Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the big news that the CFP Board has officially approved its new CFP Code of Ethics and Standards of Conduct, which for the first time will require CFP professionals to be a “fiduciary at all times”… albeit while leaving most CFP Professionals on their own in determining what conflicts of interest are, or are not, permissible to engage in without breaching that fiduciary obligation.
From there, we have several more articles related to advisor regulation, from the news that the National Association of Fixed Annuities (NAFA) has decided to withdraw its Appeal fighting the DoL fiduciary rule now that the 5th Circuit has already ruled against the DoL (to avoid creating a further split amongst the Appeals Courts), to a look at how fiduciary rulemaking is likely to play out in the coming year under the SEC if the DoL fiduciary rule really is vacated, the rise of a “point-in-time” fiduciary as the scope of fiduciary advice is applied to one-time advice interactions (rather than what was historically just ongoing regular interactions between the advisor and client), and a look at why just charging AUM fees alone doesn’t necessarily ensure the advisor is properly managing their conflicts of interest (especially if the firm charges different AUM fees for equities versus fixed-income allocations).
We also have a few advisor technology articles, including: the launch of the Orion “Compass” solution that provides additional compliance reports for RIAs using its performance reporting software (which may be especially helpful the next time the SEC shows up for an exam); the rise of estate planning “FinTech” solutions like EverPlans and Yourefolio as estate planning increasingly shifts from estate tax planning to actual planning around the distribution of the estate itself; and the new “Quick Start” offering from Tamarac that aims to make it easier for breakaway brokers to get up-and-running quickly on their trading and performance reporting software tools.
We wrap up with three interesting articles, all by industry commentator Bob Veres, about various trends in the advisory industry: the first explores how even as the CFP Board lifted up its Standards for the first time in 11 years to expand its fiduciary duty, it is still accommodating a wide range of sometimes-questionable commission compensation models under the auspices that certain products and solutions simply aren’t available or feasible for non-commission advisors… which may become a moot point in the coming decade as more and more firms finally launch “advisory” product solutions and technology makes it easier and easier to serve an ever-widening range of clients; the second details a painful list of the true costs of the low bar of suitability for brokers, which isn’t about the majority of brokers that still do the right thing for clients anyway (simply because it’s good business), but the extent to which bad behavior by a small subset of especially bad actors can and is condoned under the low suitability bar; and the last raises the interesting question of whether in the long run it’s a problem for us to have so many “overlapping” membership associations all serving financial planning and wealth management, whether it would be a better use of resources for them to merge and consolidate together, or if instead it’s actually better to have so many different organizations because the nature of competition helps to ensure that they collectively keep pushing to advance the financial planning profession forward (if only to out-compete the others trying to do the same thing).
Enjoy the “light” reading!
Weekend reading for March 31st – April 1st:
CFP Board Expands Fiduciary Requirements, Finalizes New Ethics Code (Tracey Longo, Financial Advisor) – This week, the CFP Board officially released its new Code of Ethics and Standards of Conduct, which was unanimously approved by the organization’s board of directors and will go into effect on October 1st of 2019. The new Standards cap what was ultimately a more-than-2-year process since the Commission on Standards was first announced in late 2015, and culminated in an initial proposal, a round of public comments, a re-proposal based on that public feedback, and then a second public comment letter period that led to a few final adjustments. Overall, the biggest shift of the new Standards is that going forward, a CFP professional will be required to act as a fiduciary at all times when providing financial advice, as opposed to the old version of the Standards which only required a fiduciary duty when actually delivering a financial plan (or material elements of financial planning). Notably, the CFP Board moved forward with the expanded fiduciary rule despite substantial opposition from the brokerage industry for the CFP Board to delay until the SEC comes up with its own fiduciary rule, though some critics suggest that because the CFP Board maintained compensation neutrality and did not impose substantial limitations on conflicts of interest for CFP professionals they still didn’t go far enough in trying to lift the fiduciary standard as it will apply to CFP certificants working at brokerage firms. Nonetheless, because the new Standards do at least require firms to “adopt and follow business practices reasonably designed to prevent material conflicts of interest that would compromise their ability to act in the clients’ best interests”, questions also loom large about how exactly CFP certificants at broker-dealers can and should comply, and whether any major firms will abandon the CFP marks in the wake of the new standards (as State Farm did with its nearly 500 CFP certificants after the standards were last updated in 2008). Yet with the success of the CFP Board’s public awareness campaign, it would arguably be even more painful in the current environment for any firms to publicly abandon the CFP marks because of their new fiduciary obligations. Ultimately, though, the real question will come in the future when the CFP Board actually has to enforce its new higher standard, and apply it to real-world situations across a variety of advisor business models.
