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How to 'properly manage' conflicts under the CFP Board's new code of ethics

Photo by Scott Wenger

CHICAGO — The CFP Board’s new code of ethics and standards of conduct, which became effective last week, requires certified reps to disclose their conflicts of interest, but also “properly manage” them, a clause that could pose challenges for CFPs at particular firms.

Some brokerages — including Vanguard — require their reps to recommend proprietary products. Just because a CFP is employed at such a firm doesn’t mean they are excused from their fiduciary responsibilities, according to Leo Rydzewski, the CFP Board’s general counsel who gave a presentation at NAPFA’s Fall Conference. He did not name any one company.

“We don’t certify the firms. We certify the professionals who go to a firm,” Rydzewski told Financial Planning after the presentation.

Whether at a wirehouse, broker-dealer, RIA or discount brokerage, CFPs have the same responsibility to clients, Rydzewski says. The new code of ethics and standards requires that all planners who hold the certification act as a fiduciary any time they give financial advice — they have duties of loyalty, care and to follow client instructions, according to the code.

“No matter what business model, you can always do what’s best for the client,” Rydzewski said.

This may mean a CFP will need to tell a client that he or she cannot help them, Rydzewski said in the presentation.

“[A firm] may not have products that meet the needs of every client. ... In that circumstance, [CFPs] need to tell the client that they can’t work with them using what they have available,” he said.

CFPs are required to disclose advice limitations to clients, he said. If a CFP can only recommend proprietary funds, “clients have to know this,” he said. Generally speaking, clients of firms that sell proprietary funds won’t be surprised to end up holding one of them in their portfolios, Rydzewski said.

Vanguard spokesman Charles Kurtz says Vanguard’s robo advisor uses its own funds because they are “among the lowest cost and most diversified in the market, and exhibit extremely tight tracking.” The brokerage says it is up front about how its planners only recommend proprietary funds.

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Under the new guidelines, the CFP Board now requires planners to either avoid conflicts of interest, or to fully disclose them, obtain informed consent and properly manage them.

“We are very transparent about leading with Vanguard funds — not only in disclosures and ADV, but in our marketing materials and throughout the client onboarding process,” Kurtz said in an email.

Under the new code at the CFP Board, written disclosures are not required and consent does not necessarily have to be oral, according to Rydzewski, who says this is consistent with the Advisers Act.

The CFP Board is developing a case study related to planners who are required by their companies to recommend proprietary products, Rydzewski said in the presentation.

The CFP Board’s updated requirements are more rigorous than what is required by the SEC under Regulation Best Interest, though the board had faced pressure to downgrade its standard of client care. The CFP Board said it was willing to lose thousands of its certified planners over maintaining its specified fiduciary standard.

The organization also plans to increase its scrutiny of registered reps and take steps towards stricter enforcement.

“All [Vanguard Personal Advisor Services] advisors are fiduciaries and compensated via salary, not commissions,” Kurtz said.

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