I hope I’m not the only one who feels enthusiasm toward the CFP Board. I feel they should get a pat on the back for embracing the fiduciary concept in its new, updated code of ethics and standards.

The changes are welcome at a time when others seem to be in retreat. First, the court system vacated the Department of Labor’s fiduciary rule, and earlier this month, the SEC proposed its own, watered down version of a best-interest standard.

Requiring all who hold the CFP designation to act in the best interests of their clients whenever they provide financial advice, and using the “f” word in mixed company, is an important step forward for the profession.

The last update was 11 years ago, when there was enormous controversy around any sort of fiduciary standard. The first few versions put out for public comment didn’t include the word “fiduciary” and I was one of the people in the streets, torch and pitchfork in hand, who honestly thought the CFP Board would back down from the most basic way to protect the public.

Eventually, the committee drafting the standards required those with the CFP mark to adhere to Rule 1.4: “A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.“

Photo by Scott Wener

The obvious objection was: what about when a broker is giving investment advice and maybe a needs-based evaluation that falls short of the CFP Board’s rather strict definition of a financial plan?

After avoiding this issue for several drafts, the committee made this loophole much smaller by adding a footnote: “In determining whether the certificant is providing financial planning or material elements of financial planning, factors that may be considered include, but are not limited to: The client’s understanding and intent in engaging the certificant…”

In other words, if the client believed that he or she was in a financial planning engagement, then the CFP Board could conclude that the investment advice rendered should be held to a fiduciary standard.

But of course, most of the terrible advice that people receive from brokers is not given in the context of a financial plan; it’s investment advice and recommendations, usually with a commission that may or may not be disclosed to the consumer. CFPs could still sell terrible stuff, and did. They just had to make sure their clients didn’t think they were getting a financial plan while they did so.

Quote
By the time we have human colonies on Mars, brokerage firms will still be losing business to real financial planning firms, and the SEC will still be miles behind the profession.

The point of this lesson is to show how far the profession has moved in 11 short years. This time around, the comments supporting a strict fiduciary standard greatly outnumbered those that opposed it, but there was still a real disagreement of opinion held by a significant number of current CFP holders.

SIFMA, the brokerage industry trade group, offered a response that reads like a hostage negotiation, concluding that “the burdens of the CFP Board’s proposal, coupled with the CFP Board’s failure to address our member firms’ most significant concerns about it, may cause firms to reevaluate their relationship with the CFP Board, including, without limitation, considering discontinuing their practice of reimbursing CFP certificates for the costs of training, testing, continuing education and membership, and exploring alternate designations and certifications.”

Wow! More props to the CFP Board for standing up to the bullies.

GHOST OF FIDUCIARY YET TO COME
Now that this process is behind us, it might be fun into the future, say another 11 years, and imagine what the next iteration of the standards will look like.

By then, the brokerage firms will have sighed and figured out a way to comply with the unfortunate idea that their brokers should give advice in the best interests of their clients. True fiduciaries, meanwhile, will have moved on to even higher ground. What will the standards committee write in its updated version in that very different climate?

There’s enormous room for improvement in one area. The current version of the code and standards is truly compensation-neutral, meaning that it talks about conflicts of interest — things like commissions, revenue-sharing fees and other temptations to recommend investments that might be more beneficial for the broker than the consumer.

It requires certificants to disclose these temptations in detail, and there’s a short section entitled “manage conflicts,” which implies that this is an alternative to avoiding them. This is where the brokerage firms and independent BDs find solace, and why they will eventually make peace with the current version when implemented. They can still sell their products.

But fast-forward yet another 11 years and I think a new version of the code and standards will follow the fiduciary concept to its logical conclusion and say that one cannot act as a fiduciary when one is accepting payments from certain investment companies. In the late 2020s, CFP certificants will have to go fee-only or drop the mark. In that future day,

I expect fulmination from the diminishing wirehouse community, who will still be wondering why they’ve been losing the hearts and minds of consumers to professionals who have a client-first attitude, and are willing to embrace (rather than begrudgingly comply with) a true fiduciary standard.

What about 11 years after that? By then, the debate will be over fee compensation structures. By then, the AUM revenue model — so ubiquitous today — will be in full competition with fixed quarterly fees, hourly compensation structures and generally a much better matching of costs and value to what clients are paying. The committee rewriting the CFP Board’s code and standards will take a lot of heat from traditionalists who will argue that AUM best aligns the interests of the advisor and client. And they will ultimately reject those arguments and declare that, when a client asks how much a certificant will charge, the certificant will no longer be able to reply: “I’m not sure. How much have you got?”

My crystal ball starts to get a little bit fuzzy beyond this. About all I can see are thriving human colonies on Mars and the moon, asteroid mining, a lot of dangerous investment hype about cryptocurrencies and peoples’ brains wired directly into their smartphone devices. But I’m willing to predict that the financial world, and a tax regime that extends to other planets, will be more complex than it is now. The brokerage firms will still be scratching their heads as all 15 members of their field force are losing business to real financial planning firms. Meanwhile, the SEC will always be miles behind the profession in its timid crawl toward meaningful regulatory requirements.

I would guess that in order to practice financial planning, professionals would have to have the CFP or PFS designation and be licensed by the state as well as the CFP Board. Perhaps in that future day — a time when today’s younger practitioners will still be giving financial advice — people will be required to achieve Catholic sainthood in order to hold the CFP designation. Maybe not, but I believe that the trend toward requiring fewer conflicts of interest will likely go on forever.

Bob Veres

Bob Veres

Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Follow him on Twitter at @BobVeres.