I suspect that brokerage industry lobbyists are the only people who want to explain why there are very strict (ERISA) standards for managing and advising pension plan assets, while the standards for advising taxable portfolios are so lax they might fairly be compared to the Wild West. There are no comparable laws against salespeople—including wirehouse brokers (AKA ‘Vice Presidents of Investments’)—selling expensive products, self-dealing or holding themselves out as professional advisors even if their only qualification is a couple of weeks of sales training.
Since the turn of the century, the financial planning profession has been lobbying for more and better standards under the code name ‘fiduciary,’ as shorthand for ERISA standards. If there were an enforceable fiduciary standard in the advice world, it would go a long way toward making financial planning a real profession. It would provide greatly enhanced consumer protection, and address the embarrassing discrepancy between protection for qualified plan assets and non-qualified (taxable and IRA) accounts.
All for naught. Congress punted on its only meaningful initiative after the mortgage crisis, and the SEC seems to actually be hostile to the fiduciary concept.
At this point, the profession really has no choice but to take matters in its own hands, and develop fiduciary rules that true professional advisors can pledge, in a legally-enforceable document, to abide by. That’s why I’m cheering the particularly strict version of the fiduciary standard that NAPFA has endorsed as a code of conduct for all members.
Interested readers who are not NAPFA members can find it here: https://www.napfa.org/napfa-fiduciary-standard. It includes everything you might find in ERISA: the strict duties of care and loyalty. I would argue it has a stricter duty of competence and clearer guidelines around compensation (basically no commissions or sale of financial products or revenue-sharing arrangements), plus fee disclosure and adherence to the client’s objectives rather than the advisor imposing them him/herself. There’s even a fiduciary oath for advisors to sign and hand to their clients.
This is not a marketing initiative, as some have interpreted it. I would compare it to when NAPFA adopted a strict stance on ‘fee-only’ compensation; eventually much of the profession, realizing that the idea had caught on with consumers, began publicly giving up their sales licenses. Once again, NAPFA has raised the bar.
I’m going to be particularly interested in how the CFP Board will respond, given that the Board still tolerates all the conflicts of interest of commissions that come under a ‘compensation neutral’ approach, and has bent over backward to accommodate wirehouse brokers in the CFP fold. The NAPFA standard is light years higher than the CFP Board’s, which ought to make certain board meetings in Washington, D.C. a bit uncomfortable.
Coincidentally, the CFP Board recently came out with a new ‘Guide’ which illustrates how far the organization is from requiring a true fiduciary standard of practice. The Guide to Satisfying the Duty of Care When Providing Financial Advice that Does Not Require Financial Planning might make some advisors scratch their heads just from the title. Can you give excellent financial advice without any financial planning work? Doesn’t the Board’s Code of Ethics require each CFP advisor to understand the context of every recommendation? I searched the Code in some detail and actually didn’t find that language, but maybe you can: https://www.cfp.net/ethics/code-of-ethics-and-standards-of-conduct.
There is, in the Code, a very clear distinction between financial planning engagements and pure investment advice engagements, which is what this Guide is expanding upon. This may sound unkind of me, but I’ve always believed that this particular distinction was a carve-out so that brokers with the CFP designation can sell proprietary products under a reduced standard of care so long as they carefully don’t offer financial planning. And forgive me, if you will, for believing that anyone with the Certified Financial Planner designation ought to offer advice, in all cases, in the context of a financial plan.
The Guide outlines seven steps to the non-financial-planning duty of care: understanding the client’s personal and financial circumstances; discerning the financial advice the client requires; analyzing the course of action to fulfill the scope of the engagement (?); developing the advice recommendation; presenting the advice recommendation; implementing the advice; and considering whether you need to monitor the advice.
To meet the first step, the Guide offers a list of client information that would need to be gathered. The step where I inserted the question mark is explained as a requirement to evaluate and consider alternatives to the recommendation. The Guide tells us that the rep (let’s be real; that’s who we’re talking about here) isn’t required to recommend an investment if it’s outside the proprietary or limited product menu that he or she is authorized to sell. (Sell? Again, let’s be real.)
As you read deeper into the Guide, you realize that the CFP Board has actually codified the ‘know your customer/suitability’ rules that govern brokerage firm sales—and required CFP advisors who carefully avoid a financial plan to meet FINRA sales standards. There’s a lot more verbiage and high-sounding prose in the Guide, but it boils down to a safe harbor for brokers to sell products without violating the CFP Board’s fiduciary rules. And the ‘out’ requires them NOT to offer a financial planning engagement, which seems to me to be perverse motivation.
I didn’t realize this at first, but someone pointed out that this safe harbor also allows captive insurance agents with the CFP mark a way to sell in-house commission-based life insurance products to their unwary customers.
But… Don’t they have to justify the sale as in the best interests of the customer? As one agent put it to me long ago, “there isn’t a human being on the planet who doesn’t need whole life insurance coverage.”
Ultimately, the public decides what standards they want their advice-givers to adhere to—assuming they understand the choices. When NAPFA pioneered fee-only, it took more than a decade for the public to realize that they could get financial advice from someone other than a salesperson. Now, NAPFA has drawn another line in the sand, at the same time that the CFP Board is equivocating. As I gaze into the future, I can see that eventually the public will gravitate toward professionals who adhere to a true fiduciary (higher) standard, and the CFP Board’s permissive posture toward ‘salespeople with a credential’ will be retroactively embarrassing.