DoL Fiduciary Rule Lawsuit Withdrawn By Fixed Annuities Group In DC Federal Court (Mark Schoeff, Investment News) – Last Friday, the National Association of Fixed Annuities – one of the many organizations that sued the Department of Labor over its fiduciary rule in 2016, lost, and appealed – withdrew its pending Appeal in the D.C. Circuit, acknowledging that once the 5th Circuit Court of Appeals ruled earlier this month to vacate the rule, that it was no longer beneficial to continue to pursue the matter in the D.C. Circuit. The decision of NAFA to withdraw the Appeal is also significant because a pro-DoL ruling from the D.C. Circuit could have further widened the split in Appeals Courts, undermining the 5th Circuit opinion and pushing the case towards the Supreme Court; by withdrawing the Appeal, there will no longer be an opportunity for the D.C. Circuit to rule in favor of the fiduciary rule at all. Though ultimately, it still remains to be seen what, exactly, the Department of Labor will do in the wake of the 5th Circuit decision to vacate the rule, and whether the DoL will try to Appeal to ruling itself and fight for the fiduciary rule anyway.
DoL Fiduciary Rule Death Meets ‘Back To The Future’ Is A Must-Watch (Blaine Aikin, Investment News) – With the 5th Circuit Court of Appeals decision to vacate the DoL fiduciary rule – which is slated to take effect on May 7th if the Department of Labor itself doesn’t ask for a Stay and doesn’t Appeal the ruling – the industry faces a prospective “back to the future” moment where the rules revert to where they were before the DoL’s fiduciary changes, where the only fiduciaries are RIAs and those serving as retirement advisers under ERISA, and broker-dealers (and insurance agents) revert again to non-fiduciary status. Yet it’s not clear how long this back-to-the-future environment will last, given that the SEC is still expected to proposed its own fiduciary rule as early as the coming second quarter of this year… and given that the SEC thus far hasn’t indicated much interest in changing the existing fiduciary framework for RIAs under the Investment Advisers Act of 1940, it appears that the primary focus of SEC fiduciary rulemaking is going to once again be directed towards broker-dealers. Aikin suggests that the most likely path is for the SEC to propose a new “non-fiduciary ‘best interest'” interpretation of fair dealing by broker-dealers under the Securities Exchange Act of 1934, where the new “suitability-plus” standard would simply require brokers to more fully and carefully disclose (and manage?) their conflicts of interest. The real question, though, is whether the SEC will tighten and clarify the scope of the “incidental advice” exception that currently allows brokers offering at least some financial advice to escape the requirement to register as an investment adviser in the first place, and whether the SEC would be willing to go so far as to limit the ability of brokers to use the “advisor” title when they’re not legally acting as an advisor. Yet while arguably some clarity of titles would definitely help, the end point of this approach would be a three-tier system of standards for advisors – the “high-test” under ERISA, the “regular” fiduciary duty under the Advisers Act for RIAs, and a “suitability-plus” standard for broker-dealers.
