After nearly 18 months, the CFP Board’s Commission on Standards has released newly proposed standards for CFP professionals. If the standards are enacted following a public comment period ending Aug. 21, CFP professionals will be subject to an enhanced definition of fiduciary duty.

On that score, the new standards appear to advance planning as a profession. They clearly set forth the importance of a fiduciary duty and the need to manage conflicts of interest, as well as formalizing how CFP professionals must define their scope of engagement with the client. Yet the CFP Board still retains limited means of enforcement, and because the board is not a government-sanctioned regulator, it is still limited in its ability to gather information to investigate complaints.

Read more: CFP Board’s proposed rule changes prompt heated debate online

If enacted, planners will also need to wrestle with some profoundly subjective language that could, if interpreted incorrectly, lead to their marks being revoked in extreme cases. For these and other reasons, the proposed revisions demand close, careful review.

THE BOARD’S REVISION
Back in December 2015, the CFP Board first announced that it was beginning a process to update its standards of professional conduct by bringing together a 12-person commission —ultimately expanded to 14 individuals — that included diverse representation across large and small firms, broker-dealers and RIAs, NAPFA and insurance companies, and even a consumer advocate and former regulator.

The purpose of the new group was to update the CFP Board’s existing standards of professional conduct, which is currently broken into four key sections:

Code of ethics and professional responsibility: The seven core ethical principles to which all CFP certificants should aspire, including integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence.
Rules of conduct: The specific rules by which the conduct of CFP professionals will be evaluated, including a CFP certificant’s obligations to define the client relationship, disclose conflicts to the client, protect client information, and the overall duty of conduct of the CFP certificant to the client, employers and to the CFP Board itself.
Financial planning practice standards: The standards that the CFP certificant should follow that define what planning is and how the six-step planning process itself should be delivered.
Terminology: The definitions of key terms used in the Standards of Professional Conduct, from what constitutes a planning engagement to what it means to be a fiduciary and the definition of “fee-only” and what is considered “compensation” to be disclosed.

The update process would be the first change to the CFP Board’s standards since mid-2007, which at the time was highly controversial and would stretch out for years, but would culminate in the first application of a fiduciary duty for CFP professionals.

Under the newly proposed code of ethics and standards of conduct, which the CFP Board published for public comment June 20, the four sections above will be consolidated into two sections: a Code of Ethics and a Standards of Conduct — which will incorporate the prior Rules of Conduct, Practice Standards and key Terminology.

The full text of the Proposed Code of Ethics and Standards of Conduct can be viewed here on the CFP Board’s website.

‘DOING’ FINANCIAL PLANNING
Under the CFP Board’s current rules of conduct, certificants owe to their clients a fiduciary duty of care when providing planning or material elements of planning.

Accordingly, the reality is that the overwhelming majority of CFPs are already subject to a fiduciary duty when providing planning services to clients.

However, the CFP Board’s standard has been criticized as allowing for a loophole, in that it’s not based on simply being a CFP professional, but instead tries to identify when people are doing planning or material elements thereof. This at best isn’t always clear, and at worst allows a subset of CFP professionals to aggressively sell nothing but their own products — knowingly not serving as a fiduciary, despite holding out as a CFP certificant — because a single product recommendation was not deemed to be doing planning.

Jeffrey Sauers, commercialphoto.com

PROVIDING FINANCIAL ADVICE
Now the CFP Board is taking a stronger position that certificants should be held to a fiduciary standard when delivering their services. Accordingly, the very first section of its new standards of conduct states:

A CFP professional must at all times act as a fiduciary when providing financial advice to a client, and therefore, act in the best interest of the client.

Notably, the scope of fiduciary obligation is not limited to just when providing planning or material elements of planning. Instead, the fiduciary duty will apply any time a CFP professional is “providing financial advice,” which itself is defined very broadly as:

Communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the client take or refrain from taking a particular course of action with respect to:

  1. The development or implementation of a financial plan addressing goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a client’s personal or financial circumstances;
  2. The value of or the advisability of investing in, purchasing, holding, or selling financial assets;
  3. Investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters;
  4. The selection and retention of other persons to provide financial or professional services to the client; or

B) The exercise of discretionary authority over the financial assets of a client.

In this definition, the mere suggestion that a client take or refrain from taking any particular course of action is deemed advice. Notably, the CFP Board does clarify that marketing materials, general education materials or general communication “that a reasonable person would not view as financial advice” does not constitute advice.

Nonetheless, most classic recommendations — from delivering a comprehensive plan to merely suggesting a product is right or not right for a client’s situation — would be captured under this definition of advice, and therefore subjected to a fiduciary duty.

