CFP Board - Conduct Standards and Discrepancies (update)

By Cory Roberson, Principal of My Compliance Blog
By David McNeal, Contributor of My Compliance Blog 

Discrepancies in disciplinary history reporting

CFP Board update July 30, 2019.  According to the Wall Street Journal ("WSJ"), more than 6,300 financial advisor profiles featured on the CFP Board’s site showed no sign of disciplinary history---even though those reps had consumer complaints disclosure on their reports managed by FINRA. 

To fix these discrepancies, the agency will now conduct background checks to include “manual reviews” of FINRA’s Broker Check and the SEC’s advisor site ("IAPD") during the CFP certificate qualification/renewal process.  The agency will meet with both regulators to determine the viability of an automated process to conduct such reviews. 

Revised Code of Standards

Effective October 1, 2019 June 30, 2020 (update), the CFP Board is revising its current Code of Ethics, Rules of Conduct, Terminology, and Financial Planning Practice Standards.

Amid conversations about who should regulate the financial advisory profession, the CFP Board has set new standards for advisors who bear the Certified Financial Planner (CFP) designation/credential. 

“The cornerstone of the new Code & Standards is the requirement that all CFP professionals act as a fiduciary at all times when providing financial advice to a client. At the same time, the new Code & Standards has specific implications for "fee-only" CFP professionals. This new document provides them the guidance they need to work on a '"fee-only"' basis and stay true to the new rules.  — Kevin R. Keller, CFP Board's Chief Executive Officer.

With its new Code and Standards, the CFP Board is seeking to advance the role and value of the financial planning profession with a broader fiduciary standard that elevates public trust in its CFP professionals. 

There are many recent fiduciary standards and/or proposals on the table that will shape the entire financial services industry in the United States and for operations abroad.

SEC and State securities fiduciary rulemaking

The CFP Board’s changes come at a time when the SEC released its own Best Interest Standards “Fiduciary” rule.  The legislation, called Regulation BI,  is a broad weeping rule that enhances the fiduciary standards for federally-regulated investment advisors and broker-dealers.   

Regulations don’t end there for state-advisor registrants and other financial service firms.

Many states, such as New Jersey and Massachusetts, proposed its own fiduciary rules amid the highly contested standards that were introduced, and then overruled, by the Department of Labor (“Fiduciary Rule”). 

As highlighted in these examples above, many regulators are choosing an autonomous approach to fiduciary rulemaking after the DOL Fiduciary Rule was overruled.

Fiduciary Challenges Ahead with Regulatory autonomy

The additional regulations pose a new challenge for firms also seeking to maintain compliance with fiduciary regulations from its primary regulator(s), such as the SEC, State securities divisions, and/or FINRA (largest SRO). 

In total, the SEC, state securities divisions, Department of Labor, and now the CFP Board are adding its’ own rules around the definition of a “Fiduciary”. 

What are the CFP Boards revised standards for its professionals?

An advisor, who uses the CFP professional mark, will have expanded fiduciary responsibilities in almost every aspect of their practice.

CFP Board rules, largely based on financial planning practices, should be used in tandem with general fiduciary standards that apply based on the firm’s registration/jurisdiction status.  For our clients at FIN Compliance, we will have a disclosure form that CFP Professionals can use to add to its financial planning agreements.

Expanded guidelines on Fee-Only Status

Rules stipulate, for instance, that CFP holders may only describe their practice as fee-only if their firm and its related parties don't receive any sales-related compensation in connection with the advisory services the firm provides to clients.

Highlights of the "fee-only" guidance document include:

1. Clear, plain English definitions on what it means to be practicing as a "fee-only" CFP professional;

2. Decision trees to help CFP professionals determine if they are providing financial advice and financial planning (see reference below);

3. Examples of conflicts of interest and suggestions for how to address them;

4. A detailed graphic illustrating the practice standards for the financial planning process;

5. Specific requirements for what information CFP professionals must provide clients;

Summary of the CFP Board's new Code of Ethics and Standards of Conduct:

Code of Ethics identifies principles into six sections:

A. Duties Owed to Clients

B. Financial Planning and Application of the Practice Standards for the Financial Planning Process

C. Practice Standards for the Financial Planning Process

D. Duties Owed to Firms and Subordinates

E. Duties Owed to CFP Board

F. Prohibition on Circumvention

The Code and Standards requires a CFP professional to provide eight categories of information to a Client, some of which may not be required under the existing regulatory structure and identifies whether the information must be provided orally or in writing.

The Code and Standards also identifies when a CFP professional must disclose Material changes or updates

CFP Board’s Practice Standards for the Financial Planning Process have been revised to include seven steps:

1. Understanding the Client’s Personal and Financial Circumstances

2. Identifying and Selecting Goals

3. Analyzing the Client’s Current Course of Action and Potential Alternative Course of Action

4. Developing the Financial Planning Recommendations

5. Presenting the Financial Planning Recommendations

6. Implementing the Financial Planning Recommendations

7. Monitoring Progress and Updating

The Code and Standards outlines 15 duties that a CFP professional owes to a Client:

A.1 Fiduciary Duty

A.2 Integrity

A.3 Competence

A.4 Diligence

A.5 Disclose and Manage Conflicts of Interest

A.6 Sound and Objective Professional Judgment

A.7 Professionalism

A.8 Comply with the Law

A.9 Confidentiality and Privacy

A.10 Provide Information to a Client

A.11 Duties When Communicating with a Client

A.12 Duties When Representing Compensation Method

A.13 Duties When Recommending, Engaging, and Working with Additional Persons

A.14 Duties When Selecting, Using, and Recommending Technology

A.15 Refrain from Borrowing or Lending Money and Commingling Financial Assets

The new Code and Standards sets forth three duties owed to firms and subordinates:

1. Use Reasonable Care When Supervising

2. Comply with Lawful Objectives of CFP Professional’s Firm

3. Provide Notice of Public Discipline

Among other changes in this section, the new standard includes an expanded requirement to advise the CFP Professional’s Firm, in writing, of any public discipline imposed by CFP Board.

Enforcement/Public Forums/Q&A

The Board’s ethical standards for CFP® professionals are actively enforced through an investigative process described in the Disciplinary Rules and Procedures and Appeal Rules and Procedures. 

The CFP Board is committed to maintaining a disciplinary process that is fair to CFP® professionals whose conduct comes under scrutiny and one that is credible to the public.

From September 2018 through December 2019, members of the commission are participating in a series of public forums around the country, focused on educating CFP professionals, firms, and the public on the new Code and Standards.

Resources:

Code of Standards: Click Here 

Full Compliance Guide: Click Here

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FIN Compliance (FinCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management software tool, FIN Ventures, providing business/startup strategies, and FINLancer, a business management portal featuring:  E-signature tools; Invoicing integration, Vendor Directory, continuity directory*, business client document portal, and more (available by Q4 2019).  

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We are pleased to announce a new deal flow service that includes transition planning, deal flow, and partnerships. We will have more information available as our offering develops.  Both older and new advisors alike can begin to prepare for changes in the industry.  It’s a good time to evaluate opportunities whether you are a young firm looking to buy a book of business or an older advisor looking to establish an exit for retirement.  For firms interested, we are offering a matchmaking service to connect older and new firms together for deal flow, succession planning, partnerships, and more.  

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Impact

FIN Missions (FINmissions.com) provides business support group sessions for other entrepreneurs.  In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.