Does the CFP Board choose advertising over enforcement?

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How does a line of work become a profession? For financial advisors, enforcing a fiduciary standard is key.

The CFP Board says it wants to establish the CFP mark as one it grants only to professionals, but talk is cheap. Let’s examine actions.

As a CFP certificant, I pay my annual dues just like everyone else. However, for the past several years I have timed my payment with a written communication to Kevin Keller, the CEO of the CFP Board.
I made two requests:

“Mr. Keller. I paid my dues today and again request that the portion of my dues that would go to the advertising campaign go instead to enforcing the fiduciary standard. Further, I again request that all CFP license holders be given this option.”

While I am 100% in agreement with the stated mission of the CFP Board, which is to “benefit the public by granting the CFP certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning,” I think it’s far more important to enforce the higher standard than to advertise it.

First, let me explain with some background. Then I’ll show why I am disappointed with the CFP Board. In short, I believe that it does not put its muscle where its mouth is, when it comes to enforcement.

Many years ago, I helped a client who I believe was abused by a CFP-holding advisor who represented he had a fiduciary duty. You’d expect the certification guaranteed the advisor would act as a fiduciary to put the client’s interests ahead of his own, I don’t believe that was the case in this relationship. For one, the advisor sold the client an annuity in which the advisor had taken both commissions and an ongoing fee based on AUM, year after year. By my estimation, the client was paying 5.29% annually in fees. The facts were so ugly that the insurance company and broker-dealer paid the client a handsome settlement without any legal actions taken.

The client filed complaints with financial regulators and the CFP Board. One year later, none of the financial regulators found any wrongdoing. Ultimately, the CFP Board took no public actions against this CFP.

I wrote about this case in AARP Magazine. When I later ran into Keller at a conference, he told me that standards were now higher, invited me to be part of a CFP Board disciplinary panel and said I could write about the experience. I accepted and The Wall Street Journal assigned me the story. But I never wrote it. Just before the panel, the CFP Board sent me a confidentiality agreement that included the right to read and approve the entire article before publishing. Such agreements go against responsible media guidelines. I counter-offered that we change the agreement to allow the CFP Board to approve facts and names but not be permitted to approve my opinion on the disciplinary process. The CFP Board said no.

This experience compelled me to take a closer look at how the CFP Board conducts enforcement of those who appear to break their fiduciary promises. If the CFP Board truly enforces a higher standard, I thought, we should expect that its public sanctions would come before other regulators or courts.

Well, I examined the public discipline announcement that came out on May 21 with actions taken against 10 current or former CFP certificants. That’s 10 out of about 81,000. These certificants received either letters of admonition, suspensions or revocations.

I dug into to the backgrounds of the 10 certificants. Here’s what I found:

  • Eight had already been fined, suspended or banned by financial regulators such as FINRA, the SEC or state regulators.
  • One had lost a civil lawsuit for misappropriating trade secrets from his firm.
  • Only one had no prior regulatory action I found and this person received a letter of admonition because he listed his compensation as “fee-only” when he accepted commissions for insurance sales.
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Thus, by my count, nine of the 10 had already been found to have broken the law, so this wasn’t a higher standard. The tenth, who falsely advertised “fee-only” services, came only after a 2013 article in Financial Planning noting hundreds of certificants at wirehouses were listed as fee-only. That, and a very public lawsuit, led to more consistent enforcement. So it could be argued that this tenth case is only a result of both legal actions and media stories on lack of enforcement. A brief review of the 10 certificants sanctioned in the August 30 public discipline announcement showed similar results.

Looking to confirm whether or not they agreed with my analysis, I asked the CFP Board the following question. I received an answer that didn’t seem to address my question:

Allan Roth: "Do you concur with my analysis that in the most recent public disciplinary actions taken by the CFP Board that eight came after a regulator action, one after a court action, and only one came before a regulator or court — the misuse of 'fee-only?'"

CFP Board: "CFP Board conducts an investigation when it has information indicating that a CFP professional may have engaged in conduct that presents grounds for discipline. CFP Board receives that information from multiple sources. A CFP professional may self-disclose the information, a consumer may file a grievance with CFP Board, a regulator may have taken action, a third party (such as another CFP professional) may notify CFP Board of the alleged misconduct, or CFP Board independently may discover the alleged violation. No matter the source, CFP Board takes potential violations seriously, and enforces its standards through a transparent process pursuant to which CFP professionals are given notice of the potential violation and an opportunity to be heard by a panel of other professionals. CFP Board’s enforcement of its standards is a feature that distinguishes CFP Board from the more than 180 financial services certifications and designations in the marketplace. A violation of CFP Board’s Standards may subject a CFP professional to discipline. When CFP Board determines that public discipline is warranted, CFP Board publishes the discipline in a press release and on CFP Board’s website, in fulfillment of CFP Board’s public service mission."

I’ve received more transparent answers on far tougher questions from wirehouses.