In other words, the expansion of the CFP Board’s application of the fiduciary duty to providing any kind of advice eliminates the current gap where product salespeople could sell a product as a CFP certificant and claim they’re not subject to the fiduciary duty because it wasn’t considered planning. Although the fiduciary duty is still not defined by merely being a CFP or holding out as a CFP certificant, this new and far broader scope of applying the fiduciary duty when delivering advice still accomplishes a substantively similar result, as even a focused, single-product recommendation would still constitute advice under the new rules.

On the other hand, the CFP Board’s new definition of advice to which a fiduciary duty applies may actually have gone too far, as the new rules have no actual requirement that the client have agreed to engage the CFP professional in order for the fiduciary standard to occur. By contrast, for the fiduciary duty to apply to an RIA under the Investment Advisers Act, the adviser must give advice for compensation, and the Department of Labor similarly only applies a fiduciary duty to investment advice given to a retirement investor for compensation.

The compensation requirement helps ensure that free advice is not subject to a fiduciary duty, and also helps ensure that suggestions that may be given in the course of soliciting a prospect are not deemed as fiduciary advice even if the adviser is never hired. The CFP Board may need to consider adding a similar stipulation to their current rules to make it clear that the CFP professional’s obligation to deliver fiduciary advice only applies if the client ultimately actually engages the professional for advice — for which at least some type of compensation is paid.

NEW FIDUCIARY DUTIES
Of course, if CFP certificants are going to be held to a fiduciary duty, it’s still necessary to define exactly what that means. Thanks to the recent discussions about the Labor Department’s fiduciary rule, most advisers are familiar with the classic requirement that fiduciaries must act in the best interests of their clients, but in reality a fiduciary duty can and should be broader than just this duty of loyalty to the client.

In its new rules, the CFP Board says the CFP professional as a fiduciary must:

  1. Place the interests of the client above the interests of the CFP professional and the CFP professional’s firm;
  2. Seek to avoid conflicts of interest, or fully disclose material conflicts of interest to the client, obtain the client’s informed consent, and properly manage the conflict; and
  3. Act without regard to the financial or other interests of the CFP professional, the CFP professional’s firm, or any individual or entity other than the client, which means that a CFP professional acting under a conflict of interest continues to have a duty to act in the best interest of the client and place the client’s interest above the CFP professional’s.

B) Duty of care. A CFP professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client’s goals, risk tolerance, objectives, and financial and personal circumstances.

C) Duty to follow client instructions. A CFP professional must comply with all objectives, policies, restrictions, and other terms of the engagement and all reasonable and lawful directions of the client.

In other words, the CFP Board is in fact applying the two core duties of a fiduciary standard: the duty of loyalty, which is to act in the interests of the client; and the duty of care, which is to act with the care, skill, prudence and diligence of a professional. Additionally, the CFP Board still affirms that a CFP professional must follow their clients’ instructions as well. This means that a CFP professional still has an obligation to follow the clients’ instructions if the client wants to make their own bad decision against the adviser’s advice.

Notably in the past, the CFP Board’s existing rules of conduct for CFP professionals also stated that when acting as a fiduciary while providing planning or material elements of planning, the CFP certificant owes to the client a duty of care, and must place the interest of the client ahead of his/her own. However, the new rules go much further in clearly and concretely defining the fiduciary duties of loyalty and care.

CONFLICTS OF INTEREST
One of the core issues of a fiduciary duty, and the obligation to place the interests of the client above that of the adviser or his/her firm, is how to handle the inevitable conflicts of interest that may arise.

The CFP Board’s new duty of loyalty specifically requires that CFP professionals seek to avoid conflicts of interest, or fully disclose any material conflicts of interest — where “material” is defined as “information that a reasonable client would have considered important in making a decision.”

In addition, a further expansion of the CFP professional’s duties with respect to conflicts of interest, in section 9 of the new standards, would oblige the CFP professional to obtain “informed consent” after disclosing any material conflicts of interest. That said, informed consent can be handled in conversation in a prospect/client meeting, given written consent is not required.

Furthermore, CFP professionals are expected to “adopt and follow 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.” This is very similar to the so-called policies and procedures requirement that the Labor Department imposes on institutions engaging in fiduciary advice with respect to retirement accounts — although the Labor Department’s fiduciary rule requires the firm to adopt policies and procedures, while the CFP Board’s standards require the individual CFP certificant to adopt those business practices, recognizing that the Board has no jurisdiction over firms, only certificants, and that certificants must comply even if their firms, which may have non-CFPs as well, do not adopt firm-wide policies and procedures.

On the other hand, organizations such as the Institute for the Fiduciary Standard have already pointed out that the CFP Board has a history of encouraging CFP professionals to disclose conflicts of interest, but not necessarily urging them to actually avoid or eliminate those conflicts. By contrast, the Labor Department’s recent fiduciary rule goes into far greater depth about what constitutes an unacceptable — i.e., not realistically manageable — conflict of interest, and outright bans many, as does ERISA’s fiduciary duty.

