to reduce the risk that a CFP professional is found guilty of something that is “reasonably” what another CFP professional would have done in the same situation. “Reasonableness” standards actually are peer-based professional standards, which is what you’d want for the evaluation of a professional.
However, when courts interpret laws and regulations, they do so in a public manner, which allows everyone else to see how the court interpreted the rule, and provides crucial guidance for everyone who follows thereafter. Because once the court interprets whether a certain action or approach is or isn’t permitted, it provides a legal precedent that everyone in the future can rely upon. Except in the case of the CFP Board’s Standards of Conduct, because the CFP Board’s disciplinary process is not public in the first place!
Which means even as the DEC adjudicates 29 instances of “reasonableness”, no one will know what the DEC decided, nor the criteria it used… which means there’s a risk that the DEC won’t even honor its own precedents, and that rulings will be inconsistent. And even if the DEC is internally consistent, CFP professionals won’t know how to apply the rules safely to themselves until they’re already in front of the DEC trying to defend themselves!
Fortunately, since 2010 the CFP Board has been providing a limited number of “Anonymous Case Histories” to provide some guidance on prior DEC rulings. However, the CFP Board’s current Anonymous Case History (ACH) database is still limited (it’s not all cases), and the database does not allow CFP professionals (or their legal counsel) any way to do even the most basic keyword searches OF the existing case histories (instead, you have to search via a limiting number of pre-selected keywords, or by certain enumerated practice standards… which won’t even be a relevant search format once the newly proposed Standards replace the prior format!).
Which means if the CFP Board is serious about moving forward with the new Conduct Standards, including the application of a fiduciary duty and a few dozen instances of “reasonableness” to determine whether the CFP professional met that duty, it’s absolutely crucial that the Commission on Standards require a concomitant expansion of the CFP Board’s Anonymous Case Histories database to include a full listing of all cases (after all, we don’t always know what will turn out to be an important precedent until after the fact!), made available in a manner that is fully indexed and able to be fully searched (not just using a small subset of pre-selected keywords and search criteria).
In addition, the CFP Board should further formalize an additional structure to provide periodic guidance to CFP professionals – akin to the Notice to CFP Professionals issued in 2013 regarding compensation disclosure, but on a more regular basis – to allow for a further fleshing out of the CFP Board’s views of what constitutes “reasonableness” in various areas, so that CFP professionals don’t have to solely rely on after-the-fact adjudication to understand how best to navigate the 29 instances where “reasonableness” is the essential criterion for determining whether the standards were met.
Key Point: With 29 instances of “reasonable” or “reasonably” in the proposed Standards, CFP professionals need further guidance on what constitutes “reasonableness” in a wide variety of situations. Establish a mechanism for providing proactive ongoing guidance, and expand the framework of Anonymous Case Histories to include all case histories, in a searchable and properly indexed archive, so CFP professionals (and the DEC itself) can have a growing body of case law that can be properly cited and reasonably relied upon for precedence.
Thank you for providing us as CFP professionals and stakeholders the opportunity to provide public comments regarding the CFP Board’s Proposed Standards of Conduct, and I look forward to seeing how the next version of the proposed changes will address the substantive concerns raised here!
- Michael Kitces
For CFP Professionals who are interested in submitting their own comments, the official comment period closes today (August 21st), but there’s still time!
You can submit your feedback directly through the CFP Board website here, or by emailing [email protected]. Comments and public forum feedback will then be used to re-issue a final version of the standards of conduct (or even re-proposed if the Commission on Standards deems it necessary to have another round of feedback) later this year.
And for those who want to read through a fully annotated version of the proposed Standards of Conduct themselves, the CFP Board has made a version available on their website here, and/or you can review our prior in-depth commentary about the proposed changes here.
So what do you think? Do you favor the CFP Board’s proposed Standards of Conduct moving forward in their current form? Do you see any potential issues or loopholes? Please share your thoughts in the comments below!
William Callahan, CFA, CFP® says
Thanks for writing this, Michael! Our goals are aligned, and the board needs feedback like this to ensure the best possible fiduciary and fee-only standards for our profession.
