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Room for Improvement

The CFP Board’s new Code of Ethics and Standards of Conduct became fully effective on June 30, almost exactly a month ago as I write this, and “fully effective” means that the CFP Board will be enforcing those standards.  Prominently included, right there in the very first subhead under “Duties Owed to Clients,” is a “Fiduciary Duty,” defined as a requirement that the CFP professional “place the interests of the Client above the interests of the CFP professional and the CFP professional’s firm.”  Advisors with the CFP mark must either avoid conflicts of interest or fully disclose them to the client, obtain the client’s informed consent and properly manage the conflict.

The question in my mind, all along, has been: is there any wiggle room here that would allow sales agents or brokers to act in their own best interest, or the best interests of the wirehouse that employs them?  Or (knowing the brokerage culture as I do) both?  SIFMA, the trade organization of brokerage firms, offered a comment letter that threatened that its member organizations would boycott the CFP mark and tell their brokers to renounce it if the fiduciary standard was passed as written.  But the real test, it seems to me, is whether they followed through with this threat.  If they did, we would know that there aren’t any loopholes that would permit business as usual.  If they did not, then I think it’s fair to suspect that the brokerage firms were posturing, and that after a close reading of the standards, they felt like they could find ways to act in self-interested ways while technically adhering to the Code.

So I asked the CFP Board, in the most straightforward way possible, if any brokerage firms had told its CFP reps that they had to give up the mark after June 30. 

The answer was no.

To be fair, I believe that the new Code/Standards is a big improvement over the last one, and I continue to applaud the CFP Board for creating more stringent standards than the SEC or the DOL have dared to do.  What I’m looking for here is those cracks in the seams which, next time the CFP Board decides to update its Code and Standards, might be filled in with stronger or more comprehensive language.

To that end, I recently talked with Tom Santi, who has maintained the CFP designation since 1994, but who should be regarded as an interested consumer of financial planning services, since he doesn’t practice financial planning.  (He’s a self-employed independent contractor with Suffolk Administrative Services in San Juan, Puerto Rico.) 

Santi has had what was apparently a somewhat contentious back-and-forth with the CFP Board, asking increasingly detailed questions about certain aspects of the Code and Standards until he was told that his inquiries would no longer be answered.  “I feel like the CFP community has worked hard over the years to become a profession and gain the public’s trust,” Santi told me by way of explanation.  “And to a degree I feel like the way the Board is promoting the fiduciary standard, and how they are holding it up to the media, is very misleading.  This could really cause some damage to the CFP community.”

The discrepancy can be broadly defined as the Board, in its advertisements, saying that all CFP practitioners must adhere to a strict fiduciary standard, which might not be totally accurate, due to what I earlier referred to as ‘cracks in the seams.”  The question is: could a CFP practitioner technically adhere to the standards, while still acting in a way that a reasonable consumer might not find compatible with the fiduciary concept?

Santi started his inquiry with something that has been reported before in this newsletter: that the CFP Board explicitly states that its standards are not intended to create any legal liability for a CFP relative to his or her clients.  In other words, they are not intended to be used in a court of law—which would certainly be a comfort to anyone with non-fiduciary intentions.  Santi wonders what the point of the standards are if not to provide recourse to clients who have been abused. 

The CFP Board’s response is that its enforcement powers are limited to admonishing, censuring or removing the CFP mark.  But why make an explicit statement that that a defense attorney could use in court to invalidate the Code/Standards from applying to a customer dispute?  Isn’t it possible that the client entered into a relationship with the advisor with the assurance that the CFP professional would be held to those standards?

Santi argues that when the CFP Board says, in its advertisements, that CFP practitioners are held to strict fiduciary standards, there ought to be some kind of qualification that this has limited application where it counts most: in arbitration or court hearings.  I would argue that this is something that could be fixed in the next round of Ethics/Standards development.

What else?  Santi points to the “Informed Consent” portion of the Ethics and Standards, which says (Standard A.5) that whenever a CFP professional is providing Financial Advice to a Client, CFP Board’s Code and Standards requires ‘full disclosure of all Material Conflicts of Interest.’ This standard is elucidated in more detail in a Q&A area of the CFP Board’s website (, which says that informed consent “may be inferred when not explicit.”  It says explicitly that “the standard does not require either the CFP professional’s disclosure or the Client’s consent to be in writing.” 

I think most of us in the strict fiduciary camp are a bit leery of “disclosing” rather than “avoiding” or “mitigating” conflicts of interest, while the brokerage firms are big fans of disclosure and informed consent, taking a position that I would (perhaps unfairly) interpret as “we’ll disclose on page 397 of this dense legal document that we intend to pillage you and take all of your assets including your unborn great-grandchildren, and if you sign this document, then you agree with this and we will proceed immediately.” 

But the CFP Board doesn’t even require that document.  Santi made inquiries to the CFP Board, and was told that the client was not even required to make a verbal assent; that the CFP professional (broker?) could infer that the client has assented if the client has not explicitly objected.

I honestly suspect that if actual pillaging were to take place, and the CFP broker were to swear on holy scriptures that the client didn’t object, that CFP broker would quickly lose his/her right to use the mark.  But I also think that the whole idea of disclosing away conflicts, not even in writing, not requiring written consent, not even requiring direct verbal consent, is an area that the CFP Board should consider cleaning up in the next version of the Ethics and Standards.

The CFP Board’s Ethics and Standards are not very specific about what kind of conflicts must be disclosed, which is consistent with a principles-based, rather than a rules-based, standard.  I think most of us prefer principles to rules, and of course the brokerage firms see this from exactly the opposite perspective.

But when you get into the weeds, there might be some additional cracks in the seams that the brokerage industry can put to its own use.  Santi asked the Board attorneys a very specific question: suppose a CFP broker is in what we call a “captive” environment, where only a certain group of mutual funds are available to be recommended.  All of them are high-commission, with high annual expense ratios.  Would the CFP broker violate the Board’s fiduciary rule by recommending from this limited list of funds?

The answer he received was “no.”

Would this broker be required to tell the customer that he or she could buy basically the same fund from Vanguard or in an ETF format, at a much cheaper price?

Again the answer was “no.”  It can be inferred, though not part of this conversation explicitly, that the CFP Broker should probably choose the thriftiest fund available to meet that client need, but there is no explicit obligation to say that the advisor down the street can provide better options at lower costs.  If this is indeed the case, then one can see how the brokerage firms might have decided that they can live with the CFP Board’s new Ethics and Standards after all.

There was a brief but intense argument in the upper echelons of the fiduciary community about Santi’s Q&A with the CFP Board, and the consensus seemed to be that the Ethics and Standards never intended to cover these issues in the first place.  But I think that may be exactly the point here.  Others have pointed out that the CFP Board’s advertisements paint an overly-broad picture of the fiduciary protections enjoyed by clients of a CFP professional, and should perhaps hedge a bit.  My purpose here is not to make that argument.  It is, instead, to start an early dialogue about what the next iteration of the Ethics and Standards might include.  Speaking personally, I’d feel a lot more comfortable if the brokerage firms felt a lot less comfortable allowing their brokers to conduct business as usual while maintaining their status as CFP professionals.