For the CFP Board though, the new standards have little guidance on whether CFP professionals are actually expected to avoid any conflicts of interest at all, as the focus of the new standards is simply on disclosing material conflicts of interest and gaining informed consent from the client.

In fact, because the CFP Board allows for material conflicts of interest as long as there is informed consent, there is arguably no requirement that CFP professionals actually avoid any conflict of interest at all, nor necessarily even manage them.

After all, while the new rules do suggest that CFP professionals should adopt business practices to prevent material conflicts of interest from compromising their duty of loyalty, the rules also fully permit those material conflicts of interest anyway, as long as the CFP professional can demonstrate that it was disclosed and that the client agreed to the recommendation — that is, gave informed consent.

PRACTICE STANDARDS
In addition to the new rules obliging CFP professionals to act as fiduciaries to clients, including both a duty of loyalty and a duty of care, the new practice standards further emphasize that when providing advice, the CFP professional is expected to actually do the planning.

In fact, the new practice standards presume that whenever a CFP professional provides advice, there should be a planning process that integrates together the relevant elements of the client’s personal and/or financial circumstances to make a recommendation.

Viewed another way, not only are CFP professionals no longer allowed to escape fiduciary duty by providing narrow product recommendations — in an attempt to avoid providing planning or material elements of planning — but under the new rules, any product or other recommendation or “suggestion to take or refrain from a particular course of action” is presumed to be planning and therefore necessitates following the full planning process, unless the CFP professional can prove that it wasn’t necessary to do so. It’s either that, or that the client refused the comprehensive advice or limited the scope of engagement to make comprehensive advice unnecessary.

However, it’s important to recognize that doing planning when giving advice still doesn’t necessarily mean every client must be provided a comprehensive plan. Under the new conduct standards, “financial planning” itself is defined as:

A collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.

The key term here is “relevant elements” of the client’s personal and financial circumstances. Just as a doctor doesn’t need to conduct a full-body physical exam with blood analysis to set a broken arm, neither would a CFP professional be required to do a comprehensive plan just to help a client set up a 529 college savings plan.

Nonetheless, a full evaluation of the relevant circumstances — from the ages of children and time horizon to college, to the risk tolerance of the parents, their tax situation, and available savings and other resources for college — would still be necessary to deliver appropriate planning advice.

EGADIM’S NEW STEP
Perhaps more notable though, is that the planning process itself is changed and updated under the new conduct standards.

In the past, the standard planning process was known by the acronym EGADIM: establish client/planner relationship, gather data, analyze the client situation, develop plan recommendations, implement the plan and monitor the plan. Each part of the six-step process also had one to three levels of detailed practice standards about how they should be delivered.

Under the new rules, planning would entail a seven-step process that would put the expectation on the adviser to:

1. Understand the client’s personal and financial circumstances (including gathering quantitative and qualitative information, analyzing the information, and identifying any pertinent gaps in the information);
2. Identify and select goals (including a discussion on how the selection of one goal may impact other goals);
3. Analyze the current course of action and potential recommendations (evaluating based the advantages and disadvantages of the current course of action, and the advantages and disadvantages of potential recommendations);
4. Develop financial planning recommendations (including not only what the client should do, but the timing and priority of recommendations, and whether recommendations are independent or must be implemented jointly);
5. Present financial planning recommendations (and discuss how those recommendations were determined);
6. Implement recommendations (including which products or services will be used, and who has the responsibility to implement); and
7. Monitoring progress and updating (including clarifying the scope of the engagement, and which actions, products, or services, will be the CFP professionals’ responsibility to monitor and provide subsequent recommendations).

Unfortunately, the new seven-step process isn’t as conducive to an acronym as EGADIM was, though a new option might be CGADPIM: circumstances, goals, analyze, develop, present, implement, monitor).

In practice, the primary difference under the new rules is that the prior requirement to establish the scope of the engagement is not considered part of the planning process itself —though it will still be separately required, as discussed below. The client-data gathering phase is now broken out into two standalone steps of the process — first to gather information about the client’s circumstances, then to identify the client’s goals — and the CFP Board has similarly separated the prior develop and present recommendations of EGADIM into separate develop and present process steps.

Another key distinction of the new seven-step process though, is that the last two steps — to implement and to monitor — are explicitly defined as optional, and are only an obligation for the CFP professional if the client’s scope of engagement specifically dictates that the CFP professional will be responsible for implementation and/or monitoring. Notably, the presumption is that the CFP professional will have such responsibilities, unless they are specifically excluded in the scope.

In other words, if the CFP professional defines the scope of the agreement as only leading up to presenting recommendations — that is, the CGADP part of the new planning process — but leaves it up to the client to proceed with implementation and monitoring, which is permitted under the new rules, recognizing that some clients prefer to only engage in more modular advice and a second opinion from a CFP professional, but may not wish to implement with that professional.