What It Means To Be A ‘Point In Time’ Fiduciary (Greg Iacurci, Investment News) – Recently, Fidelity announced that it was taking to take a more proactive fiduciary role in the retirement plans to which it provides recordkeeping services, but without going so far as to become a full-time ongoing fiduciary to its plans. Instead, Fidelity is positioning itself as what is now being dubbed a “point-in-time” fiduciary, where it does take on the fiduciary mantle when providing one-time recommendations to plan sponsors, but without the ongoing fiduciary obligation of monitoring and ongoing due diligence. For instance, if an employer asks Fidelity if it is prudent to add a particular fund to its 401(k) lineup (or for help assembling its initial 401(k) lineup), the company is willing to operate as a fiduciary for that one recommendation at that one moment in time, even if it doesn’t provide ongoing fiduciary services. In a world where, historically, ERISA fiduciaries by definition were only such when they provided ongoing (i.e., regular) advice to plans, this distinction of an ongoing versus point-in-time fiduciary never before existed; yet with the recognition that even single-event advice recommendations can now trigger a fiduciary duty, the concept of the “point-in-time” fiduciary emerges. The question, in the long run, is whether this will simply be viewed as another way to broaden access to fiduciary advice, or a new form of consumer (or plan sponsor) confusion as providers switch back and forth between fiduciary moments in time, and non-fiduciary support services as well.
Why AUM-Based Fees Don’t Meet Fiduciary Standards (Bert Whitehead, Advisor Perspectives) – Over the past decade of debate on fiduciary rules for financial advisors, “fee-only” advisors, particularly those who use an AUM model that pays ongoing level advisory fees instead of lumpier commissions have contended that their compensation model is superior because it doesn’t trigger the conflicts of interest that commissions do. However, as Whitehead notes, in today’s environment, it is increasingly common to charge different AUM fees for different parts of the portfolio – specifically, lower fees on fixed income assets, as in an ultra-low interest rate environment the advisory fee could otherwise consume most or all of the entire bond return! Yet the problem is that when advisors charge less on bonds, they have a potentially substantial economic incentive to increase the investor’s allocation to stocks (turning them into a more lucrative client). And the Department of Labor itself agreed, explicitly stating in their June 2017 guidance that they were prohibiting advisors from charging different ongoing AUM fees for different portions of the portfolio (e.g., charging a higher fee for equities and a lower fee for bonds) on a discretionary basis due to the untenable conflict of interest it creates. Yet the alternative, of charging uniform level fees, also creates challenges – because if clients still don’t want to pay the full uniform advisory fee on the fixed income portion of the assets, there’s a risk that they will split assets away from the advisor – and potentially not even tell the advisor – which can undermine the entire advisory relationship and the accuracy and relevance of the advice itself. Ultimately, Whitehead suggests that the endpoint will be charging monthly subscription fees or annual retainer fees for advice instead, specifically to eliminate this lingering conflict of interest.
After Orion User Conference, CEO Clarke Greenlights New Compliance Software Layer (Lisa Shidler, RIABiz) – Historically, an RIA’s preparation for an SEC audit has been mostly an ad-hoc reactive event, where the firm tries to ensure it has reasonably compliance protocols in place, and then still does the work and gathers whatever reports are deemed necessary when the SEC examiners arrive. Yet given the immense number of hours involved in preparing for an SEC audit – which for large RIAs can be as much as 100 hours of work in the few weeks before the SEC arrives – and the fact that SEC audits are a regular and ongoing requirement (and one that is occurring even more often as the SEC increases its exam frequency), Orion decided to develop and roll out a new solution to help with the compliance burden. Dubbed “Compass“, the solution is intended to help expedite the production of common reports required from SEC auditors, with both new output reports from Orion and even Orion staff support to help ensure that firms can produce what they need, as well as additional support for ongoing compliance needs (e.g., AML screenings and cross-referencing employee trade reports against the firm’s investments to verify employees aren’t front-running the firm’s trades). Which is significant not only for the potential time savings associated with the compliance obligations themselves, but also because the shift broadens the scope of Orion’s own solution into an ever-broadening advisor “platform” beyond simply reporting, trading, and billing.
