Northwestern’s CFP disclosures put industry’s fraught questions in focus

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This conversation could get awkward.

More than 1,000 CFPs affiliated with Northwestern Mutual now have to make their conflicts of interest abundantly clear and explain how they manage them in clients’ best interests.

The insurer and broker-dealer has created a disclosure document intended to comply with the CFP Board's new code of ethics and standards of conduct. In the document, advisors tell planning clients outright that they’re incentivized to “sell Northwestern Mutual insurance products to a client often” — and for the highest possible commissions.

The CFPs at Northwestern also have a financial interest in selling permanent life insurance with higher initial premiums than term products. They’re encouraged “to sell more expensive products and services to you which will have the effect of increasing my compensation,” the document states. They can be paid on an ongoing basis for selling a Northwestern variable annuity in a brokerage account with less than $50,000, but not for selling a mutual fund, the brochure says.

“I know that in the long run, I will benefit most by serving you well,” it says later. “Your interests and my interests align in this respect because I rely heavily on the referrals I receive from satisfied clients. This in itself helps to mitigate the material conflicts of interest described above.”

Financial Planning obtained the remarkable 8-page template, which is entitled “My commitment to you as a CFP professional.” The traditional brokerage and insurance incentives don’t stand out as much as the firm’s “sincere effort to explain those conflicts clearly,” according to Barbara Roper, director of investor protection for the Consumer Federation of America.

“I’ve read a lot of these types of documents over the years, and this is clearer than most,” Roper said in an email.

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The brochure lays bare every form of compensation, each conflict relating to insurance and investment product sales and how Northwestern and its financial advisors say they manage the conflicts. CFPs can alter the template with the firm’s approval before distributing it to clients.

“Although this template brochure is intended to comprehensively disclose conflicts of interest,” according to a briefing included with the document, “the obligation to make full disclosure is your obligation, and you must decide for yourself how you wish to meet it.”

Some Northwestern advisors have customized the template, while others will use it as is, according to spokeswoman Betsy Hoylman.

“Northwestern Mutual advisors build lifetime client relationships based on trust,” Hoylman said in an email. The template provides “transparent disclosure language they can use with clients to further strengthen these relationships” and “is largely drawn from other disclosures,” she says.

Tens of thousands of CFPs affiliated with BDs are now grappling with changes after the new rules went into effect on Oct. 1. The advisors will become subject to CFP Board enforcement in July. In a public comment last year calling for delaying the standards, eight giant BDs, including three wirehouses, LPL Financial and Edward Jones, noted they had a total of some 18,200 CFPs at the time.

The template is one of the byproducts of complex negotiations with the issuing organization for planning’s most respected certification, held by 85,000 CFPs. In the summer, the CFP Board pushed back the enforcement date nine months, though it didn’t postpone the standards.

The CFP Board's rules go further than the SEC’s Regulation Best Interest — which is now on a similar implementation timeline — by imposing a fiduciary duty on all financial advice. The new requirements prompted questions as to whether BDs would shun the mark altogether.

The board believes that the rules are “a workable framework for any CFP professional,” says General Counsel Leo Rydzewski. “Even those who operate in a fee-only environment have conflicts of interest that they also have to disclose and manage.”

CFPs can disclose conflicts verbally when providing advice that isn’t planning-related, but planning clients must receive them in writing, he notes. Much of the information listed in the CFP Board’s roadmap guide for compliance already appears in other documents like SEC Form ADV.

Other disclosures can run up to hundreds of pages longer than the template, though, and they use much more dense legalese and jargon.

Some of the conflicts described in the document would apply to nearly any BD, while others — such as a prohibition on fixed index annuities — are more unique to Northwestern. Cash sweeps, revenue sharing, 12b-1 fees, sales loads and other commissions remain widespread.

Besides the commission for selling Northwestern products, the firm’s representatives earn cash bonuses based on production, credits and subsidies toward retirement and healthcare benefits, training allowances, awards, travel, gifts, prizes and other forms of compensation.

The Northwestern insurance commissions can amount to as much as 55% of the first-year premium of the policy or contract for life, disability, long-term care insurance or annuities. Renewal commissions, persistency fees and service fees may also figure in the mix.

Insurance sales relate to compensation for investment advice and planning. The investment product compensation grid gives higher pay based on representatives selling Northwestern insurance, and each of them is required to meet minimum insurance production requirements.

Northwestern manages this conflict by limiting “virtually all compensation increases based on production” to 5% or less and paying the rep each year based on the previous year’s revenue, the brochure states. Bonus programs also focus on long-term production and proportional pay.

“Specific programs within Northwestern Mutual’s compensation for insurance products were designed intentionally to minimize compensation that could incent sales behavior that is in material conflict with a client’s best interest,” according to the brochure.

“Consistent with Northwestern Mutual’s philosophy,” it goes on, “the grid is intended to foster recommendations made in the client’s best interest by encouraging holistic planning to meet both the investment and insurance needs to help ensure financial security.”

For Knut Rostad, the president of the Institute for the Fiduciary Standard think tank, the section about managing conflicts of interest doesn’t read as convincing, he said in an email. Nothing in the brochure mentions specific measures taken by CFPs under the new standards.

Northwestern “admits to their complex and opaque conflicts,” he says. “This is good. But then the firm says, in its form disclosure, these conflicts are ‘self-mitigated’ by the same complex and opaque incentive system. The upshot: Conflicts don’t matter; CFPs have nothing to mitigate.”

Roper, a fellow outspoken fiduciary stalwart, views it differently. The fact that, besides disclosing them, the CFP professional “still has to manage the conflicts, and act without regard to those conflicts, and make recommendations that are in the client’s best interests” is critical, she says.

“If it works as intended, the CFP Board fiduciary standard should help to ensure that CFPs working in firms with significant conflicts will still find a way to do what is right for their client,” Roper says. “Time will tell. But at least they’ve set the bar at the right level.”

For the BDs and their reps, the new standards are rolling out just as the SEC, FINRA and state regulators implement Reg BI and reckon with state-level fiduciary rules. The CFP Board rules aim for a higher but common ground in the fraught space between BDs and fee-only advisors.

The IBD trade group FSI — where Northwestern is a member — praised the multi-year rulemaking process. Rydzewski of the CFP Board expressed hope that the conversations can continue, with an eye toward avoiding any BD fallout under the new rules.

“We appreciate the CFP Board being receptive of our comments and the changes they did make to their Standard of Conduct,” FSI Deputy General Counsel Robin Traxler said in a statement. “We hope CFPs and their clients find the standard provides its intended benefits for both parties.”

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