CFP Standards Michael Kitces

PROVIDING INTRODUCTORY INFORMATION
Currently, the CFP Board’s Rules of Conduct when a CFP professional is engaged by a client to provide planning or material elements of planning include an obligation to provide information to clients prior to entering into an agreement — including the responsibilities of each party, the compensation that the CFP professional or any legal affiliates will or could receive and, upon being formally engaged by the client for services, the CFP professional is expected to enter into a formal written agreement specifying the planning services to be provided.

Under the new rules, these disclosure and engagement requirements would be expanded further into a series of at least two written documents.

The first is introductory information to be provided to a prospect before becoming a client, and the second is a terms of engagement agreement provided to a client at the time the client engages the adviser.

The introductory information must include:

1. Description of the CFP professional’s available services and category of financial products;
2. Description of how the client pays, and how the CFP professional and the professional’s firm are compensated for providing services and products;
3. Brief summary of any of the following conflicts of interest (if applicable): offering proprietary products; receipt of third-party payments for recommending products; material limitations on the universe of available products; and the receipt of additional compensation when the client increases the amounts of assets under management; and
4. A link to (or URL for) relevant webpages of any government authorities, SROs, or professional organizations, where the CFP professional’s public disciplinary history or personal/business bankruptcies are displayed (e.g., the SEC’s IAPD, FINRA BrokerCheck, and the CFP Board’s own website).

The new rules state that for RIAs, the delivering of Form ADV Part 2 will satisfy the introductory information requirement. Meanwhile, broker-dealers would need to create and distribute their own introductory information guidance. The CFP Board has indicated that it will be creating an introductory information template for advisers and brokers to use. The introductory information is expected to be delivered to a prospect at the time of initial consultation, or “as soon as practicable thereafter,” and it may be delivered in writing, electronically or orally — if appropriate given a presumably limited scope of services.

In addition, when a CFP professional is actually engaged to give advice, the CFP professional must further provide a written terms of engagement agreement, including:

– Scope of engagement (and any limitations) period for which services will be provided, and client responsibilities
– Further disclosures, to the extent not already provided, including:
– More detailed description of costs to the client, including:
– How the client pays, and how the CFP Professional and the professional’s firm are compensated for providing services and products;
– Additional types of costs that the client may incur, including product management fees;
– Identification of any related party that will receive compensation for providing services or offering products;
– Full disclosure of all material conflicts of interest;
– Link to relevant webpages of any government authorities, SROs, or professional organizations, where the CFP professional’s public disciplinary history or personal/business bankruptcies are displayed; and
– Any other information that would be material to the client’s decision to engage (or continue to engage) the CFP professional or his/her firm.

As mentioned earlier, the CFP Board’s current standards of professional conduct already require that CFP certificants enter into a written agreement with clients that defines the scope of the engagement. But with an expanded fiduciary duty for CFP professionals, it seems likely that advisers may become more proactive about clearly defining the scope of what they will — and won’t — do as a part of the client engagement. This is especially true since the CFP Board’s new seven-step process makes it optional for the CFP to follow through on the implementation and/or monitoring phases of the process, but only if the scope of engagement explicitly excludes those steps.

In addition, the mere delivery of a comprehensive plan under a more comprehensive fiduciary duty creates potential new liability exposures for advisers. If the adviser’s agreement says the plan is comprehensive, what exactly does that cover? Is it everything in the CFP Board’s current topic list? Does that mean CFP professionals could get themselves into trouble for offering a comprehensive plan, but then failing to review a will or a trust, or an automobile or renter’s insurance policy?

Under the new standard, CFP professionals may want to become far more proactive about stating exactly what they will cover in a plan — to more concretely define the scope of engagement — rather than just stating that it will be comprehensive.

The new standards of conduct also would require that the CFP professional disclose to the client any material change of information that occurs between the introductory information and when the actual terms of engagement are signed, along with any material changes that occur after the engagement begins but during the scope of the ongoing engagement. Updates must be provided at least annually, except for public disciplinary actions or bankruptcy information, which must be disclosed to the client within 90 days along with a link to the relevant regulatory disclosure websites.

CLEANING UP
One of the most challenging issues for the CFP Board in recent years has been its compensation definitions — specifically pertaining to when and how a CFP professional can call themselves fee-only, which had led to both a lawsuit against the CFP Board by Jeff and Kim Camarda; the resignation of now-former CFP Board chair Alan Goldfarb, who was later publicly admonished; and a series of ongoing debacles for the CFP Board as it kept trying to update its flawed interpretation of the original fee-only compensation definition.

The problem was that under the prior rules, fee-only was defined as occurring “if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage, or performance-based fees.” And the certificant’s compensation was in turn defined as “any non-trivial economic benefit, whether monetary or non-monetary, that a certificant or related party receives or is entitled to receive for providing professional activities.”

