WASHINGTON -- The CFP Board prides itself as the issuer of a leading credential for financial planners, and that means that certificants are expected to adhere to a rigorous set of professional standards.
Under the group's guidelines, certified financial planners are required to offer clients disclosures about cost structures and conflicts that could materially impact the advice they offer, as well as a relatively new obligation to act in their clients' best interests, just as other advisors must under the regulations of the SEC or FINRA.
The CFP Board overhauled its standards of professional conduct in 2008, including for the first time the fiduciary duty provisions mandating that certificants consistently provide financial advice that is demonstrably to the maximum benefit of their clients. And that rule, more than anything else, has come to define the CFP Board's work in upholding its standards of professional conduct, according to Michael Shaw, the organization's managing director of professional standards and legal.
"There's no question the single biggest change to those standards was the incorporation of the fiduciary standard," Shaw said in a recent interview. "Whenever we talk about CFP Board's ethical standards, we start with fiduciary standard."
He noted that the fiduciary duty requirement only applies when a CFP professional is engaged in the provision of financial-planning services, pointing out that not all client relationships rise to that level.
But in instances when it does apply, the standard is very similar to the regulatory provisions that govern the broader class of investment advisors. Courts have generally adhered to the "best-interest" standard when considering questions of fiduciary duty, and that view is reflected in the CFP Board's definition of the term, which deems a fiduciary "one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client."
"What we mean by that is recommending the best options within the business and regulatory environment in which a CFP professional practices," Shaw explained. "Business environment is dictated by the company they work for. Some companies require CFPs to sell only that company's products. Regulatory environment has to do with the state and federal regulations that apply to that individual's business. So we don't dictate that you have to work within a certain business environment or that you have to work within a certain regulatory environment. We simply say that whatever environment you're working in, sell the best products that are available in those environments."
Beyond the fiduciary responsibilities, certified financial planners are bound by the board's standards to make disclosures to clients about the cost structures of the products they are recommending and in cases when conflicts of interest arise.
Many cost structures or conflicts of the sort that require disclosure under the CFP Board's standards of professional conduct are entirely legitimate and above board, Shaw is quick to point out. The CFP Board sees nothing inherently unethical, for instance, in a company whose planners are permitted only to sell that firm's products, so long as they explain that framework to their clients.
"There's nothing wrong with that business model," Shaw said. "CFP Board is business-model neutral. That means you can work in any business model you want. You can sell only insurance. You can sell only brokerage products. You can work for a firm that provides nothing but financial planning services. It doesn't matter what business model you're in, but if you are in a business model that limits you with regard to the kinds of services or products that you can offer, that has to be disclosed to the client so the client can make an informed decision."
The same goes for planners who work under incentive programs that reward the sales of certain products.
Likewise, CFP professionals are required to provide clients with details about how they are compensated (such as commission, fixed fees, bonuses or salaries) and a full rundown of the costs of the financial products they are recommending, bringing to light expenses that a client might not otherwise ascertain, such as 12b-1 fees or surrender charges associated with an insurance policy.
"All of these disclosures are for the purpose of helping the client to make an informed decision, a fully informed decision so that client knows what they're buying," Shaw said.
The CFP Board launches investigations into questions of planners' misconduct as a result of information disclosed by the planners themselves or discovered by the board's staff, or in response to a complaint filed by a client or another party. Shaw said that about three-quarters of the investigations the board conduct originate from planners' self-disclosure, commonly on a declarations page the board collects when certificants apply to renew their credentials, with the remainder evenly split between staff discovery and third-party grievances.
As a matter of procedure, an investigation begins with the assignment of the case to one of the CFP Board's seven full-time analysts, who promptly send a letter to the planner in question detailing the allegations. The planner has 30 days to respond to the charges, at which point the case could be dismissed outright, or, in the event the analyst finds evidence indicating probable cause of a rule violation, the board would issue a formal complaint and the case would head to a hearing.
At that point, the CFP Board would turn the case over to the Disciplinary and Ethics Commission, or DEC, an independent body comprised of nine members who serve terms of four years. At present, the DEC consists of seven certified financial planners and two so-called public members, who both happen to be attorneys. Under the CFP Board's rules, the DEC can include as many as three public members from outside the industry.
The DEC meets three times a year in Washington to hear cases about alleged improprieties. At the hour-long hearings, the planner, who can bring counsel, is given 20 minutes to make his case, followed by an equal amount of time for the presentation of evidence by the CFP Board's attorney. The remaining 20 minutes are reserved for questions from the three members of the DEC empaneled to hear the case.
Over the course of two days, the DEC commissioners will meet as a cohort four times to make a final judgment on each case in what is known as a ratification meeting. At those sessions, the chairmen of each panel will make recommendations about adjudicating the cases that they heard, and all nine commissioners will vote.
Planners can contest the outcome of their case through an appeals process, which sends the matter to the CFP Board's board of directors. In an appeal hearing, five members of the board would consider the case, and their decision would be final.
The CFP Board's enforcement structure provides for a varied set of disciplinary actions, ranging from a private censure to a permanent revocation of the credential. The board can also impose a suspension, stripping the planner of the right to advertise as a CFP for a certain period of time, or issue a public letter of admonition. All public actions are posted on the CFP Board's website and included in a press release the group issues following the DEC meetings.
Cases can also be dismissed without merit or dismissed with caution, meaning that there was not a compelling enough case to merit a disciplinary action, but that the DEC nonetheless found some evidence of dubious behavior.
Planners who do not respond to the initial letter from the CFP Board analysts face an administrative revocation of their credential in lieu of a hearing.
The bulk of the enforcement actions that the CFP Board takes (there were 135 hearings in 2011) still involve disclosure issues, rather than allegations of a breach of fiduciary duty, but Shaw attributes that disparity to the relatively recent addition of the fiduciary rules. That provision, which became effective in 2008, did not become subject to enforcement actions until the following January, a grace period the CFP Board offered to allow planners to modify their business practices to ensure compliance. But over time, the fiduciary standard figures to play a larger role in the board's enforcement activities, according to Shaw.
"My guess is we will see more going forward. And the reason is there's a lag," he said. "My guess is that we will begin to see more and more cases as time goes on involving conduct that occurred after Jan. 1, 2009, in a financial planning relationship where the fiduciary standard applies. That will be coming up."
In 2011, the CFP Board spent $2.85 million, or about 11% of its total operating expenses, on enforcement of its professional standards, according to an unaudited statement of the group's financial position.
The CFP Board does not track the number of investigations that involve planners who have previously been sanctioned, but Shaw said those cases are relatively unusual.
"We don't see that many repeat offenders. We really don't," he said. "Certainly, if they received any kind of a sanction from us in the past, we would look at that in considering what's the appropriate sanction now given the current conduct. We'd even look at dismissed with caution because, again, even though that doesn't rise to the level of a rule violation, there was some conduct we were concerned about."
Shaw also defended the CFP Board's tiered enforcement program against charges from critics who have objected to the notion of a private censure, arguing that any conduct that amounted to a rule violation should be public.
The private censure, Shaw submitted, is a useful tool to address relatively minor rule violations that don't constitute a public disciplinary action, but that nonetheless deserve some formal, if undisclosed, rebuke.
"It's a pretty big leap to go from a dismiss-with-caution to a public letter of admonition. It's pretty big and I think there's conduct that falls in between, and that's why we have the private censure," he said. "What the DEC often asks when they're considering between a private censure and a public letter is, does the public need to be warned about this conduct? Is it the kind of conduct the public, clients, prospective clients need to know about? If the answer to that is yes, it's going to be a public letter."