CFP Board beefs up digital advisor resources with new guides on conflicts, duty of care and the financial planning process

The CFP Board kicked off the new year with three additions to its growing collection of resources for professionals looking to comply with the board’s ethical dos and don'ts.

Guides on satisfying the duty of care when providing financial advice, the seven-step financial planning process and managing material conflicts of interest developed by the organization's Standards Resource Commission offer the latest blast of clarity about the CFP Board’s still somewhat fresh code of ethics and standards of conduct. The revised guidelines went into effect in October 2019 and began being enforced in June 2020.

CFP Board General Counsel Leo Rydzewski said through these guides, the CFP Board aims to help advisors gain a deeper understanding of the rules and regulations that govern them.

“When we developed our code of ethics and standards of conduct, we put several years into putting it together … and as you might imagine, it takes some time for the profession to adjust to new standards,” Rydzewski told Financial Planning. “We recognize that one of the key elements of the fiduciary duty has to do with the duty of loyalty, and the duty of loyalty is critically important because we know that so many advisors in the profession do have conflicts of interest. I mean, the fact you're being paid presents a conflict of interest. And it was really important for the CFP board to address it.

“Our code of Standards is largely a principles-based document. It’s principles-based because there are so many different ways a CFP professional is providing advice to a client, and there are so many myriad situations that might arise that we need a standard that can cover all of them, and a principle is the best way to do that.”

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But some critics and fiduciary advocates say with the additional clarity comes the need for redefining core principles of the profession and, in some cases, the very essence of what it means to be a financial planner. Not all conflicts are the same, they say.

“In some ways these guides do provide clarity, but I think it's clarity in the wrong direction,” said Knut A. Rostad, co-founder and president of the Institute for the Fiduciary Standard. “Over time, the broker-dealer industry, and, unfortunately, I think CFP Board in parallel, have advocated a different view of conflicts. And the CFP Board clarity is that the starting point is that all representatives and all firms have conflicts. Period. But let me be absolutely clear. The point isn't to say fee-only advisors don't have any conflicts. The point is to say the differences among the conflicts from different business models varies enormously and should be treated very differently. That to me is the view that we started with historically from 1940, but we've moved away from that and the crystallization of that is in this paper from CFP Board when they talk about that everyone has conflicts, and that implies that conflict should be treated the same.”

The three new guides explain different elements of the code and standards via step-by-step processes; a case study that illustrates how a financial advisor might provide ethical financial planning to a client through the use of a hypothetical circumstance; and tips about how to implement best practices to remain compliant.

The duty of care guide, for example, explains that a cornerstone of the code and standards is the fiduciary duty that applies whenever a CFP professional is providing financial advice to a client. Within the guide, advisors will find a seven-step process for satisfying the duty of care when providing financial advice that does not require financial planning, stating that it would be difficult to comply with the code if the process isn’t closely adhered to.

The board’s financial planning process guide is a case study for solo practitioners that invites readers to follow a fictional CFP pro named Joe as he guides a 32-year-old married couple with a child through that seven-step process. Together, Joe and the young couple tackle life changes while hitting, tracking and setting new financial goals along the way.

The conflict of interest guide states that conflicts are present in every business model, and a CFP professional must be aware of the material conflicts present within their practice. The guide states that material conflicts of interest most commonly arise from advisor compensation.

The guide goes on to say CFP Board’s code and standards do not require advisors to eliminate conflicts of interest. Instead, the code says a CFP professional must either avoid or disclose and manage conflicts of interest.

If conflicts are not avoided, the advisor must fully disclose material conflicts of interest; obtain the client’s informed consent to the conflict; and manage the conflict by adopting and following business practices reasonably designed to prevent material conflicts of interest from compromising the CFP professional’s ability to act in the client’s best interests.

Common conflict scenarios identified in the guide include rollover from an employer plan to an IRA, using assets to invest versus paying off debt and recommending an asset allocation strategy.

“In each of these circumstances, a CFP professional can manage the material conflict of interest by relying on a prudent process to determine which alternative is in the best interests of the client based on the client’s goals, risk tolerance, objectives, and financial and personal circumstances,” the guide says. “That process must reflect the practices of a prudent CFP professional. The process may be proportional to the size of the conflict. The greater the conflict of interest, the more carefully CFP Board will scrutinize the conflict management process.”

Rydzewski adds that more resources are on the way as CFP Board leaders and the 13-member Standards Resource Commission is working to develop additional materials to join the dozens of guides, articles, FAQs, case studies and videos already populating the organization’s compliance resources library.

“We've been hard at work. Our Standards Resource Commission is composed of leaders in the professional community, individuals with regulatory experience, CFP professionals of all business model backgrounds, individuals who are speaking up on behalf of the public and looking out for the public interest,” he said. “We've already developed more than 30 case studies with hypothetical, factual circumstances that we believe are relevant to the practices of all CFP professionals. So if I’m a CFP professional working on my own practice and a situation arises, I can go and look at these case studies for guidance … it may not be my exact fact pattern because you know there's so many fact patterns out there for you to evaluate, but these case studies can be used to learn from CFP Board's perspective how the situation should be handled.”

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Rostad, a former regulatory and compliance officer, said he “absolutely applauds” the CFP Board for providing guidance in the issue of conflicts of interest.

But the guides, he said, move the industry further away from its roots, a path Rostad said the CFP Board has intentionally walked for more than decade since imposing fiduciary duty on all financial advice and leading some to question whether broker-dealers would shun the mark altogether.

For him, the redefinition of conflicts is the biggest deviation, noting that guidance to disclose and manage conflicts instead of outright eliminating them is at odds with history. He said in the landmark 1963 Capital Gains Research Bureau case, the Supreme Court held that the fundamental purpose of the Advisers Act of 1940 was to “to eliminate conflicts between the investment adviser and clients.”

“There's no question in my mind that this change was intentional and with a clear purpose. I don't know how you could suggest otherwise because the guides released in January follow the trend in terms of looking at the background of the CFP Board on the issue of standards,” Rostad said. “The CFP Board came out and said that if you are engaged in financial planning, which not all CFPs are, you must hold yourself to a fiduciary standard. And then the part that becomes very complicated in a sense is, ‘as we define it.’ And so going back to 2008, they sort of reject the SEC’s view of fiduciary as defined for investment advisors, and they do so purposely.”

Rostad said after making that change and expanding the fiduciary standard, the CFP Board in his opinion did not provide any guidance about how it defined fiduciary for many years.

“It was sort of a major issue in terms of not saying what it means, except for saying it doesn't mean what the SEC says it means for investment advisors,” Rostad said.

Rostad also remains critical of the amount of time spent by the CFP Board in going over the updated stance on conflicts in the new guides. He applauds its mention that material conflicts may be too great to be managed, and that conflicts may be managed through compensation models that place less emphasis on flat, AUM or hourly fees. But he said those key points should have more than a few sentences of explanation dedicated to them.

“Over the last three or four years I have written on a regular basis that the CFP Board needs to provide CFPs definitions for what it means they have to do. And over the last year or two they have started providing that definition, and this new paper is one of the papers that they have provided,” Rostad continued. “But they put themselves in a very difficult position that is not sufficiently looked at, and that is the CFP Board standards don't apply to the firm. They apply to the individual representative.

“Be it a wirehouse, be it an independent B-D, be it an investment advisor … can't just go to their compliance people and say ‘what do I need to do?’ Because it doesn't apply to the firm. This is a complication that in my view still has not gotten sufficient attention. It's in that context that, again I look at this paper and point out that the definition that they provide is fundamentally different as opposed to the definition provided in law for investment advisors starting in 1940.”