The CFP Board of Governors has unanimously approved the new CFP Code of Ethics and Standards of Conduct, which notably includes, right up-front, the following language: At all times, when providing Financial Advice to a Client, a CFP Professional must act as a fiduciary, and therefore, act in the best interests of the Client.
This new Code will take effect 11 years after the last revision, which some would argue (including me) included a relatively week fiduciary requirement, but which many argued was seriously overstepping the boundaries of what is effectively an educational designation. Today, some are saying that the CFP Board is not moving nearly fast enough on fiduciary issues, by only requiring fiduciary behavior when providing financial advice, while others are decrying regulatory overreach and saying the CFP Board is taking away choice in the marketplace. This dichotomous response tells me that the Board is probably moving at an appropriate speed as it prods the profession forward.
Of course, many planners are already living under stricter pro-client standards. One participant in the CFP Board’s announcement conference call asked if CFP professionals would still be able to take commissions. CFP Board chair Richard Salmen was quick to jump in and answer that the Board has always been compensation-neutral, and then he went on to say that it is perfectly possible for someone to take commissions and still act as a fiduciary.
In the strictest sense, this is still true, but I don’t think it will be very much longer. Advisors are telling me that they will routinely work with less wealthy individuals by recommending C share mutual funds, where they let the mutual fund company handle the expensive billing process and pay them what a fee-only advisor would have charged anyway. Others tell me that they can’t find insurance products that are good enough to recommend and commissionless. But both circumstances are evolving rapidly. The online investment (‘robo’) platforms, with increasingly automated onboarding, are actually becoming MORE convenient than C shares for working with less-wealthy clients, and (as I’ll detail in an article in the next issue of Inside Information) we’re about to see a remarkable transformation in the insurance marketplace, with all the major firms coming out with no-load product lines that would meet even the strictest fiduciary standard.
Where am I going with this? I’m cheering the CFP Board for taking a step forward in the fiduciary debate, having the courage to require fiduciary conduct that is at odds with the entire culture of the brokerage industry and its sizable cohort of CFPs. I’m admiring the fact that there seems to be a roughly equal number of critics on both sides (Too far! Not far enough!), which is a tough balancing act to maintain.
And at the same time, I’m expecting that in the next ten years, perhaps sooner, the marketplace will have made it possible for another revision. This new version of the Code has a lot of language around managing and disclosing conflicts of interest, about how to distinguish between fee-only and fee-based (reworded to ‘fee plus commission’), and there’s a whole section on commissions and non-monetary benefits received in exchange for making a particular recommendation.
I think we should all be preparing for the next version of the Code, which will mandate that CFP professionals cannot accept payments in return for recommending products, be they funds, annuities, term insurance or non-traded REITs. That next version of the Code will recognize a sober reality: if the products have to pay people, often generously, to recommend them over other, better alternatives, then they are not, by definition, a fiduciary recommendation. We’re always hearing from the brokerage firms and the Financial Services Institute about “choice;” well, then let’s make our choices based purely on merits, not on bonus commissions and incentive trips.
By that future date, it will be easier to put clients on an automated advice platform than to sell a C share, there will be plenty of name-brand no-load insurance products, and a truly objective evaluation of all recommendations will be possible and even convenient for the real professionals among us. We’ll still have commissions. We’ll still have sales agents. But they won’t be CFPs.
I hope that day is not a full 10 years away.