Executive Summary Beginning with the CFP Board’s formation of the Commision on Standards back in late 2015, the CFP Board has been in the process of updating our Standards of Professional Conduct for CFP certificants for the first time since 2007. After an 18-month process, in early summer of this year, the Commission on Standards released its first proposal of the new Standards of Professional Conduct. Due to the complexity of adopting new standards for nearly 80,000 CFP professionals, the CFP Board put the newly proposed standards out for a 60-day comment period. During that time, the CFP Board received a lot of feedback (over 1,300 public comment letters), which was incorporated into a newly revised version of the Proposed CFP Standards of Professional Conduct. Yesterday, December 20th, the CFP Board released the 2nd version of these proposed standards, and announced that a second comment period will open on January 2nd and run for 30 days, until February 2nd of 2018. In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at at the changes made in the 2nd version of the Proposed CFP Standards of Professional Conduct, including the things the CFP Board got right in the revisions, some things they unfortunately walked back on, and some areas of focus for those drafting comment letters for the second comment period beginning on January 2nd of 2018. First and foremost, when you subject a 17-page standards document to 1,300 hundred public comment letters, there are a lot of small tweaks that get made. Fortunately, the CFP Board is taking feedback seriously and should be commended for this. In the latest revision, important adjustments include: clarification was provided to the gifts and other “benefits” CFPs cannot receive from clients if it will compromise their objectivity; the requirement that CFP professionals cannot use the term “fee-based” to imply they’re fee-only was expanded to stipulate that CFPs cannot use any other not-fee-only term to imply they are fee-only either; clarification that salary-based advisors who receive bonuses for product sales must still disclose this compensation as sales-related; and a new exclusion allowing advisors who use TAMPs to not run afoul of the fee-only rules simply for outsourcing investment management functions. Overall, these are good and reasonable changes. However, there are a few areas in the new revised Standards of Professional Conduct that are more concerning. The first is that under the original proposal, the CFP Board significantly expanded the disclosure requirements for CFP professionals. Not only at the time the client engages the advisor, but also with a new “Initial Disclosure Information” document that would have to be provided to prospects, detailing the nature of the CFP professional’s services, a description of how they are compensated, and a summary of their conflicts of interest (basically an RIA’s Form ADV Part 2). But here, the broker-dealer community pushed back very hard in their comment letters, claiming that this new initial disclosure requirement would simply be too onerous for them. Which, in reality, really is hard to supervise, as this kind of upfront information document would likely itself be treated as “advertising” communication with the public under FINRA Rule 2210. And so the CFP Board backed off the upfront disclosure requirement, albeit while still keeping the requirement for disclosure at the time the client actually engages the CFP professional. Overall, it’s very unfortunate that the CFP Board backed off this initial disclosure requirement, but understandable, as higher standards do need to be administratively feasible. The other, perhaps more concerning change that came through under the revised Standards of Professional Conduct, is a shift in the presumption of when a CFP professional is actually doing financial planning or not. This distinction has actually been a major issue under the CFP Board’s Standards of Conduct for a long time. Under the current rules, there is effectively a “loophole” that allows CFP professionals to escape their fiduciary duty under the CFP Board’s Standards, because the current rules state that a CFP professional only has a fiduciary duty to clients when doing financial planning or material elements of financial planning (which meant CFP professionals could avoid their fiduciary obligation by just not actually doing financial planning). Accordingly, it was a big deal that under the new Standards of Professional Conduct the new rule would become “fiduciary all the time” as a CFP professional, with a presumption that any time a CFP professional engages with clients, they are doing financial planning (unless proven otherwise). In the revised standards, though, the CFP Board has dropped this rebuttable presumption. As it stands, all CFP professionals will still be fiduciaries when providing financial advice – which includes product sales – but there’s no presumption that they’re actually doing financial planning just because they’re CFP professionals (which means they don’t have to adhere to the full Practice Standards for delivering financial planning). As a result, there are now basically have two types of CFPs: those who provide financial planning advice, and those who provide non-financial-planning financial advice and don’t have to adhere to the Practice Standards for financial planners. Confusing? Exactly. In other words, all marketing to the contrary, the CFP Board’s revised standards are effectively telling the public “it’s not even safe to assume that engaging a CERTIFIED FINANCIAL PLANNER professional for financial advice will result in any actual financial planning.” Which is problematic both for the weakened consumer protection, and the fact that it’s not even clear how to apply a fiduciary duty to non-financial-planning financial advice, or what standards such a CFP would be held to. If you agree that this is concerning as well, I hope you’ll submit a public comment letter next month. The point is not that every CFP professional must do financial planning for every client, but to emphasize to the CFP Board that when a CFP professional holds out to the public as a CFP, that the consumer should be able to safely assume they will be getting financial planning subject to the full standards that apply to financial planning, unless a clear advisory agreement and scope of engagement stipulates otherwise and the CFP professional clearly discloses this is not financial planning advice. Otherwise, the CFP marks risk simply becoming a misleading marketing label that implies to consumers a breadth of financial planning expertise and advice that the CFP Board doesn’t actually require of those CFP professionals in the first place.