What I have learned over the past few months has only hardened my belief that the CFP Board has a responsibility to spend more member dollars on enforcement, and less on marketing its mark as the definitive last word in advisor qualifications. I have hoped my requests would be heard by the board of directors, but it appears that has not been the case.

Last year, when I sent in my CFP dues along with my now-standard request that my dues go to enforcing the fiduciary standard, Keller responded. “It is not a procedural or operational issue, but a directive from our board,” he wrote in an email.

I asked why in an email and the CFP Board’s COO, Elizabeth Stewart, called me. I asked her my questions and she later responded in an email: “The board established a new annual certification fee amount, and dedicated $145 of that amount exclusively for funding the public awareness campaign. The amount earmarked for the campaign has been unchanged since its inception more than eight years ago, and it cannot, has not, and will not be used for operations such as our enforcement activities."

Last month, CFP Board spokesman Dan Drummond said in an email that my message “has not gone to the board because it is in conflict with the standing policy of the board.”

While I wait and hope the board eventually sees my request to use more of my dues for enforcement (and less for advertising), I decided I needed a gut check. I believe my career needs strict enforcement of fiduciary standards to be considered a true profession. But am I asking too much? So I reached out to an expert.

“To become a profession, both advertising and enforcement of standards are needed,” Deborah DeMott, the David F. Cavers Professor of Law at Duke University and an expert in fiduciary obligations, told me. “To become a profession, there must be a robust debate on how to enforce standards,” she added.

Michael Kitces, publisher of the Nerd’s Eye View and a Financial Planning contributor, notes that since the CFP Board is not a regulator, they can’t just compel planners to turn over client information and related client communication in an investigation as that would violate firms’ privacy policies. Their hands are somewhat tied, Kitces told me, though he pointed out an SEC “no-action” letter that allows advisors to hand over client information. He says that CFPs have a higher standard yet agrees that they are not fully held to that higher standard.

Kitces firmly disagreed with my request to allow CFPs to direct their $145 fee be applied to enforcement. He stated that accounting systems would have to be changed and contracts were likely signed with the marketing firms committing such funds, and that large organizations have to manage their resources holistically.

Keller’s bio notes he has increased membership by more than 30% to 72,000 certificants. As of August, the CFP Board’s website says there are 82,260 certificants, so that would be about a 46% increase. By my math, at $355 fee per certificant, that’s an annual revenue stream of $29.2 million, with about $11.9 million going to advertising the mark. And, according to CFP Board’s 2016 form 990 disclosure, $681,000 was paid to Marketing General, whose trademarked tag line is, “We grow membership.” Indeed, the CFP Board noted its milestone when it surpassed 80,000 certificants.

Kitces states that the number of CFPs has grown, now comprising between a quarter to a third of all financial planners, while the FPA has shown membership declines. And the board appears to have rewarded Keller with compensation of more than $900,000 in 2016, which is from the latest form 990 available. That’s more than twice the compensation he received only seven years earlier. While growth is clearly good for the CFP Board, I don’t think a profession is about growing; rather it’s about creating public good. Though Keller’s compensation is positively correlated with growth, as in investing, correlation doesn’t mean causation.

Are CFPs held to a higher standard? Clearly the mark is superior to most of the 200 so-called financial designations out there. I’ve written about some that can be obtained over a fun weekend in Las Vegas in that same AARP magazine article. But based on my examinations of announcements of disciplinary action and reviews of prior cases, I think the evidence demonstrates that the CFP Board typically takes disciplinary action after regulators or courts do so. The only exception I saw was the use of the term “fee-only,” which arguably is in response to a prior scandal.

Is Kitces correct that the CFP Board’s hands are tied in that they cannot compel firms to hand over client information? One solution could be that clients direct the planner to turn over their information to the CFP Board. And is it really such a systems nightmare to update systems to allow certificants to divert fees away from the advertisement campaign? As a former CFO of organizations many times the size of the CFP Board, I think it would be fairly easy to do. As far as contractual commitments for advertising and marketing, I’m not privy to those contracts, but good contracting would argue for flexibility.

My view is that advertising something that isn’t true will backfire. Advertising a higher standard and then not holding certificants to that higher standard isn’t all that different from TV ads from the big brokerage firms trying to create a warm and fuzzy feeling with potential clients and then selling high-fee products. But at least those firms aren’t advertising fiduciary duty.

However, change may be coming. In just over a year, the CFP Board implements new standards. Jack Brod, a former Vanguard executive, will become chairman shortly thereafter and has talked about sharpening the compliance focus. But talk is cheap and, to date, I’ve seen more talk than action. The board must embrace discussion and dissent on enforcement of standards if it wants the CFP mark to be the standard elevating financial planning as a profession.

The CFP Board told me, “The board will consider the separability of the Public Awareness Campaign fees when it approves the 2019 budget.” I hope this is a sign that it is getting serious on enforcement.

In my view, advertising a fiduciary standard that isn’t enforced dooms financial planning to that of a sales vocation. Not a profession.

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CFPs Fiduciary standard RIAs Enforcement Kevin Keller CFP Board