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CFP Seeks to Limit Ambiguity with New Standards

The new standards provide clarity around CFP certificants’ fiduciary duty, as well as how they represent their compensation.

The CFP Board has released a draft of proposed changes to its Code of Ethics and Standards of Conduct, and will receive public comments on the new standards for the next 60 days. The new standards provide clarity around CFP certificants’ fiduciary duty, as well how they represent their compensation.

The CFP standards have not been updated since January 2009, and the board expects to adopt the new ones by the end of the year.

Under the current standard, fiduciary duty applies when providing financial planning. But under the revised standard, fiduciary duty also applies when providing financial advice.

“Financial advice [is defined as any time] you’re making a communication that’s a suggestion that you take or refrain from taking a particular action,” said Leo Rydzewski, CFP Board general counsel. “In many respects, it’s the equivalent here of saying that a CFP professional must at all times act as fiduciary.”

Under the new standard, CFP professionals should seek to avoid conflicts of interest, or disclose those conflicts to the client. It does not require written consent of the conflict.

“Overall, we recognize that there are conflicts,” Rydzewski said. “The fact that people are paid is a conflict. If you were to literally say you couldn’t have conflicts, it means that the entire profession would have to work pro bono. Nobody believes that’s going to happen.”

And even if one were operating under a conflict, they would still be obligated to act in the client’s best interest, Rydzewski added.

“Nowhere in there do they say, ‘Sales compensation is bad,’ but under the fiduciary rule, it is bad,” said Tim Welsh, president and founder of Nexus Strategy. “A conflict of interest is created when a commission happens, no matter what they say. ‘I make more money if I sell you this.’”

Blaine Aikin, chair of the board of directors of the CFP Board, said the new standards were informed by what’s happening in the regulatory environment, particularly the Department of Labor’s fiduciary rule. The standards are not a way to expand the CFP mark’s reach into the commission world.

“You cannot just willy-nilly sell something that’s higher than alternatives, that are inferior to other alternatives that are within your reach,” Aikin said. “They’re certainly not designed as a growth strategy. They’re designed as a competence-and-ethics service to the public, consistent with our mission.”

The standards also lay out appropriate definitions of compensation models, including “fee only,” “fee based” and “sales-related compensation.” If a CFP is receiving sales-related compensation, they can’t describe themselves as “fee only.” CFP Board prefers the term “fee and commission” instead of “fee based.”

“We’re not banning someone from being able to use the term ‘fee based,’ but if you do use that term, you have to do it in a way that does not suggest that you’re fee only,” Rydzewski said.

Those who present themselves as “fee based” can either tell clients that they earn fees and commissions, or tell them that they’re not fee only.

“If you think about ‘fee only’/’fee based’—whenever a client hears that, there is high potential for confusion as to what the difference is between those two,” Aikin said.

Also, if a related party is receiving sales-related compensation, the advisor can’t call him- or herself “fee only.” In other words, sales-related compensation of a related party will be considered if it’s provided in connection with services that the advisor or his firm is providing to clients.

The CFP Board also shortened the definition of financial planning to make it more digestible; it’s now at 30 words. They’ve also updated the practice standards.

"Financial Planning Definition: Financial Planning is a collaborative process that helps maximize a Client's potenial for meeting life goals through Financial Advice that integrates relevant elements of the Client's personal and financial circumstances."

“People look to our practice standards for how they’re going to deliver financial planning,” Rydzewski said. “Some firms, in fact, look to our practice standards as a way to train new advisors on how to provide financial planning.”

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