For a word so central to the investment industry, "fiduciary" resists easy classification. There is no definition of it in the Investment Advisers Act of 1940, the guiding legislation of the industry. It's a concept that's often defined in the breach.

The "F word," as some are calling it, lies at the heart of a controversy surrounding the Certified Financial Planner Board of Standards' proposed changes to its ethical and practice guidelines. In July, the CFP Board, a private regulatory body, released draft changes to its Code of Ethics and Professional Responsibility and Financial Planning Practice Standards, which outline the responsibilities that go with the CFP designation the board administers.

HEATED DEBATE

The proposed changes include a new definition of fiduciary and set it as the default legal standard for CFP-client relationships. Critics have charged the CFP Board with weakening its ethical and practice standards with its new changes. Yet Sarah Ball Teslik, head of the CFP Board, insists that the basic principles remain the same: "There's a lot less action than the yelling and screaming would suggest."

Amid the heated rhetoric--one prominent planner calls the board's draft presentation "at worst, potentially a Machiavellian effort to obfuscate many significant changes and deletions"--a kind of identity crisis has emerged. Patients know that doctors' priority is to heal, and clients know that attorneys will keep their confidences. But what do consumers expect from financial planners?

A survey by TD Ameritrade this year revealed that 43% of respondents didn't know that stockbrokers and investment advisors offering fee-based advice provide different levels of investor protection. This confusion has contributed to the concern that financial planning is not yet a full-fledged profession. Some would like to see the CFP mark achieve the status of an "MD," a universal and easily understood credential that signals a high standard of professional care.

While the proposed changes technically apply only to the 51,000 CFPs, they have more far-reaching implications. For one, the existing guidelines have been used in court to define the profession's standards, says Harold Evensky, chairman of Evensky & Katz in Coral Gables, Fla., a former chair of the CFP Board of Governors, who has testified as an expert witness in trials involving planners.

The CFP Board isn't alone in grappling with fiduciary standards for planners. The National Association of Personal Financial Advisors (NAPFA) launched a "Focus on Fiduciary" campaign this summer to educate consumers about what to expect from planners. And this month, oral arguments are scheduled to begin in the lawsuit the Financial Planning Association brought against the Securities and Exchange Commission over the agency's April 2005 ruling that brokers could give limited investment advice without being held to the 1940 Act. The SEC, too, plans to conduct a study on how the separate regulations for broker-dealers and investment advisors affect investors.

WHAT'S NEW

The most significant proposed change, the board says, requires CFPs to state in writing what legal standard will govern their agreement with clients and sets the default standard at the fiduciary level. The draft defines fiduciary as "in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and in a manner he or she reasonably believes to be in the best interests of the client." The current default standard is to "exercise reasonable and prudent professional judgment in providing professional services," and, for practitioners, to "act in the interest of the client." Another change would have CFPs outline the terms of their client agreement in writing and state all the different ways they could be paid.

That might seem clear enough, but critics charge that the draft lowers existing standards and that its language is confusing. Harold Evensky, for example, objects to the new definition of fiduciary because he says it lowers the existing prudent-professional standard to a prudent-man standard. And while the legal default standard is that planners must be fiduciaries, the guidelines also say planners can specify a different legal standard in writing, but do not say what type of agreement that might be. Allowing the CFP to opt out this way is "not making it clear to the consumer," says Peggy Cabaniss, a former NAPFA chair. Chris Brown, with Ivy League Financial Advisors in Maryland, says it's unrealistic to expect that a CFP would explain to a client that she's not acting in the client's best interest on a given transaction, so any such explanation would probably be hidden in fine print. Teslik defends the opt-out provision, because the fiduciary standard wouldn't be appropriate for broker-dealers who buy and sell securities on demand; they shouldn't be held to the same standard as those who provide comprehensive investment advice.

The proposed standards also hold everyone, not just those engaged in financial planning, to the CFP Practice Standards, which the board claims haven't changed much from the current version. This is an attempt to close a "legal loophole" that has hampered the board in investigating complaints against its certificants. Most of the current Practice Standards apply only to conduct that is labeled financial planning. (Current standards define financial planning as "the process of determining whether and how an individual can meet life goals through the proper management of financial resources.") Those under investigation often say they weren't engaged in financial planning at the time of their alleged infraction, leaving the CFP Board's hands tied. Although the board can't send offenders to jail or impose fines, it can strip them of their right to use the CFP mark and often publicizes its actions in press releases and on its website. Of the 66 cases brought to hearing last year, 38% resulted in public disciplinary measures, says Tamara Monroe, director of professional review for the CFP Board.

QUEST FOR CLARITY

Critics are also baffled by how to apply the draft changes. John S. Simmers, the chief executive officer of ING Advisors Network, has studied the proposal and wants to know how it will affect his CFP reps. He estimates that hundreds of the more than 9,000 advisors in ING's four independent broker-dealer firms hold a CFP and says the proposal doesn't make clear what new obligations these reps would have or whether ING will reap benefits or suffer costs in helping CFPs meet them. "Are we creating a new standard that allows the legal profession to exploit noncompliance in another way?" Simmers asks.

Planners will have to wait for definitive answers. The CFP Board plans to release a best-practices document that offers more-detailed guidance, but there's no timeline for when the final draft will be issued.

Meanwhile, the SEC is planning a study on how the separate regulatory systems for broker-dealers and investment advisors affect investors. A spokesman says the commission could revisit its April 2005 rule based on the results. That rule basically holds investment advisors to a fiduciary standard--whatever that means, exactly-while broker-dealers are held to a less--stringent "suitability" standard. Like fiduciary, suitability is often defined in the breach. According to the NASD, unsuitable broker behaviors include recommending a security that's inconsistent with a client's investment goals, misrepresenting or failing to disclose material facts concerning an investment and charging excessive markups. Most NASD arbitration cases are for breach of fiduciary duty, but arbitrators aren't bound by strict legal definitions when they determine whether investors deserve their money back, says Elisse Walter, NASD's senior executive vice president. With standards like these, it's no wonder planners yearn for clarity.

Planners may well look back on this period as a watershed in the industry, when professional ethics began to coalesce into a more coherent whole. To get there, practitioners must put their differences behind them. "Everybody has a basic understanding of what it means to be a steward, to have responsibility," says Don Trone, the CEO of Fiduciary 360, a national organization that trains advisors in investment fiduciary responsibility. "I don't think the industry should be quibbling about that. If we let ourselves quibble, we will never have a profession."

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