The primary problem in this context was that the CFP Board interpreted these rules to mean that if a related party could receive non-fee compensation, the CFP certificant couldn’t call themselves fee-only — even if the CFP professional could prove that 100% of their clients paid 100% in fees and no commissions for any client work.

In other words, the CFP Board imputed the possibility of a commission to taint the CFP professional’s status as fee-only, regardless of whether the client ever actually paid a commission to anyone, ever. Being able to prove that all your clients only paid fees wasn’t even a legitimate defense to claiming that you were fee-only.

Under the new standards of conduct, the overall structure of fee-only is substantively similar, but updated in ways that should help to resolve many of the prior problems and misinterpretations of the definition. Now, compensation can only be fairly described as fee-only when:

1. The CFP professional and the professional’s firm receive no sales-related compensation; and
2. Related parties receive no sales-related compensation in connection with any professional services the CFP professional or the CFP professional’s firm provides to clients.

In turn, “sales-related compensation” is defined as:

More than a de minimis economic benefit for purchasing, holding for purposes other than providing financial advice, or selling a client’s financial assets, or for the referral of a client to any person or entity. Sales-related compensation includes, for example, commissions, trailing commissions, 12(b)1 fees, spreads, charges, revenue sharing, referral fees, or similar consideration.

Meanwhile, sales-related compensation does not include:

1. Soft dollars (any research or other benefits received in connection with client brokerage that qualifies for the “safe harbor” of Section 28(e) of the Securities Exchange Act of 1934);
2. Reasonable and customary fees for custodial or similar administrative services if the fee or amount of the fee is not determined based on the amount or value of client transactions; or
3. The receipt by a related party solicitor of a fee for soliciting clients for the CFP professional or the CFP professional’s firm.

Not surprisingly, sales-related compensation is defined as any type of compensation that is paid for any type of purchase or sale related to a client’s assets, or for a referral that might subsequently lead to such outcomes.

Thus, selling an investment or insurance product for a commission would be sales-related compensation, as would referring a client to an insurance agent, broker or anyone else who pays the CFP professional for referring the lead. Although under the current rules, using an outsourced investment provider — i.e., a TAMP — might also be deemed a referral fee, to the extent that many TAMPs collect the AUM fees and then remit a portion of the CFP professional as a solicitor/referrer fee, which would no longer be allowed even if the cost is the same to the client as the CFP professional who hires his/her own internal CFA to run the portfolio.

A RULES REVISION?
More generally, it’s notable that the new fee-only rules are not actually defined by whether the CFP professional receives various types of AUM, hourly or retainer fees. Instead, it is defined by not receiving any type of sales-related compensation — such that client fees are all that is left. As a result, the new fee-only definition might more aptly be explained as being applicable to no-commission and no-referral-fee advice instead.

A key distinction of the new rules though, is that for a CFP professional to be fee-only, neither the CFP professional nor his/her firm can receive any sales-related compensation, but a related party can receive sales-related compensation as long as it is not in connection with the services being provided to the client by the CFP professional or his/her firm.

This shift is important, as otherwise any connection between the CFP professional and any related party to his/her firm could run afoul of the fee-only rules. For instance, if a fee-only RIA was bought by a bank or holding company, which separately had another division that happened to offer mortgages for a commission, the RIA would lose its fee-only status even if no clients ever actually did business with the related subsidiary.

Under the new rules, external related parties could still co-exist in a manner that doesn’t eliminate the CFP professional’s fee-only status, as long as no clients actually do business with that related party — such that no clients ever actually pay a commission to a related party — and the CFP professional’s own firm doesn’t directly accept any type of sales-related compensation.

According to these new definitions, Jeff and Kim Camarda — who had a fee-only RIA but referred clients internally to a co-owned insurance subsidiary that earned commissions — would still not have been permitted to call themselves fee-only, as clients really were paying commissions to a related party in connection with the Camardas’ advice. However, the strange case of former CFP Board chair Alan Goldfarb — who was deemed to violate the fee-only rules because his RIA-parent-company accounting firm also owned a broker-dealer even though it was never stated that a single client of Goldfarb’s ever actually paid a commission to that entity — would have been appropriately still allowed to call himself fee-only.

On the other hand, it’s not entirely clear whether the CFP Board considered how CFP professionals might shift toward fee-only compensation in the future.

For instance, what happens if a CFP professional who currently earns commissions and trails decides to stop doing any commission-based business and operate solely on a fee-only basis in the future — but doesn’t want to walk away from his/her existing trails for prior business?

Under a strict interpretation of the current sales-related compensation rules, even old sales-related compensation that has no relationship to current clients would still run afoul of the rules, even though the CFP professional really does work solely on a fee-only basis now. In addition, receiving old trails typically still requires the CFP professional to maintain a broker-dealer registration to remain as a broker of record, and/or a state insurance license and an appointment to one or several insurance companies, to remain an agent of record.

This means the CFP professional would still be affiliated with a firm that receives sales-related compensation, which also runs afoul of the rules.