Steve Starnes says
Really great input, thanks for speaking up for so many of us who may not be able to articulate clearly on all these important details. One question – does an Investment Advisor Representative, as an employee of an RIA, also have a conflict of duty to both client and to the employer RIA? You mentioned broker dealers, but not RIAs.
An IAR should be aligned with The RIA practice behaviors. The RIA should be practicing within a strict Fiduciary practice guideline.If there is no alignment then an IAR needs to be aligned with an RIA that advocates the IAR’s practice behaviors. In the end all should be aligned with an extremely stringent Fiduciary Guideline no matter what. After all, this is what we all require ASAP. The public will relate to this model.
Thanks Michael. Frankly I do not relate to Williams comment below. “Best possible fiduciary and fee-only standard”. We are either acting in the clients best interests as a fiduciary or not. Fee-only has nothing to do with this. Show me where a fee-only adviser produces better results than a commission based model. I am not an advocate of any model other than practicing within the most stringent fiduciary guidelines. After 35+ years as a CFP I find it incredible that the CFP Board cannot resolve and seriously address what a fiduciary practice behavior is. The FEE Only concept is what clogs the pipes guys. Give it a break. Furthermore, those practitioners that are not CFP designees could give a rats ass about a fiduciary based practice. They are a group that survives by sales and personal relationships as the primary credibility factor.
It is my most humble opinion that the CFP Board start advocating what a real FIDUCIARY behavior is. The advocation of the CFP designation has less credibility or understanding than what a Fiduciary law is and practice is and what it means to the consumer. I challenge that board to stick to its edict that they are working in the best interests of the client. If so, then get on board and sell the fiduciary practice model. Stop the arguments about what is fee only vs any other model. The fee-only model is a credibility perception vs reality. Try standing on something like fiduciary practices because that is defendable and understood in the courts.
Vijay Khetarpal,CFP says
Well done Michael; you have captured very eloquently all relevant matters for the Board to look into. Best wishes.
Well said, Michael. Lot’s of clarification needed, for sure. Some of those clarifications will make some folks uncomfortable as they will most likely lean heavily toward the client and the fiduciary responsibility. Perhaps the most difficult for many will be the responsibility of the CFP to the client over the firm. Is that a difficult choice? You bet. But IMHO it simply comes down to serving the client as a CFP professional is expected to do. The CFP mark should carry a clear message to the public – if you work with a CFP licensee you are receiving a fiduciary standard of care. If a planner cannot do so under the professional standard that characterizes the mark, there are two choices. Keep the mark, leave the firm and follow the standard as required, or drop the mark as stay in the employment relationship. If we financial planners are ever to be perceived as respected professionals vs. product sales representatives, the latter choice is the wrong one.
RE: The CFP’s Professional Scope and Unintended [but foreseeable] Consequences
Based on my review of the proposed standards and Michael’s poignant comments, am I to understand that the CFP may be held accountable for a “fiduciary” standard care for all elements that comprise the Principal Knowledge Topics (72 Topics) and the related Job Task Domains?
I understand that this is an outrageous speculation or one that, at a minimum, would require a level of disclosure during the client engagement that would be voluminous. On the other hand, perhaps the speculation is not outrageous or possibly creates more latitude for plaintiffs’ attorneys than envisioned.
For example, there are CFP practitioners who collect, read and summarize estate planning documents for their clients. In fact, Commonwealth Financial Advisors has incorporated this protocol as part of a practice management guideline is a 2017 issued notice to its advisors.
Now consider the implications of the following example, which represents a negotiated settlement I had conducted on behalf of a client, who was a trust beneficiary of a testamentary trust. The CFP advisor had advised the client’s father to place a significant portion of the father’s estate assets in a POD account; the effect of which was to have the value of these assets bypass the testamentary trust prepared by the father’s estate planning attorney. (This alone should provide all the facts required to understand the potential conflicts and damages that arose at the father’s death.)
As you might suspect, the advisor’s website and representations of estate planning expertise established a very strong foundation to establish negligence.
It’s just not much of a guideline, per Job Task 4.B, that a CFP should “consult with other professionals as appropriate” when developing recommendations for clients.
Again, reviewing the “scope” of professional responsibilities proposed by the CFP Board, coupled with the practice management “blueprint” embodied by the CFP 2015 Principal Knowledge Topics and Job Task Domains, one my be inclined to believe that the CFP designated advisor is a financial guru, investment advisor, tax accountant and attorney rolled into one “Super Advisor.”
