MAKING CENTS OUT OF THE NEWS
(March 29th, 2018)
By Tom McAllister, CFP®
Will Brokerages Comply with CFP Board’s New Fiduciary Standard? The fiduciary puzzle continues:
Long time readers will recall my strong support for mandating securities representatives to behave as fiduciaries in their interaction with clients and prospects. As a long time certified financial planner (1977) I have tried to hold myself, and my CFP fellows to the same standards as other financial professions, CPAs, attorneys, etc. Wirehouse firms have balked at the proposed enhancements to the most widely known professional mark for the industry, threatening to abandon their support for the designation. The Certified Financial Planner Board of Standards, issuers of the most widely recognized professional designation in the financial planning industry, approved its new Code of Ethics and Standards of Conduct; it mandates that all holders of the designation who engage in financial advice be held to a stricter fiduciary standard than previously demanded. That proposal prompted threats from some large brokerages that they may abandon their support of the designation. The new rules will take effect Oct. 1, 2019, to give firms time to implement them.
“We’re trying to strike a balance here between the needs of the consumer and the recognition that firms must take steps to operationalize the standards for their advisors,” said Kevin Keller, CEO of the CFP Board. “We believe that we’ve done [that] by emphasizing a fiduciary standard for providing financial advice while also modifying the original proposal so that it is more practical for firms.” Some groups felt the standard went too far, while others argued it didn’t go far enough, according to public comments.
Shannon Pike, chair of the Financial Planning Association, calls the standard “a sea change” for fiduciary—more so than the Department of Labor’s or SEC rules—with more than 80,000 of the total 400,000 advisors across the industry now held to the standard.
But the ease of complying with the new standard depends on where you sit, he says. The wirehouses’ are heavily invested in ensuring their younger brokers hold the CFP designation—those firms will now face some operational challenges to comply with the new standards.
In a comment letter, a group of brokerages, including Wells Fargo Advisors, Morgan Stanley and UBS, urged the CFP Board to wait for the SEC to issue its own fiduciary proposal. They argued that the standard would force them to create two different compliance approaches—one for CFPs and one for the rest of their advisors.
“CFP Board should be aware that moving forward at this time with the current proposal will require a regulated firm to consider the practical compliance and implementation challenges of the Standards of Conduct and will likely lead to varying levels of acceptance and approaches to implementation of the Standards of Conduct by regulated firms, which could potentially include considering alternatives ranging from no longer reimbursing CFP certificants’ for training, testing and membership costs to exploring alternate designations and certifications to meet training needs,” the letter said.
Could Firms Back Away from the CFP? There is some precedent for the wirehouses’ threat. When the CFP Board put out its first fiduciary standard in 2007, which applied only to advisors engaged in financial planning, State Farm asked its CFP certificates’ to relinquish the mark. But Keller didn’t seem worried about that happening again.
“We lost about 500 State Farm advisors and agents who the firm would not allow them to maintain their certification,” Keller said. “As we look at it, firms that adopt and embrace our standards have a better opportunity to retain advisors, a better opportunity to attract the next generation of financial planners, and are better positioned with the public at large.”
A spokeswoman for Wells Fargo Advisors referred WealthManagement.com to the comment letter. Merrill Lynch replied; “As a leading employer of CFP certificantes’, Merrill Lynch appreciates the CFP Board’s leadership in helping us elevate the standards for the profession, as well as their delayed implementation approach which allows time for coordination with evolving regulatory expectations," said Bank of America Merrill Lynch Spokeswoman Susan McCabe, in a statement. The other two warehouses didn’t respond to requests for comment.
After the first standard was put in place, other firms just floated by, says Tim Welsh, president, CEO and founder of Nexus Strategy. “Technically they were always in violation—the warehouses—of having their employees not be able to hold themselves out as fiduciaries because their parent company said, ‘No you’re not,’” he says. “Yet the CFP code said, ‘Yes, you are.” Welsh expects major firms will, again, just shrug off the change and hope the CFP Board will look the other way.
Since the CFP Board is not a regulatory entity, it does not audit firms. It enforces its standards through its peer review framework, led by its disciplinary and ethics commission. Information comes in via self-reporting, aggrieved consumers, members of the public or other CFP professionals. “There is no entity that can enforce it,” Welsh says. “If there isn’t one, then it’s really just words on a piece of paper or a website. It really doesn’t mean anything.” “You’re not going to go to your top 3,000 advisors at Merrill Lynch and say, ‘Sorry guys, give us back your marks’; they’ll revolt,” he says. “In the meantime, they’re fully investing in the CFP marks in the warehouses; they’re encouraging them to get it. They’re supporting them. In some cases, they’re paying them.”
Dan Moisand, a principal and advisor with Moisand Fitzgerald Tamayo and a past president of the FPA, says the new standard is not particularly burdensome to somebody who’s already doing financial planning and communicating with their clients. And most of the major firms are already subject to a fiduciary standard on the advisory side, so they understand the processes and procedures. “I understand that a lot of the firms are claiming this is going to be unduly burdensome, of course, but I think that’s just a pretty pathetic threat,” Moisand said. “The smart firms will adapt, and do everything they can to help their CFP licensee employees.”
Duane Thompson, president and founder of Potomac Strategies, says the CFP Board’s standard is more like the fiduciary standard under securities law than under ERISA, so it should be less difficult for the large broker/dealers to comply than it was under the DOL’s rule. “I don't think the fiduciary standard that’s put out there by the CFP Board presents any insurmountable hurdles for the brokerage industry, which is increasingly becoming actually more comfortable in the fiduciary space, as we’ve seen over the years,” he says.
Fred Reish, a partner at Drinker Biddle, agrees that the standard won’t present firms with a significant issue. “The trend line’s in that direction,” he says. “I think more and more advisors and insurance agents are going to hold to a fiduciary standard.”
Personally, I believe it is past time for the securities world to catch up with the times. Those who fail to do so will eventually be sidelined by their clients’ awareness that they are not being treated as clients, but rather as customers. Indeed, stockbrokers were called “customers men” prior to World War II. I hope this blog helps my readers to better understand the situation. I will be traveling the next two weeks and will resume my blogs after April 15.
Tom McAllister, CFP