Does the CFP Board need to add a further clause that clarifies how CFP professionals who are transitioning to fee-only can keep old commission trails for prior sales — and old affiliations to broker-dealers or insurance companies to receive those trails — and still be permitted to hold out as fee-only going forward as long as no new clients ever again compensate the adviser via commissions or other sales-related compensation?

CAUTION AROUND COMPENSATION
In addition to tightening the CFP Board’s definition of fee-only compensation, the new rules also explicitly caution CFP professionals against the use of the term “fee-based,” which was originally a label for investment wrap accounts where trading costs were fee-based rather than based on a per-trade commission. But in recent years this model has occasionally been used by brokers to imply they are offering fee-only advice, relying on consumers to not understand the difference between the two.

To limit this, the new CFP Board conduct standards would require that anyone who holds out as fee-based to clearly state that the CFP professional either “earns fees and commissions” or that “the CFP professional is not fee-only” — and that the term should not otherwise be used in a manner that suggests the CFP professional is fee-only. Recognizing that the term is enshrined in SEC regulations as a part of fee-based wrap accounts, it can’t realistically be eliminated from the investment lexicon altogether.

The caveat, however, is that while the CFP Board is explicitly cracking down on the use of “fee-based” as a marketing label, the organization is backing away from its prior “Notice to CFP Professionals” guidance from 2013, which grouped all adviser compensation into being either fee-only, commission-only or commission and fee. This seems concerning, as while grouping CFP professionals into just three buckets has limited value when most are in the middle and operate with some blend of commissions and fees, it’s still better than not requiring consistent definitions at all.

Otherwise, what’s to stop CFP professionals from just coming up with another label for being partially fee-compensated that isn’t fee-only, but that would sound similar? This is precisely why “fee-based” has been increasingly adopted in recent years.

In other words, if the CFP Board states, “All CFP professionals must disclose that their compensation is fee-only, commission-and-fee, or commission-only, and should provide further compensation disclosure details as appropriate,” then at least CFP professionals will disclose their compensation consistently.

But with the CFP Board’s current approach, a CFP professional who receives at least some fees might have to stop using fee-based, but could use similar terms like fee-oriented, fee-compensated or fee-for-service, which would still focus on and imply fees (and fee-only) without stating that the actual compensation includes commissions as well. And a reminder, using the term “fee and commission” is now only required when attached to “fee-based.”

ENFORCEMENT
Notwithstanding its expansion in the scope of fiduciary duties that would apply to CFP professionals, it’s important to recognize that the CFP Board’s ability to enforce its standards is still somewhat limited.

At most, the CFP Board’s Disciplinary and Ethics Commission (DEC) can only privately censure or publicly admonish a CFP certificant, and, in more extreme cases, suspend or revoke the CFP marks from that individual. However, that doesn’t mean the CFP Board can actually limit someone’s ability to be a practicing adviser who offers — and is paid for giving — advice to the public. Nor can the organization fine or otherwise financially punish a CFP certificant beyond the consequences that might occur to the CFP certificant’s business if he/she is either publicly admonished, or has his/her marks suspended or revoked — which is also part of the public record.

The real challenge for the CFP Board is that because it is not an actual government-sanctioned regulator, its ability to collect the information necessary to adjudicate its disciplinary hearings is a significant challenge. Indeed, broker-dealers and advisory firms have in some cases refused to provide the necessary information to the CFP Board regarding a CFP certificant and his/her clients when a client is filed, as the firm fears that actual government regulators such as the SEC and FINRA might discipline them for a breach of client privacy by sharing information with the CFP Board.

In fact, back in 2011 the CFP Board had to seek out a “no-action” letter from the SEC to affirm that it was permissible for firms to share background documents without violating Reg S-P, and continued pushback from firms led the CFP Board to request a follow-up no-action letter request in 2014 to further expand the scope of what firms even could share with the CFP Board.

Of course, in situations where a client files a complaint with the CFP Board, the client has authorization to release his/her own information to the Board to evaluate the complaint. But the limitations of the CFP Board’s ability to even investigate complaints against CFP certificants, especially in the case of third-party complaints — i.e., where it is not the client who submits the complaint, and his/her information to document it — raise serious concerns about the Board’s ability to effectively enforce its new standards.

It’s not a coincidence that the overwhelming majority of current CFP Board disciplinary actions are based almost entirely on public information — from bankruptcy filings and DUI convictions to CFP certificants who are disciplined after the SEC or FINRA already found them publicly guilty — and/or pertain to situations that wouldn’t require client-specific information anyway, such as whether the adviser misrepresented his/her compensation in marketing materials.

Kevin Keller, CEO of the CFP Board
Kevin Keller, CEO of the CFP Board

In other words, the good news of the new CFP conduct standards is that CFP professionals will be required to meet a fiduciary standard of care when providing any kind of advice to clients. But what happens if they don’t? To what extent can the CFP Board enforce against those who don’t effectively comply with the rules, and then simply refuse to provide information under the guise of Reg S-P when a complaint is filed?