(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)

#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone! Welcome to Office Hours with Michael Kitces.

For this week’s discussion, I want to talk about the big news that hit this morning, which is the release of the Revised 2nd Edition Proposal for the CFP Board’s new Standards of Conduct for CFP Professionals. As some of you may recall, this has actually been a two-year process in the making from the CFP Board. It started all the way back in late 2015, with the formation of a Commission on Standards, a 12-person committee that was going to be tasked with updating our Standards of Professional Conduct that we as CFP certificants have to follow, for what would be the first update since 2007.

After an 18-month process, in early summer of this year 2017, the Commission on Standards released its first proposal on what those new standards of conduct would look like. Which most notably included an expansion of the fiduciary duty to all CFP professionals who provide any kind of financial advice to consumers, which included not just comprehensive financial planning but any kind of advice which is broadly defined to include even just a suggestion to a client to pursue some course of action such as whether to buy or sell any financial services product. So, in essence, even product sales by CFP certificants would finally be subjected to a fiduciary duty under the CFP Board’s proposed standard.

Beyond that, the CFP Board standards proposal had a lot of other new elements as well. It expanded the six-step financial planning process into a seven-step process by basically separating out the development of plan recommendations from the presentation of plan recommendations, recognizing the growth of back office paraplanners who don’t create… or shall I say who create but don’t necessarily present plans. So we needed to separate those out.

The proposal limited the use of the term “fee-based,” declaring that CFP professionals can’t use the label in a manner that even implies they’re fee-only if they’re not. And the proposed new Standards of the Professional Conduct created a bunch of new disclosure requirements for CFP professionals, including not just more specific disclosure requirements when the client engages us in financial planning, but a new introductory information disclosure requirement that CFP professionals would have to give in advance when working with the client.

The sheer complexity of adopting new standards like this for what are now almost 80,000 CFP professionals for the first time in a decade means there’s a lot that goes into it. And so the CFP Board appropriately put all of these proposed changes out for a 60-day public comment period for feedback over the summer, including a bunch of town hall meetings they conducted with certificants. And they got a lot of feedback.

Well, we’ve now found out there were over 1,300 public comment letters filed, more than any other proposal that the CFP Board has ever put forth, and many included a rather lengthy public comment letter that I put forth with lots of suggestions that we posted on Nerd’s Eye View, actually suggest that there was so much to adjust in the first proposal even though it was well-intentioned and on a good track, that there should be a revised proposal with a new second comment period.

And so today we actually have the release of the new revised second version of the proposed Standards of Professional Conduct for CFP professionals, and the announcement there will be a new second public comment period opening up January 2nd and running for 30 days until February 2nd. So for this Office Hours, I want to talk about a few of the changes and the revisions that were made to the original proposal, some good and some concerning.

Changes In The 2nd Version Of The Proposed CFP Standards Of Professional Conduct [Time – 3:41]

First and foremost, when you subject 17 pages of professional standards to 1,300 public comment letters, you’re going to get a lot of small tweaks, which I actually think is good. I wish the CFP Board would put all of their proposed changes to any of the four E’s, so the experience requirement, the exam requirement, the educational requirement, and the ethics requirement through this process and not just changes to the ethics and standards of conduct. Because feedback like this helps catch both small mistakes and unintended consequences.

And so, in this context, there were a lot of small tweaks made. The requirement that a CFP professional may not accept gifts or other benefits from clients if it will compromise their objectivity was clarified. That means a gift, a gratuity, entertainment, any other non-cash compensation.

There was a requirement that CFP professionals not use the term “fee-based” to imply they’re fee-only if they’re not, and it was expanded to stipulate the CFP professional can’t use “fee-based” or any other not fee-only term that might imply or sounds like fee-only. Which I think was important because as I pointed out in my own comment letter, if all the CFP Board did was crackdown and say, “You can’t use the fee-based label,” it would just lead advisors to make up other new terms, fee-oriented, fee-compensated, fee-for-service, that might still really actually be fee and commission model. So in the second version of the standards, it’s much clearer. You can’t imply you’re fee-only if you’re not.