FinTech Aims To Digitize Estate Planning (Ryan Neal, Investment News) – While financial planning software has been popular for decades, advisors have had relatively little in the way of software tools to aid with estate planning (beyond perhaps basic projections of estate tax exposure and the value of various life insurance strategies to contend with the tax, and “vault” tools to facilitate sharing estate planning documents like Wills and trusts between the advisor and client). But in recent years, a number of new software solutions are coming to the table in an effort to assist in the process. The first is Everplans, which first launched back in 2011 as an educational resource for end-of-life planning, but now provides a robust vault-style platform to not only facilitate the collection of estate planning documents like Wills and trusts, but information on all the client’s financial accounts, insurance policies, other digital resources, and more. And after raising additional venture funding, Everplans launched an advisor version of the software that can be used collaboratively with clients, and recently announced a blockbuster deal with Raymond James to provide their software to RayJay’s 7,300 advisors. Another recent newcomer in the space is Yourefolio, which was envisioned as a form of “eMoney for end-of-life wishes” where advisors can aggregate client assets, review the entire estate plan, and identify any deficiencies (in addition to providing an estate planning vault).
Tamarac Introduces Quick Start Offering To Support Breakaways (Ryan Neal, Investment News) – Performance reporting and trading platform Tamarac announced this month a new “Quick Start” offering, designed particularly for breakaway brokers who are launching a new RIA and need to get up-and-running with performance reporting tools within 30 days. The core of the Quick Start offering is a streamlining of the collection and conversion process for historical client data, which is usually the most time- and labor-intensive part of the process. In addition, Quick Start will provide a library of training videos that allow a new team to get up to speed quickly on the software (instead of waiting for the next in-person training program). And Quick Start will also make it easier firms to quickly start using the breadth of Envestnet’s investment solutions (i.e., various separately managed accounts and alternatives), for those breakaways who need to quickly transition and get clients (re-)invested. Notably, Envestnet points out that the process will still not be completely turnkey and automated – there is still “work” involved for the breakaway advisor – but in a world of breakaways where time is of the essence and data migrations are laborious, arguably Tamarac has identified a significant need for which even “just” compressing the time window to get up-and-running can be very valuable (especially since whatever solution a breakaway adopts initially is likely to be the one he/she sticks with for many years thereafter as an independent!).
The Next Step (Bob Veres, Inside Information) – With the decision of the CFP Board’s Board of Directors to unanimously approve the new CFP Standards that, right up front, stipulate that “at all times, when providing Financial Advice to a Client, a CFP Professional must act as a fiduciary, and therefore, act in the best interests of the Client”, the CFP Board enters a new era for the financial planning profession. With an effective date in the fall of 2019, it will be a full 11 years since the last revision to the CFP Board’s Standards, which was controversial at the time when it first introduced a fiduciary duty for CFP certificants that some argued was still too weak and had too many loopholes and others stated was already an “overreach” from what is effectively still “just” a voluntary educational designation managed under trademark law (a difference of opinion that is being echoed once again with the CFP Board’s latest changes). Veres suggests that in the long run, the CFP Board’s fiduciary standard still has a “Next Step” to take, and that its compensation-neutral approach to fiduciary – where advisors can still receive commissions while operating as fiduciaries – may soon change, if only because a growing number of technology tools are improving efficiencies for small clients (reducing the “need” to be compensated by commissions for small accounts) and more and more insurance and annuity products are rolling out “advisory” options (that strip out the commissions anyway). Which means the CFP Board’s change to the standard probably won’t be the last, and it might not even take 10 years before the marketplace makes it possible for another revision, where the CFP Board can take even stronger positions with respect to minimizing and eliminating conflicts of interest. Which is not about decreasing compensation to advisors for working with various types of clients, but simply conforming to the standards of other professions, where the professionals are paid directly by the client regardless of which or whether product or solution they ultimately implement after the advice is given.
