CFP Board Multimedia Series Sheds Light On When CFPs Are And Are Not Acting As Fiduciaries Hot

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Posting on the public Web to clarify the CFP’s role as a fiduciary is commendable. So is the storytelling approach that is employed by CFP Board to make the presentations user-friendly. Making these presentations available to consumers and CFPs helps clarify when a CFP licensee is required to act as a fiduciary, and when he’s not. Regrettably, however, the information is buried on CFP Board’s website. Few practitioners or consumers are likely to come upon the information because of the way it is presented on the Web. Nonetheless, “Multimedia Presentations: CFP Board's Standards Applied to Specific Situations and Business Models,” provides valuable guidance for CFPs and members of the public seeking to understand when a CFP owes clients a duty to act as a fiduciary. The CFP Board is adding to this series and my post today is an effort to promote a discussion about them.


CFP Board's Recent Fiduciary Controversy In WSJ

The position of CFP Board on applying a fiduciary standard evoked a commotion recently. In a scathing column blasting CFP Board, Allan S. Roth, a CFP licensee who writes for The Wall Street Journal’s personal finance blog, accused CFP Board of giving little more than lip service in requiring CFPs to act in their clients’ best interests in a September 12, 2012 posting, entitled “Is The Fiduciary Standard A Joke.” The controversial issue, thus, spilled over to a consumer audience.


CFP Board's Difficult Position Vis A Vis Fiduciary?

Taking a position on when CFP practitioners owe clients a fiduciary obligation places CFP Board in a difficult spot. If the CFP Board were to suddenly change its rules and say all CFPs affiliated with BDs cannot act as fiduciaries and, therefore, can no longer dispense advice as a CFP, it would alienate too many of its licensees. Yet that is basically what some CFPs not affiliated with BDs would like to see done by CFP Board.


As the public becomes more keenly aware of CFP Board’s position, it is going to be important for CFP Board to simplify its rules about when CFPs are bound by a fiduciary duty. However, since so many of the nation’s CFP licensees are affiliated with broker/dealers, CFP Board must walk a delicate line balancing the interests of consumers and practitioners.


CFP Board is a not-for-profit licensing body for the CFP certification. CFP Board has always maintained that consumer protection and regulating the profession is paramount to fulfilling its mission, and that is true. It owes consumers a duty to do what is in their best interest. However, CFP Board should not serve consumers to the exclusion of CFPs. CFP Board, in addition to consumers, owes a duty to do what’s best for practitioners.


CFP Board's Standards Of Conduct: When Are CFPs A Fiduciary

Here’s a summary of the multimedia presentations provided by CFP Board explaining its standards of conduct and shedding light on when a CFP is required to act as a fiduciary and when he is not.


Scenario SS 3: Understanding the Definition of Financial Planning and Material Elements of Financial Planning: Advice in a Single Subject Area. This scenario addresses how to apply CFP Board standards of conduct when providing advice in a single subject area, such as retirement or estate planning. While CFP Board provides several videos illuminating its code of conduct in single-subject cases, the scenario laid out in “SS3” adds definition to what might constitute straying into other elements of planning and that could trigger the added responsibility (read: liability) that comes with acting as a fiduciary.     


In scenario SS3, Jim Hollis, CFP, meets with a business owner to discuss replacing his company’s existing qualified retirement plan. The business is growing and its owner is worried his firm’s qualified plan could become unaffordable. He’s considering terminating a money purchase plan and replacing it with a 401(k).


An unusual aspect of scenario SS3 is that the CFP is brought into the case by the business owner’s financial advisor. While there are indeed CFP licensees providing nothing but retirement plan advice to small businesses, they are rare. Most CFPs providing advice to qualified plans also want to advise business owners on their personal finances. So the example seems extremely unlikely to happen. Why provide guidance to CFPs using a scenario that almost never comes up?


Still, the information provided here is instructive. By addressing when a CFP is not acting as a fiduciary, CFP Board does help all its constituents understand what triggers a fiduciary obligation. CFP Board draws a bright line in specific scenarios.


According to CFP Board, a key issue that a CFP must consider in defining his obligation to the client is whether he is providing financial planning advice. If a CFP is providing planning advice, then CFP Board Standards of Conduct say he indeed would be acting as a fiduciary.


A licensed planner must consider four factors in determining whether he owes a fiduciary duty to a client:

·        the intent of the client in hiring the CFP

·        the scope of the engagement whether it is  limited to one subject area or spans multiple subject areas involved in the financial planning process

·        the comprehensiveness of the data gathered about the client

·        the breadth of recommendations to the client recommendations may delve deep in s ingle subject area, but spanning numerous subject areas is different


In this case, SS3, CFP Board says, the practitioner is “a resource focused on a very particular business issue.” Because he is focused on a single subject area of planning, according to CFP Board, the planner “is not providing financial planning.” Hence, he is not a fiduciary.


Notably, the planner in SS3 must place not only the business owner’s interest ahead of his own, but he also is required to place the interests of the financial advisor ahead of his own.


CFP Board in SS3 concludes that the practitioner is not required to provide written disclosures about his compensation or a written agreement and, again, he is not required to act as a fiduciary.


What’s curious is that CFP Board appears to be drawing a distinction between pursuing clients’ best interests and a fiduciary obligation. Therein lies the rub. What’s the difference between doing what’s in the client’s best interest and owing a fiduciary obligation? Is it a distinction without a difference?


A shortcoming of the CFP Board multimedia presentations defining a CFP’s fiduciary duty is that the Single Subject (SS) series of presentations all share the same title. The titles are identical except that one is entitled “Scenario SS1” and the other is “Scenario SS2.” These titles almost ensure that these presentations, which are so important for professionals and the public to understand, won’t be easy to find on the Web.