Now, the CFP Board notably isn’t limiting the use of commissions at all. This is not about a compensation bias of the CFP Board, this is a truth in advertising requirement. That you have to accurately state your compensation whatever it is, and, you know, the word “only” in “fee-only” has a kind of a specific meaning. So the CFP Board is just making sure that advisors are clear about their descriptions.

Some other notable changes in the compensation area, in particular, was a clarification that even salary-based advisors who receive bonuses for product sales have to still disclose that as sales-related, i.e., commission compensation, because they’re getting bonused. It’s basically the equivalent of a commission. Although other internal revenue-based compensation for fee-only firms is fine as long as they’re essentially revenue-sharing of fees.

And also a new provision that would allow advisors who use third-party TAMPs (turnkey asset management platforms), to collect and remit their fees without running afoul of the fee-only rule just because they outsource investment management to a third-party provider, instead of hiring a CFA internally to run their models.

A couple of other notable changes include the documentation requirements for CFPs were clarified and simplified a little, including some of the reporting requirements back to CFP Board. Under the existing rules, anytime you have a regulatory infraction you need to tell the CFP Board, now they reasonably exclude minor rule violations if it was a less than $2,500 fine. They clarified what constitutes family and common control business entities under the related party rules for those who might have been shifting compensation from one entity to another.

Overall, I think these are all good and reasonable changes. There were maybe a few that still need to be refined further. For instance, at the point the CFP Board says any not fee-only label has to disclose that someone receives fees and commissions, I don’t know why they don’t just say the required categories are either fee-only or commission and fee and even talk about fee-based and all. Let’s just define clear categories. But most of these new revisions I think are a positive step forward and a good example of how a rulemaking process can actually go well, when you open up for public comments and feedback.

Reduced Upfront Disclosure Requirements As A Concession To Broker-Dealers [Time – 7:15]

All of that being said, I do want to highlight a few areas in the new revised Standards of Professional Conduct that I think are more concerning. The first is that under the original proposal, the CFP Board proposed that there would be expanded disclosure requirements for CFP professionals, not just when the client engages the advisor, but also with what was called a new initial disclosure information document that would have to be given to prospects detailing the nature of the CFP professional services, description of how they’re compensated, and a summary of their conflicts of interest, which should sound familiar because that’s basically what an RIA’s Form ADV Part 2 requires now.

And in fact, the proposal explicitly stated that a properly completed and delivered Form ADV Part 2 would satisfy this requirement for the client. And so the CFP Board had gone further and said, well, basically that means RIAs will comply with this with Form ADV Part 2, and for non-RIAs (i.e. the broker-dealer community), they would need to use something substantively similar, and that the CFP Board was going to make a model template that broker-dealers could use.

But here the broker-dealer community pushed back really hard in their comment letters, both directly and through their lobbying organizations like FSI and SIFMA claiming that this new initial disclosure requirement, in particular, would be too onerous for them. After all, just the reality is most RIAs make this disclosure one or two or three advisors at a time since most of us in the RIA community are small, even large RIAs have maybe a few dozen advisors and typically operate under a standardized structure for which you can have one standardized Form ADV Part 2.

If you’re a broker-dealer, though, you may have hundreds or thousands of advisors on your platform. If you’re an independent broker-dealer, each of them could have a different business model and services and disclosure document, which is really hard to supervise if you’re a broker-dealer. Especially because this kind of upfront information would likely itself be treated as advertising communication with the public under FINRA Rule 2210, which means the broker-dealer would have a duty to engage in compliance oversight of every unique CFP disclosure document for every registered rep that had the CFP marks, which is a really challenging cost layer.

And while I’m all for clear disclosures, it is a practical reality that there are advisors in RIAs and there are advisors at broker-dealers, and while RIAs may already have the systems in place for these kinds of upfront disclosures because we’re already required to produce Part 2 of Form ADV, broker-dealers don’t have this in place. And it’s tough for the CFP Board to require something that even the SEC and FINRA don’t require in the broker-dealer community right now.

As a result, the CFP Board backed off this upfront disclosure requirement and simply said that, at the time of engagements, all disclosures will still exist and they’re going to create a model pre-engagement disclosure that can be used voluntarily by broker-dealers but won’t be required of all CFP professionals. And all of the remaining disclosures that were going to be in that initial disclosure…regarding the description of services, how the advisor will be compensated, etc., gets moved to the time of engagement disclosure along with a clarification that CFP professionals providing financial planning have to clearly define the scope of their planning engagement.