It seems to this professional that the Board would do well to sharpen its focus on “Rules of Engagement.”
What am I missing here? – David F. Sterling, Esq., Consultant
CFP’s should never cross the “Practicing Law” State Guidelines. With that said I would suggest that CFP’s be aware of possible concerns but always refer to an estate atty for a professional analyses. Same goes for all other professions.
Seems to me many, many advisor’s, CFP or not, skirt very close to crossing the line, if not out right crossing it.
Your point about a “Super Advisor” is not discussed nearly enough. It seems to me in the race to provide comprehensive services, many firm’s are over selling their expertise and qualifications to the point of giving advice, particularly tax and legal advice, that they are not legally authorized to do so.
RE: The culprit may not be “what” you don’t know. It may be “what” you know that isn’t so.
– Mark Twain
Thank you for acknowledging a consideration that warrants attention but receives little play. I continue to hold firm in the belief that the content of the CFP curriculum is exceptional. However, let’s distinguish “knowledge” and “know how,” while also throwing into the “mix” the competence and professional license to “act.”
As I am not reluctant to solicit the scorn of my legal brethren, volumes could be written about estate planning attorneys who draft documents in “isolation” or without any regard for the nature and structure of assets comprising the estate inventory.
When placing these two considerations adjacent to one another, I submit that an “unparalleled” opportunity is revealed that has yet to be explored and cultivated. – David F. Sterling, Esq., Consultant (Also securities and insurance licensed)
Nearly every firm/advisor web site emphasizes some variation of the following “review your estate plan”. I would like to see a discussion as to what or what does not constitute “practicing without a license.”
I would ask whether Commonwealths estate lawyers prepared the summary? I can only speak to my process and procedure. I always professionally engage the services of an estate planning attorney to not only write the estate plan and the summary as well. Why not? Same with business advisory and reviewing corporate financials as pertains to the owners and impact on their personal financial plan. I engage an experienced CPA to review the corporate and personal tax returns and prepare a summary. This is, in my opinion, the most professional way to go about this. Frankly, I always thought this was the way we are supposed to do the “old fashion” 6 step process.
FBA and BA31,
The document was issued to advisors by the marketing department of Commonwealth. I would like to think that is was reviewed by in-house counsel or a third-party before authorized for distribution. That said, it is immaterial whether or not the it was prepared by Commonwealth’s estate attorneys. (It would, however, serve as a compelling exhibit in any dispute that might arise germane to its message.) This brings me to another consideration regarding the “unauthorized practice of law,” UPL.
I concur with BA31 that this discussion does not receive the attention and acknowledgement that is warranted. Regarding his or her inquiry about the circumstances giving rise to a finding of UPL, I will offer the following considerations:
 UPL can constitute a crime, where the complaint would be filed with the State Attorney’s Office or a civil matter, which may originate with the filing of a complaint with a state’s Bar Association. States have elevated the “crime” to felony from misdemeanor status.
 A UPL violation can be found under the broad categories of (1) advice and/or (2) specific services rendered – e.g. the drafting of documents.
 Nearly all states have statutes on the books that provide definitions and guidelines to assist with the determination of a UPL violation.
 Determinations are guided by statutory provisions and common law precedence. As you might expect, there are few “bright-line” tests that can be applied, which results in a case by case determination.
FINALLY, I can offer from direct experience with the Florida Bar and its role in the Florida legislative process that TWO AREAS of concern for the financial services community are those client engagements and services rendered that involve (1) the structuring of assets and (2) guidance which calls into question substantive procedures that have a direct bearing on the legal rights and entitlements of primary clients or others.
NOTE. This content is submitted for general information purposes only and does not nor should it be interpreted or applied as “legal counsel.”
Hope this helps. David F. Sterling, Esq., Consultant
Yes, great explanation.
Would you care, if possible, give some examples of what you would consider some of the instances that advisor’s are or might be doing that would technically qualify as UPL?
I will provide a few examples and then drop out of the discussion and direct more of my commentary directly to the CFP Board. Before doing so, I would welcome feedback on a TWO considerations which continue to “trouble” me about the scope of CFP professional authority.
