This month, a fairly comprehensive rewrite of the Certified Financial Board of Standards Code of Ethics and Standards of Conduct went into effect. Some of the changes in the new Code and Standards are stylistic and some of the changes are more substantial. We think they are a positive for the Financial Planning profession and the changes raise the value of the CFP® mark for the public.
The new Code and Standards invoke a much stronger set of rules requiring CFP® Certificants to adhere to a fiduciary standard. Essentially, CFP® Certificants are required to adhere to a fiduciary standard whenever providing Financial Advice to a Client. The terms Financial Advice and Client are broadly defined. This is a tightening of the standards over the previous code which had a somewhat looser fiduciary standard. Incidentally, the prior code provided an exception (loophole) for Certificants not providing "material elements" of financial planning in the relationship. I doubt one in a million clients knows what "material elements" of financial planning are, much less what the impact might be on the nature of their relationship with an advisor who happens to hold the CFP® designation.
There remains an exception for CFP® Certificants who are "order takers". For example, this would include folks who work in call centers for a brokerage and who simply take calls from customers and accept the orders from customers as given ... without providing Financial Advice. At first blush, this particular exception would seem to offer almost no room for abuse. But, let's consider for example if a CFP® Certificant order taker has knowledge about an investment he or she believes would cause the caller to not execute (or even to just question) a particular transaction. Would this exception allow the CFP® Certificant to remain silent and take the order as long as the investment seems to pass the much lower "suitability" standard? If so, we think that is the wrong result. We believe any client (or prospective client) who has a CFP® Certificant on the other end of the line (or across the table) should be able to expect to be treated with the full good faith of the fiduciary standard. No ifs, ands, or buts.
We question the need for exceptions in circumstances where the client will have no awareness of the terms and conditions of the exception. This change has no effect on our practice. We have held ourselves to a fiduciary standard at all times and in all circumstances since day one.
Information Provided to Client
The new Code and Standards make explicit several reporting and disclosure requirements, some of which were already required by the SEC or State regulatory authorities. The newly required or enhanced disclosures are:
- The existence of any public discipline or bankruptcy, and the locations of webpages of public websites that set forth the CFP® Professional's public disciplinary history or any personal or business bankruptcy
- Conflicts of Interest - Disclosure requirements for conflicts of interest are more explicit. The new requirements include a consent requirement that may be inferred or implied from continuation of the engagement.
- Privacy Notice regarding Non-Public Personal Information - This notice has been required for many years by regulators and by statute.
- Disclosure of Economic Benefit for Referral or Engagement of Additional Persons
The new Code and Standards have tightened, once again, the requirements associated with disclosure of compensation arrangements. This change addresses the practice of advisors who take sales-related compensation (commissions) in addition to fees and have adopted the term "Fee-Based" as a way of passing themselves off as "almost”, or “pretty much”, or “kind of” “fee only". The new code requires CFP® Certificants not use the term "Fee Based" in a manner suggesting the practitioner is Fee Only and must state that the practitioner is not fee only or that the practitioner also earns commissions. We have always been Fee-Only. It is galling to have advisors who are clearly not fee-only falsely capitalize on the public acceptance of the term.
Financial Planning and Application of the Practice Standards for the Financial Planning Process
The new Code and Standards presume, in effect, that each and every client will receive Financial Planning services delivered according to the Practice Standard. This is pretty understandable given the organization is the Certified Financial Planner Board of Standards. We believe in the value of Financial Planning and in the application of the Practice Standards in the Financial Planning Process. The Standards define Financial Planning as follows:
Financial Planning Definition. Financial Planning is 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.
Relevant elements of personal and financial circumstances vary from Client to Client, and may include the Client’s need for or desire to: develop goals, manage assets and liabilities, manage cash flow, identify and manage risks, identify and manage the financial effect of health considerations, provide for educational needs, achieve financial security, preserve or increase wealth, identify tax considerations, prepare for retirement, pursue philanthropic interests, and address estate and legacy matters.
The Practice Standards lay out a 7-Step Process for the delivery of Financial Planning Services:
- Understanding the Client's Personal and financial Circumstances
- Identifying and Selecting Goals
- Analyzing the Client's Current Course of Action and Potential Alternative Courses of Action
- Developing the Financial Planning Recommendations
- Presenting the Financial Planning Recommendations
- Implementing the Financial Planning Recommendations
- Monitoring Progress and Updating
The above Practice Standards are intuitively sound and align closely with the processes we have employed for many years. The Standards are not a "one size fits all" prescription. The Relevant Elements vary from Client to Client and the Standards explicitly refer to the Client's needs and desires. Also, steps 6 and 7 may be assigned to either the client or the advisor or may be shared.
The changes are meaningful steps in the right direction for the CFP® Board of Standards. We continue and have been evaluating the impact of the standards on our professional practices, disclosure practices and client relationships.
These Standards apply only to holders of the CFP® Certification; further reason for all folks seeking Financial Advice to require their advisor be a CFP® Professional.
Reminder to get your quarterly Credit Report from: Experian
The table below shows the returns through September 30, 2019 for selected investment asset classes. In most cases, the results below are appropriate benchmarks for the related mutual funds in your investment portfolio.