Will the CFP Board has to rely on consumers to file their own complaints just to get the information necessary to investigate such complaints? And is the CFP Board prepared to enforce against the non-trivial number of CFP certificants who have been acting as non-fiduciaries for years or decades already by using their CFP marks to sell products — which now will be subject to a fiduciary obligation for the first time?

This is especially relevant because the CFP Board doesn’t require CFP professionals to state in writing to their clients that they’re fiduciaries, which means the board’s fiduciary duty still won’t necessarily be grounds for a client to actually sue the adviser for breach of fiduciary duty — as the CFP certificant would simply be failing to adhere to the board’s requirement that he/she act as a fiduciary, and not an actual fiduciary commitment to the client.

CASE LAW PRECEDENTS
On the other hand, one of the greatest challenges for the CFP Board may not be the consequences if it can’t investigate claims against CFP professionals, but whether it sees an uptick in the number of complaints and enforcement actions under the new CFP conduct standards.

The problem is that ultimately, a large swath of the newly proposed standards contain potentially subjective labels to determine whether the rules have actually been followed or not.

For instance, the word “reasonable” or “reasonably” is used 26 times in the draft conduct standards. Usage pertains to everything from whether a conflict of interest in material — based on whether a reasonable client would have considered the information important — to whether a party is related based on whether a reasonable CFP professional would interpret him/her that way, to requirements that CFP professionals diligently respond to reasonable client inquiries; follow all reasonable and lawful directions of the client; avoid accepting gifts that reasonably could be expected to compromise objectivity; and provide introductory information disclosures to prospects who the CFP professional reasonably anticipates providing subsequent advice to.

Additionally, the entire application of the rules themselves depend on the CFP Board’s determination of whether advice was provided — which triggers the fiduciary obligation for CFP professionals — and CFP professionals with material conflicts of interest will or will not be found guilty of violating their fiduciary duty based on the CFP Board’s determination of whether the client gave informed consent or not.

In other words, the CFP Board’s new standards of conduct leave a lot of room for the DEC to make determinations of what is and isn’t reasonable in literally several dozen instances of the rules, as well as determining how they will determine when advice is given and what does and doesn’t constitute informed consent.

To be fair, it’s always the case that regulators and legislators write the rules and the courts interpret them in the adjudication process. Consequently, the idea that the CFP Board’s DEC will have to make interpretations of all these new rules isn’t unique.

And frankly, using reasonableness as a standard actually helps reduce the risk that a CFP professional would be found guilty of something that another CFP professional would have reasonably done in the same situation. Reasonableness standards actually are peer-based professional standards, which is what you’d want for the evaluation of a professional.

However, when courts interpret laws and regulations, they do so in a public manner, which allows everyone else to see how the court interpreted the rule, and provides crucial guidance for everyone who follows.

Indeed, once the court interprets whether a certain action or approach is or isn’t permitted, it provides a legal precedent that everyone thereafter can rely on. In fact, many of the key rules that apply to RIA fiduciaries today, including that a fiduciary duty applies to RIAs, didn’t actually come from regulators. Rather, they came from how the courts interpreted those regulations — which in the case of an RIA’s fiduciary duty stemmed from the 1963 Supreme Court case of SEC v. Capital Gains Research Bureau.

The problem is that the CFP Board’s disciplinary process is not public. This means that even as the DEC adjudicates 26 instances of reasonableness, no one will know what the DEC decided, nor the criteria it used — which means there’s a risk that the DEC won’t even honor its own precedents, and that rulings will be inconsistent. Consequently, even if the DEC is internally consistent, CFP professionals won’t know how to apply the rules safely to themselves until they’re already in front of the DEC trying to defend themselves.

This concern — of the lack of disciplinary precedence in CFP Board DEC hearings — was notable after the last round of practice standard updates in 2008, and ultimately led to the start of the CFP Board releasing anonymous case histories [Office2] in 2010 that provide information on the CFP Board’s prior rulings. Making them public — especially in situations where there was not a public letter of admonition, a public suspension or a revocation — would itself be a potential breach of the CFP professional’s privacy.

However, the CFP Board’s current anonymous case history database is still limited, as it contains merely a collection of cases that the CFP Board has chosen to share. And the database does not allow CFP professionals or their legal counsel to perform even the most basic keyword searches of the existing case histories. Instead, they must search via a limited number of pre-selected keywords, or by certain enumerated practice standards. Notably, this will just be even more confusing in the future, as the current proposal would completely rework the existing standard numbering system.

This all means that if the CFP Board is serious about formulating more expanded conduct standards — including the application of a fiduciary duty and a few dozen instances of reasonableness to determine whether the CFP professional met that duty — the board absolutely must expand its anonymous case history database to include a full listing of all cases. After all, we don’t always know what will turn out to be an important precedent until after the fact.