FIRST, does the CFP “fiduciary relationship” with a client presume the CFP’s competency to serve the best interests of the client for all content areas comprising the Principal Knowledge Topics (72 Topics) and related Job Task Domains? NOTE. I raise this question because in my client engagements I have seen little evidence of disclosures that limit the CFP’s qualifications to act or that limit the scope of the client engagement.
SECOND, I have found little evidence within CFP curriculum outlines that effectively and properly “guide” the CFP through the maze of considerations and practice management activities which could be interpreted as “overreaching” and “violating” conduct standards established under state and federal regulations, statutory provisions and common law principles. RULES OF ENGAGEMENT would be an appropriate heading. AM I MISTAKEN? Moving along to UPL examples.
UPL Examples. Important to keep in mind that states and even the American Bar Association, for which I had just completed my appointment as the Co-Chair of its Insurance and Financial Planning Committee, continues to wrestle with a definition a “what” constitutes the practice of law to effectively determine when a “line” has been crossed.
One other consideration to keep in mind is that there are an array of other possible allegations that can be raised to define professional conduct transgressions and that could comprise a “complaint” brought against a financial advisor. For example, all are likely familiar with possible “actions” under contract and tort law.
THE APPLICATION OF GENERAL LEGAL PRINCIPLES. To avoid crossing the line into legal territory, financial advisors must pay close attention to how they interact with their clients and ensure they stay within the bounds of their authority. It may be permissible for advisors to discuss general legal principles with clients, but they must be careful not to apply the principles to specific facts of a case.
For example, it is one thing to generally discuss the various types of trusts the exist and some of their general planning applications. HOWEVER, when applying a “general understanding” to a client’s specific needs and circumstances which results in an analysis and recommendation to proceed with a specific “trust strategy,” I submit that the case can be made that the UPL line has been crossed.
This example would also include an advisor’s role in placing certain assets under trust ownership when the advisor possessed a limited understanding of the conflicts that can arise from the trust ownership arrangement. My files are overflowing with examples involving the placement of SPIAs and Deferred Annuities under trust.
There are advisors who have recommended the use of SPIAs within the context of credit-shelter trusts only to later learn the application of the exclusion ratio to the payment stream resulted in the “unauthorized distribution” of trust principal; thus, compromising a remainder beneficiary’s “vested” interest in the trust.
I am also involved in a matter where a CFP had recommended the acquisition of a life insurance policy to be used for various legitimate financial planning purposes, which had included the convenient and expedient transfer of contract value at death of the insured/owner under the contract.
The premium payment had been pulled from an account that was to be governed by the estate plan prepared by the attorney. Overlooked by or unbeknownst to the CFP, substantial estate value had been converted from a plan governed by a “per stirpes” plan of distribution to one governed by a default “per capita” provision.
As fate would have it, one of the three policy beneficiaries predeceased the owner/insured. The result, at the death of the insured/owner was the “disinheritance” of two grandchildren from their otherwise intended share of their grandfather’s estate plan.
The “shifting” of assets from one “legal structure” to another can have severe consequences that are only just beginning to get the attention of estate litigators.
Be safe out there. Recent federal and more recent state estate tax legislation, coupled with misunderstandings about portability are contributing to the recommendation of estate planning strategies and product sales creating adverse but foreseeable consequences.
LAST COMMENT. Consider the ramifications for those with a fiduciary duty to be held accountable for not only that which is “foreseeable” but also for that which “should be foreseeable.” – David F. Sterling, Esq., Consultant
BA31, I did enter a reply on the discussion thread. It was somewhat lengthy but relevant, or so I thought. I do not see it and can only hope it is being reviewed and not censored. Unfortunately, skepticism is part my professional and personal DNA. David
Michael Kitces says
You should see all of your threads/comments here. We don’t censor/block anything unless it is an overt personal attack, or clearly fake spam. Though sometimes our automatic filtering comment tools temporarily block something and force me to manually approve (which I do as quickly as I can).
If there’s a comment you believe got erroneously lost/filtered by mistake, please let me know and we’ll dig in and get it approved. I welcome the discussion and issues you’re raising here.
