Fiduciary Flap Trips Up CFP Board

The rift in the investment-advisor industry came into sharp focus Tuesday, when the CFP Board announced that it has put off making proposed changes to its Code of Ethics until January 2007 in order to consider the heated reactions of industry members. The flap over the board’s Code of Ethics has been ongoing since the proposed changes were announced in late July. But, really, this is just the latest scuffle in an ongoing battle over the differing legal responsibilities that investment-advisor reps and registered reps have to clients—in other words, over the broker/dealer exemption (a.k.a. the Merrill Lynch rule) and the term fiduciary.

The rift in the investment-advisor industry came into sharp focus Tuesday, when the CFP Board announced that it has put off making proposed changes to its Code of Ethics until January 2007 in order to consider the heated reactions of industry members. The flap over the board’s Code of Ethics has been ongoing since the proposed changes were announced in late July. But, really, this is just the latest scuffle in an ongoing battle over the differing legal responsibilities that investment-advisor reps and registered reps have to clients—in other words, over the broker/dealer exemption (a.k.a. the Merrill Lynch rule) and the term fiduciary.

The CFP Board’s Code of Ethics governs the more than 52,000 holders of the CFP designation. Most of these CFP holders are financial planners and registered investment advisors (who are governed by the Investment Advisers Act of 1940), but, increasingly, brokers at big wirehouse firms (who are governed by the Securities Act of 1933 and the Securities Exchange Act of 1934) have been earning the CFP as well.

Over the summer, the CFP Board proposed amendments to its Code of Ethics that would allow CFP holders to “opt out” of their fiduciary duty to clients as long as they disclosed it in writing to the client. But the leadership of the Financial Planning Association, which represents financial planners, blasted the proposal, as did FPA members in comment letters to the CFP Board and FPA. The “revisions fail to enhance consumer protections or advance the profession of financial planning,” wrote Dan Moisand, FPA president, in a letter to the CFP Board. Subsequently, Sarah Teslik, the CFP Board’s CEO and leader in the effort to change the Code, resigned in mid-October, stating that her resignation had nothing to do with the uproar. The CFP Board is now working on new drafts.

Moisand says the intent of the CFP Board in proposing the controversial changes has been to minimize existing redundancies and loopholes in the rules governing CFPs. “And we support that fully. Where we have the disagreement is that the proposal they made is not the mechanism for that,” he says. “Most registered reps act as fiduciaries in some capacity already—it’s not about where you work, it’s how you act. Brokers are welcome to the CFP community, but we want all the rules to apply to everyone all the time.”

Under current regulatory law, RIAs and their investment-advisor reps must take on fiduciary responsibility for their clients—in other words, they must put the client’s best interests first, ahead of their own. Brokers, by contrast, typically have to abide by the looser “suitability” standard (unless they have full discretion over a client account). But under the b/d exemption, an amendment to the Securities and Exchange Act of 1933, filed by the SEC in April 2005, if a broker advertises himself as a financial planner or offers comprehensive financial-planning services—something that brokers have been doing more and more in recent years—then he must take on fiduciary responsibility. Still, the language of the exemption is somewhat murky, and critics say there are some very wide loopholes. B/ds counter by saying in practice there really is no difference in how clients are treated by Series 7-holders and investment-advisor reps. That’s because Series 7-holders are already heavily regulated by the NASD and, in some cases, by the NYSE, as well as watched by the SEC. Further, they say they have their own compliance departments and supervisory apparatus to protect the interests of clients.

And, anyway, major wirehouses, like Merrill Lynch and Smith Barney, for example, strongly encourage the CFP designation for their reps, but this is precisely what angers planners, who think that the reps are encroaching on their turf without having to follow their rules.

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