These must be made available in a manner that is fully indexed and able to be searched —and not just according to a small subset of pre-selected keywords and search criteria. With the CFP Board’s unilateral update to its terms and conditions of certification last year, CFP professionals cannot even take the board to court if they dispute the organization’s findings, and instead are bound to mandatory arbitration, which itself is also non-public.

PREDICTING THE IMPLICATIONS
Overall, for CFP certificants — including yours truly — who have called on the CFP Board for years to raise its fiduciary standard for professionals, there’s a lot to like in the newly proposed standards of conduct.

The CFP Board literally leads off with the application of the fiduciary duty to CFP professionals, and expands the scope of the Board’s standards to cover not just delivering planning or material elements of planning but any advice by a CFP professional — for which it is presumed that delivering that advice should entail doing planning.

In addition, the CFP Board has taken a substantial step forward on its disclosure requirements for conflicts of interest, particularly regarding the creation of its introductory information requirement for upfront disclosures to prospects, and its expanded and more detailed requirements for setting the terms of engagement for client agreements.

For anyone who still believes the CFP Board is beholden to its large-firm broker-dealers, this latter point should definitively settle the issue. Broker-dealers’ compliance departments will most definitely not be happy that the board — a non-regulator entity — is imposing disclosure requirements on their CFP brokers.

There’s a non-trivial risk for the CFP Board that some large brokerage or insurance firms may decide to back away from the board’s expansion of its fiduciary duty, just as State Farm did back in 2009 when the board first introduced its fiduciary standard. On the other hand, it is still notable that despite increasing the disclosure requirements associated with its expanded fiduciary duty for CFP professionals, the board isn’t actually requiring professionals to change very much from what they do today.

Material conflicts of interest must be disclosed, but obtaining informed consent appears to be a legitimate resolution to any actual conflict of interest. And debating whether a conflicted recommendation that the client agreed to with informed consent was still a fiduciary breach or not would quickly come back to a determination of whether the CFP professional’s advice met various standards of reasonableness — which, as of now, aren’t entirely clear standards, and if the CFP Board can’t effectively expand its anonymous case history database, may not get much clearer in the future even as the DEC interprets what is reasonable.

Meantime, to the extent that the CFP Board’s newly expanded fiduciary standard — both the duty of loyalty and the expanded duty of care — creates at least some new level of accountability for CFP professionals, the real challenge may be the CFP Board’s own ability to enforce and even investigate complaints if and when they occur. By promulgating standards of conduct it may struggle to effectively enforce, the CFP Board must ensure its mouth — as the saying goes — isn’t writing checks that its body can’t cash. Whether and how the CFP Board will expand and reinvest in its own disciplinary process and capabilities remains to be seen.

But overall, the CFP Board’s newly proposed standards of conduct really do appear to be a good-faith effort to step up and improve on the gaps of the existing standards of professional conduct.

The scope of what constitutes doing planning for the purposes of the fiduciary duty is expanded — and if anything, the CFP Board may have gone too far by not limiting the scope of fiduciary duty to an established advice relationship for compensation. The fee-only compensation definition is improved, although the board may be starting a problematic game of whack-a-mole by just punishing fee-based instead of more formally establishing a standardized series of compensation definitions.

And although the board didn’t crack down on material conflicts of interest to the extent of the Labor Department’s fiduciary rule, it still moved the ball farther down the field by more fully highlighting prospective conflicts and increasing the disclosure requirements for both RIAs and especially broker-dealers and insurance firms.

Though for the time being, it’s also important to recognize that these are only proposed standards, not finalized ones. The CFP Board is engaging in a series of eight public forums in late July across the country to gather feedback directly from CFP professionals; register for one in your area directly on the board’s website. It’s also accepting public comments for a 60-day period, ending Aug. 21, which you can submit through the website or by emailing comments@cfpboard.org.

Comments and public forum feedback will then be used to reissue a final version of the standards of conduct later this year. They also might be utilized to gauge whether the Commission on Standards needs to call for another round of feedback.

And for those who want to read through a fully annotated version of the proposed standards of conduct themselves, the CFP Board has made a version available on its website.

So what do you think? Does this represent a positive step forward for the CFP Board and its Standards of Conduct for CFP professionals? Did the CFP Board go far enough in trying to move the standards forward, or too far at once? Do you think the CFP Board will be able to effectively enforce the new standards? Please share your thoughts in the comments below.

Michael Kitces

Michael Kitces

Michael Kitces, CFP, a Financial Planning contributing writer, is a partner and director of wealth management at Pinnacle Advisory Group in Columbia, Maryland; co-founder of the XY Planning Network; and publisher of the planning blog Nerd’s Eye View. Follow him on Twitter at @MichaelKitces.