David Sterling says
Thank you for your thoughtful and professional reply. My “off-the-cuff” comment was intended for BA31’s eyes only as I had responded through the Disqus notice and did not believe it would appear on your website. However, this does not excuse the skepticism based on your track record of transparency and credibility. My apologies.
I am, however, left with a real concern for the scope of expressed and implied authority that is conferred upon CFPs, as evidenced by the Principal Knowledge Topics and Job Domain Tasks. My concerns include some of the following considerations.
FIRST, can financial planning as promoted by the CFP Board ever rise to the level of a sanctioned profession when the “discipline” cuts across such an extensive array of specialized bodies of knowledge, disciplines and protocols?
SECOND, on a related note, can a CFP realistically be held to a “fiduciary” standard of care for each of the “content” specialties that comprise its curriculum?
THIRD, though you have acknowledged that the Board would like move to a greater level of specificity regarding “Rules of Engagement,” I submit that the failure to acknowledge the importance of this practice management necessity will misrepresent the scope of the client engagement and the CFP’s credibility to “act” in such a broad array of “knowledge and skill sets. I will also add that it exposes the CFP to a level of accountability and potential liability that few individuals would desire.
FINALLY, the Board does not appear to grasp the reality of what it means to be a “fiduciary” and that the application of legal principle and standard of care can be defined and restricted or confined to particular activities comprising the client engagement.
On a personal note, I am grateful for your expertise, initiative and commitment to advancing the interests of the financial services profession and those it serves.
– David F. Sterling, Esq., Consultant
Michael Kitces says
With effective definitions of scope in place (which I realize is a substantive caveat that isn’t in place very well today), I don’t see the broad-based nature of financial planning as making it impossible to ever have a bona fide profession or fulfill a fiduciary duty.
In point of fact, most professions have both ‘generalists’ and specialists that go into ever-increasing levels of depth and specificity. The fact that surgery is a specialization doesn’t make the family practitioner doctor less of a professional. The presence of LLMs and legal specializations doesn’t invalidate the nature of becoming a lawyer before specializing. Though again, both doctor and lawyer “generalists” are FAR more effective at recognizing and limiting scope than CFP certificants (or financial planners) typically are, which will have to change at some point.
I do think it’s true that one substantial challenge for the emergence of financial planning as a profession, though, is the fact that it “overlaps” other existing professions, which from a practical perspective means someday lines of professional boundary may need to be redrawn. For instance, right now you express concern of CFPs that give estate planning advice without legal knowledge (which I concur is a concern in many situations); but at what point might an estate planning advice need to be limited in giving advice without required training in the financial, family dynamics, and Finology issues of money and inheritances (an increasing domain of CFP professionals)?
Realistically, that’s a shift I expect will take a decade or two to play out. But the fact that financial planning and advice spans multiple domains is what already creates many of our regulatory challenges today – the Department of Labor’s fiduciary rule aimed to regulate advice, and created turmoil precisely because the scope of its advice rules spanned multiple channels (broker-dealers, RIAs, insurance and annuity agents, etc).
That’s the whole point – the emergence of professionals forces the redrawing of lines (both potentially within the industry, and in how we work with other professions), which is the natural counterpart to more clearly defining (and limiting) scope. As financial planners, we still have work to do on both fronts. 🙂
David Sterling says
RE: A Luxury Clients Don’t Have
Your concur with your observations regarding the effectiveness and roles of “generalists” in many professions. Since I am licensed as an attorney and financial professional, I will limit my comments to distinctions between these arenas.
FIRST AND FOREMOST, clients of CFPs do not have the time for these highly trained and knowledgeable professionals to refine their service engagement protocols. It is a disservice and misrepresentation of “comprehensive” skill competencies for any practitioner to allege accountability to such a broad based and, in my opinion, rather ambiguous fiduciary standards of care.
[Offer] I would be more than pleased and consider it a privilege to submit evidence (off-line) regarding transgressions that are more the general rule than the exception.
SECOND, estate planning attorneys who basically function as “generalists” routinely conduct “transgressions,” if measured against the technical skill competencies and standards of care required of Bar certified specialists. The channels and venues are well established through which “victims” can pursue recovery for damages.