Entitling the videos something like, “When Is A CFP A Fiduciary,” would make these presentations far more likely to be found on the Web than Scenario SS1: Understanding the definition of financial planning and material elements of financial planning: Advice in a Single Subject Area.


By not giving the presentations titles that contain search terms people would use who are trying to learn about this topic, CFP Board is burying the information, obscuring it from public view, unintentionally, of course.


Scenario SS1: Understanding the definition of financial planning and material elements of financial planning: Advice in a Single Subject Area. While sharing the same subtitle as Scenario SS3, Scenario SS1 is otherwise quite different. It provides guidance on a common scenario: a CFP giving advice in a single area of financial planning -- estate planning -- to a business owner.


In this case, an attorney recommends an irrevocable life insurance trust (ILIT), and the client needs life insurance for the ILIT as part of a business succession plan. The attorney refers the client to a CFP practitioner Liz Weston. Liz recommends two products, an ordinary life policy and a variable universal life policy.


To understand whether she will be advising the client as a fiduciary, according to CFP Board’s video, Liz must first examine whether she is performing financial planning for the client or material elements of financial planning. If she is providing financial planning, CFP Board says then Liz would be required to establish a written agreement with the client, provide the client with a written explanation of all compensation and conflicts of interest, and to act as a fiduciary.


Since providing the material elements of financial planning could trigger the fiduciary obligation and other standards of conduct, Liz must rely on CFP Board’s four factors guiding practitioners, the same four factors referred to above in SS3.


While Liz’s research is "deep," her advice is not so broad that the client would believe it goes beyond estate planning. So Liz, in Scenario SS1 is not providing financial planning or material elements of financial planning. As a result, Liz is not required to act as a fiduciary.


The CFP in SS1 is not required to provide written disclosures about her compensation, and a written agreement, CFP Board says.


“Liz is not required to act as a fiduciary as defined by CFP Board,” according to Scenario SS1. “However Liz always tries her best to recommend what is in the client’s best interest in every case.”


CFP Board adds: “She does have to place the client’s interests ahead of her own and use reasonable and prudent judgment,” CFP Board says.


Again, CFP Board appears to be saying that placing a client’s interest ahead of your own is different from what it expects practitioners to do as a fiduciary. (Hopefully, this post will encourage CFP Board to explain that point.)


Scenario RIA 2: Understanding CFP Board's Standards of Professional Conduct: RIA Disclosure

This presentation is about Owen Weiss, CFP, a registered rep at a large BD with an RIA subsidiary, and the RIA offers financial planning. In Scenario RIA 2, Weiss provides financial planning as part of a team.


When activities of the RIA end, the RIA’s fiduciary obligation is terminated. “Current regulation requires the RIA to act as a fiduciary during the time when the agreement is active,” CFP Board says in the presentation.


“The RIA requires its reps to notify the clients that the activities for which the RIA is responsible end with delivery of the plan,” CFP Board says, “and to obtain the signature of the client on an acknowledgement form. This effectively ends the fiduciary duty of the RIA.”


Then comes an important point.  “However, Owen maintains an ongoing client relationship after the delivery of the plan,” says CFP Board in this scenario.


To be clear, once a registered rep acts as a fiduciary, he cannot revert to a lower standard of care vis-a-vis the client.


CFP Board says “there is little question in this case that the client wanted financial planning advice and entered into an agreement with the RIA to receive a financial plan.” The intent of the client one of the four factors is clear.


According to CFP Board, Weiss fulfilled his duties as a CFP certificant to disclose information about his compensation and conflicts of interest by providing the client with form ADV Part 2 and with a financial planning agreement, which were provided to Weiss by the BD-owned RIA and signed by the client. “Owen is a fiduciary as defined by the CFP Board,” says the video.


“Terminating the financial planning agreement by the client and the RIA at plan delivery meets the business needs of the RIA and is an accepted practice by regulators,” says the CFP Board. “Owen as a registered representative for the BD and an agent for the RIA must comply with the plan delivery requirement.


“However, Owen’s duties as a CFP practitioner are distinct from those of the RIA,” says CFP Board. “CFP Board policies maintain that once a fiduciary duty has been attained on behalf of a client, certificants may not revert to a lower standard while maintaining the relationship. This standard differs that required by current financial services regulation.”


Scenario TOD 1: Understanding CFP Board's Standards of Professional Conduct: Timing of Disclosures, the fourth multimedia presentation on CFP Board’s website on this topic is, is the story of CFP Marie Washington, a widow who is described by CFP Board as deriving 80% of her compensation from insurance and product sales and 20% from advice fees. Washington, in this scenario, is advising a client who is also a widow.


At their first meeting, the widow asks Washington how she gets paid. “Since it is early in relationship and Marie does not understand the client’s needs, Marie deflects, 'We’ll talk about it later,’” the CFP tells the widow, while also assuring the widow that her compensation is “reasonable and good value.”


Surprise! When Marie failed to answer the client’s question directly, CFP Board says, she failed to meet the Board’s requirements. CFP Board requires licensees to address compensation at the outset of a client relationship and to do so in a straightforward manner.



CFP Board’s multimedia presentations mark a good start in explaining how and when practitioners trigger a fiduciary obligation to clients. But I am not sure CFP certificants have seen these videos and that’s why I have taken the liberty of airing them, to generate a conversation. Please let me know what you think. 


Editor's Note: While this story was originally published October 10, 2012, CFP Board rebuilt and launched a new website in March 2013. The site corrects some of the problems discussed in this story to make the multimedia presentations more visible in search engines and easier to find.


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