Initial reactions to the proposed changes to the ethical standards for certified financial planners have been favorable, but the other shoe could drop this week.
DETROIT — Initial reactions to the proposed changes to the ethical standards for certified financial planners have been favorable, but the other shoe could drop this week.
The Certified Financial Planner Board of Standards Inc. might see some resistance from the more
commission-oriented side of the business during a webcast this Friday.
So far, the Denver-based CFP Board has enjoyed plenty of positive feedback from a marketplace of fee-only advisers bent on linking fiduciary responsibility to the CFP mark, which is held by more than 54,000 individuals worldwide.
‘Stretching the net’
But the commission-based side of the financial-intermediary market — which is estimated to represent about half the practicing CFP designees — has yet to check in with an official response to the latest draft proposal, unveiled March 9.
“In the large [brokerage] firms, where they have all kinds of things going on, we’re making it clearer and stretching the net over a wider group of activities,” said Karen Schaeffer, CFP Board chairwoman and president of Schaeffer Financial LLC in Rockville, Md.
From the CFP Board’s perspective, clarity and open lines of communication are the main distinctions between the latest ethical-standards proposal and the version introduced in July.
The open webcast, scheduled for this Friday at 9 a.m. EDT, is an example of the board’s efforts to make the entire process as transparent as possible — a stark contrast to the strategy following the release of the first draft proposal.
“In the first draft, we realized there were some interpretations that were not our intent,” said Marilyn C. Dimitroff, chairwoman of the CFP Board’s ethics task force group, which is responsible for revising the standards.
“The first time around, we just put the draft out with no introduction or comments,” added Ms. Dimitroff, president of Capelli Financial Services Inc. in Bloomfield Hills, Mich. “This time, we wanted to make the process absolutely transparent.”
Key components of the rewritten ethical standards, which merge the code of ethics with the practice standards for CFP holders, relate to fiduciary responsibility and the disclosure of compensation structures to clients.
According to Ms. Dimitroff, the substance of the standards wasn’t changed from the first draft to the second with regard to fiduciary responsibility and disclosure, but the rewrite clarified that the CFP Board didn’t support any kind of “opt out” provision for commission-based brokers who also were offering financial planning services.
“Clearly, it was not stated well in the first draft, but it was always our intention that if someone is doing data gathering on a client and looking at some of the broader uses of financial planning, then they are probably engaged in material elements of financial planning,” she said.
FPA, NAPFA approve
According to the latest draft proposal, the fiduciary responsibility to place a client’s interests first will still not apply to those brokers that are purely commission based. But under the current guidelines, there is no room for a broker to move in and out of the fiduciary role, as was interpreted by some in the earlier draft.
Both the Financial Planning Association in Denver and the National Association of Personal Financial Advisors in Arlington Heights, Ill., have already released statements in support of the latest draft proposal.
Despite the positive feedback to the latest revisions, there remains a need for a critical review of how the draft proposal compares with the current standards, which were last revised in 1993.
“This is a five-course meal, and we haven’t finished digesting it yet,” said Duane Thompson, managing director of the FPA’s Washington office.
“As much as possible, we’d like to see professional standards that can apply to someone in any kind of financial planning practice,” he added. “And it should be clear enough that you don’t need a lawyer to understand what it means.”
Merrill Lynch & Co. Inc., the New York wirehouse that has become synonymous with the notion of straddling the line between brokerage services and financial planning, declined to comment.
The Securities Industry and Financial Markets Association, which has offices in New York and Washington, also declined comment on the draft proposal.
Ms. Schaeffer doesn’t expect the silence to last much longer, especially considering the potential effect of the new rules on commission-based representatives who hold the CFP mark.
“It’s not beyond my comprehension that a compliance officer at a larger brokerage firm will have problems with this proposal,” she said. “But I think they know that when something is good for consumers, it’s also good for business.”
Some independent fee-based advisers interpret the latest CFP Board proposal as the beginning of the end of the CFP mark for brokerage reps.
“With this new turn, the wirehouses will probably make the reps take ‘CFP’ off their business cards and make them stop doing financial plans,” said Ted Feight, owner of Creative Financial Design in Lansing, Mich. “I think it’s a gutsy move on the part of the CFP Board, because it might reduce their ranks.”
Courageous was also how Novi, Mich.-based sole proprietor adviser George Papadopoulos described the CFP Board’s proposal.
“I know the CFP Board doesn’t want to commit financial suicide, but if they went all the way with this, a lot of CFPs could drop the designation,” he said.
Ms. Dimitroff doesn’t anticipate such extreme measures.
“I’m convinced the brokerage firms will work this out, because I do believe most firms regard their certified financial planners as very valuable employees,” she said. “We hope this would actually increase the number of CFP certificants.”