The Real Cost(s) Of Suitability (Bob Veres, Inside Information) – One of the major debates that has been underway since the Department of Labor proposed its fiduciary rule to apply to broker-dealers and insurance agents is whether it’s necessary to try to regulate what is arguably already a good business practice anyway: to act in the best interests of the client, in order to build a lasting business and get referrals for growth (on top of the fact that it’s just the “right” thing to do!). Yet the fundamental problem is not that the majority of advisors who already likely do the right thing need additional regulation to “prove” it, but that when the suitability bar is set as low as it is, there are a subset of especially “bad” advisors (or really, unscrupulous salespeople) who can engage in highly questionable transactions and then avoid any culpability or liability by hiding under the protection of the low suitability standard. Accordingly, Veres details out a large number of harrowing cases where good advisors discovered the prior bad actions that had been inflicted upon consumers by those who seek to “only” fulfill the least that the suitability rule requires, including: an 80-year-old who wanted to grow his $1.7M of assets for his kids as an inheritance, but ended out in a series of four annuities with high expenses (ostensibly for income guarantees he didn’t need, and without a step-up in basis at death) and three non-traded REITs (that wouldn’t have been liquid as an inheritance for his children when he died anyway); a widowed client who received $1M of insurance proceeds after the death of her husband, who kept acting on the “recommendations” of her broker to trade various stocks until eventually the portfolio had lost 40% of its value (during a period where the market was up over 100%); a 55-year-old single schoolteacher with no kids whose prior “advisor” had advised her to take 72(t) distributions from her IRA to pay $50,000/year premiums on a cash value life insurance policy (where the premiums were further elevated by the fact that she was in poor health) with a whopping 20-year surrender period (and ultimately exited the policy with an 85% loss of principal after 3 years of a bull market); and an “advisor” who recommended replacing an old variable universal life insurance policy with a newer one that had a “similar” premium, where the client only discovered years later that the premium was the same because it included a substantial blended term rider that caused the premiums to spike by more than 6X just 10 years later. The fundamental problem, though, is not merely that the questionable transaction happened… but that under the suitability standard, they would all likely be deemed “suitable” and defensible, based on the fact that the “risks” of the strategies had been disclosed and it was the client who made the final decision to move forward with each transaction anyway. Despite the fact that most would likely say they were relying on the advice of their “advisor”, who actually wasn’t acting in that capacity in the first place.
Who Shall Rule The Planning Profession: Competition Versus Consolidation (Bob Veres, Advisor Perspectives) – Nearly 18 years ago, the Financial Planning Association was formed as the consolidation of the IAFP and ICFP, which ideally was supposed to combine the ICFP’s central mission of lifting the financial planning profession with the IAFP’s resources… but in practice, many critics suggest that the FPA ended up watering down the ICFP’s core mission by widening its tent and welcoming a wide range of non-fiduciary non-planning-oriented “advisors” into its membership (and thus explaining why the FPA’s membership has declined since the merger, despite the fact that the number of CFP certificants more-than-doubled over the same time period). Nonetheless, the FPA has adopted a “one profession, one designation” slogan, and in recent years has been reportedly attempting to engineer a merger of NAPFA into the FPA as well, arguing that a single larger organization with more resources will be more capable of positively influencing the future of the financial planning profession. Yet Veres raises the question of whether it’s better to have more consolidation and shared resources amongst the various membership associations, or whether it’s better to have a level of “healthy” competition, which keeps the pressure on the various organizations to always have to improve (or risk being out-competed by the others), and ensures that not too much power over the profession is put in the hands of any one single entity. And in practice, with other organizations now overlapping financial planning and wealth management as well, from the AICPA’s Personal Financial Planning (PFP) section, to the Investments & Wealth Institute (formerly IMCA), and even the CFA Institute, if anything the level of competition amongst organizations has been rising in recent years. Which just emphasizes the question – in the long run, is it better to have so many potentially overlapping membership associations where competition helps drive the profession forward, or is it time for consolidation to allow one organization to really focus its resources on the advancement of the profession?
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you’re interested in more news and information regarding advisor technology, I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors as well.