As the CFP Board continues to promote and represent its moniker, as certification of superior professional standing, I submit that it is “overreaching” appropriate lines of professional conduct, creating false impressions and mismanaging client expectations. The “public” can not nor should be expected to “draw” lines of distinction regarding the “scope” and “parameters” of promised and delivered services.
FINALLY, drawing upon what I observe to be an “unrealistic” claim of skill competencies comprising the “Principal Knowledge Topics (72 Topics)” and the related “Job Task Domains,” I recommend that the Board begin with examining with far greater detail “Rules of Engagement” and the “scope” of knowledge and operational service applications to which it holds the CFP accountable.
Such a refinement would serve the interests of the CFP client and the CFP professional. Though the redrawing of professional lines will take time, the Board can a long way at this time and moment to act with greater clarity and respect for those professionals who are governed by state and federally sanctioned protocols.
Michael Kitces says
It’s worth noting that the CFP Board’s Conduct Standards here do focus more on clearly defining the Scope of Engagement than they have in the past.
I suspect that over time, this will help advisors to more clearly define – and limit – the scope of engagement. There is a tendency amongst financial advisors to characterize their scope of engagement as broadly as possible, for the marketing advantage of saying they’re “comprehensive”. It’s a stark contrast to attorneys, who have a longer history of recognizing the advice liability exposure this creates, and instead tend to be far more proactive in LIMITING the scope of engagement, not trying to expand it.
Stay tuned to see how this plays out in the coming years. I suspect the CFP attitude is going to look a lot more like the attorney approach (to define and limit scope) once a few fiduciary infractions occur for overly broad advice scopes beyond the advisor’s actual scope of competency…
W Phil Ratcliff says
Michael, so you really think that I shouldn’t be able to pay my employee advisors bonuses and still be fee-only? How do you reward people based on their actual performance? Should all fee-only firms be solo/partnerships or turn into TIAA CREF? Granted, hopefully, most good employee advisors may eventually earn and then buy into the practice but there has to be something there for them before that…
Hi W. Phil,
Actually there are some very strategic discretionary bonus systems that would work. You have mentioned that you would like to pay your “employee”. Are they actual employees or independent contractors? This is a critical decision. If they are employees there are discretionary bonus structures that work especially for a succession plan. If they are an independent contractor then a different system can be put into place.
Michael Kitces says
I’m not against performance-based rewards and bonuses. My primary point here was just to highlight the striking distinction that compensation to employee advisors is magically transmuted into “sales-related compensation” when involving a non-employee affiliated advisor under the CFP Board’s rules. Even if the services to clients, and compensation the client pays, is exactly the same with the employee and non-employee affiliated advisor.
That distinction is the concern to me. Whether/how best to compensate and reward and incentivize employees is a whole other discussion for another day. 🙂
Andrew K says
Great article, as always. I love you detailed look into things. I have a few comments.
1. Other than the one Camarda case that comes to mind, it seems the CFP board only revokes a CFP designation after it is to late. In other words, after many complaints and FINRA/SEC has expelled them from the industry. Similar to the Fiduciary rule, what does it matter if it will not be enforced?
2. After all, without going into crazy research for exact figures. There are a very large number of CFP holders who work for firms as employees, and whose firms pay for the CFP designation. If the CFP board upsets them to much I can imagine the CFP losing membership. the CFP board would never make the mark for fee only fiduciaries, they would lose way too much membership and future members.
3. I am still almost surprised that the custodians at large have not figured out the 12b1 fee issue. In other words, the custodians collect the 12b1, and pay it as a fee to the advisor. I believe some have started to figure this out. 401(k) recordkeepers are already doing something similar. It also seems more insurance/annuities are allowing RIAs to service contractors. Such as the RIA can reallocate a variable life insurance sub account even without a finra license. I hope this becomes more commonplace.
4. I know some currently have CFPs give disclosures. Which basically say they are biased towards the firms products and may be compensated better for selling the firm’s products, and are required to give that to all clients. I do think more firms need to do this.
Thanks again for your comprehensive analyses and professionally addressing this topic. You always provide an excellent review in all that you write.
Steve Smith says
I gather the only way you will know the extent to which these concerns have been addressed is by reading whatever the next draft says.
Anyway, great work.
Michael Kitces says
Yup. We’ll see! 🙂