Overall, I think it’s very unfortunate that the CFP Board backed off this initial disclosure requirement, but I do understand it. From a practical perspective, CFP certification is a voluntary designation, its standards are voluntary, that means they can be over and above the minimum regulatory requirements, but they still have to be administratively feasible to comply with those higher standards. And arguably, this upfront disclosure requirement was one that would create legitimate challenges for large non-RIA firms. In part, because of the conflict that what is disclosure for CFP Board purposes is actually advertising for FINRA purposes. And that’s the problem with having advisors subject to all these different regulators and standards as we are. Hopefully someday we’ll simplify that process and then perhaps upfront disclosures can be revisited, but for now, we can at least be satisfied the disclosures are required at the time that the CFP professional is actually going to engage the client.

CFPs Professionals Are Always Fiduciaries But Not Always Financial Planners? [Time – 11:29]

Now, one other thing that came through under the revised standards of conduct that I do think is actually a little bit more concerning is a shift in the presumption of when a CFP professional is actually doing financial planning or not. This distinction between CFPs who do financial planning and those who don’t has actually long been a major issue under the CFP Board’s standards of conduct. Under the current rules, even as it exists today, there’s effectively a loophole that allows CFP professionals to escape their fiduciary duty under the CFP Board standards because the current rules state that a CFP professional only has a fiduciary duty to clients when doing financial planning or material elements of financial planning, which means basically you can put “CFP” on your business card, say you’re a financial planner, sell whatever you want, and then have no fiduciary duty to clients as long as you say, “Oh no, I wasn’t actually doing financial planning, I was just selling a product,” even though you were marketing yourself as a Certified Financial Planner.

In other words, the fiduciary duty for CFP professionals didn’t apply because you were being a CFP, you had to be doing financial planning. And this difference in fiduciary duty between doing planning versus being a CFP professional was viewed, appropriately, I think, as a loophole in the CFP Board’s current standards. And so it was a big deal this summer when the new Standards for Professional Conduct were released because the new rule became fiduciary at all times as a CFP professional. As long as you have the marks and you provide any kind of financial advice, which, as we noted earlier, is very broadly construed to not just doing planning, but anytime you make any kind of recommendation on any financial services product, all CFP professionals would be a fiduciary.

In addition, the CFP Board introduced a rebuttable presumption that anytime a CFP professional was engaged by a client, it is presumed that they’re doing financial planning and would have to adhere to the six-step, now seven-step financial planning process and Practice Standards unless they can prove that they were not doing financial planning. Now, this matters because in the revised standards, the second edition that just came out, the CFP Board has dropped this rebuttable presumption. So as it stands, all CFP professionals will still be fiduciaries when providing financial advice, which includes product sales, but there’s no presumption that they’re actually doing financial planning just because they’re CFP professionals, which means they don’t have to adhere to all the rest of the Practice Standards when delivering financial planning. Which I think is a problem.

The objection of this provision and the reason why it was dropped is that there are a lot of CFP professionals who don’t actually do financial planning with all of their clients or even with any of their clients, and they didn’t want to have a presumption that every client working with them as a CFP professional would get financial planning when not every client working with the CFP professional is getting financial planning. Except that’s the problem.

There are so many CFP professionals using the CFP marks and holding out to the public as Certified Financial Planners without actually doing financial planning or being accountable for it, which creates a lot of confusion for consumers. Basically the CFP Board is telling the public, “The CFP mark is the gold standard for financial planning advice, but don’t presume that you’re going to get financial planning from a CFP just because you hire one,” especially since there’s no upfront disclosure requirement to clarify whether you’re going to be getting financial planning advice from your CFP or not.

In fact, even under the revised standards, someone who’s providing what’s basically non-financial planning financial advice doesn’t even need to define and clarify the scope of their engagement as excluding financial planning advice. So it’s fine to say you’re a CFP professional, which implies you’re going to give financial planning advice, then not actually give any financial planning advice, and then not be responsible for the fact that you said you were a CFP but skipped the entire financial planning process. Basically, we’re going to end up with two types of CFPs: CFPs who provide financial planning advice and CFPs who provide non-financial planning financial advice and therefore don’t have to adhere to the Practice Standards for financial planning.

Now, you might be asking, “What’s the difference between financial planning advice and non-financial planning financial advice?” Exactly, confusing, isn’t it? If you look at the CFP Board’s definition of financial advice, it’s basically developing a financial plan, giving advice on buying or selling products, or managing portfolios or identifying third-party managers. So when you strip out the financial planning part basically what you’re left with is selling products and managing portfolios is non-financial planning financial advice. Where you can hold out as a CFP professional to gain the client’s trust not give any financial planning advice, and then have no accountability for not doing financial planning while you sold the product or managed the portfolio, even though that’s probably what the client was expecting when you wrote “CFP” on your business card, right?

We don’t waive the standards for doctors who provide non-medical health advice, we don’t waive the standards for CPAs who provide non-accounting financial advice, but we’re waiving the standards for CFPs who provide non-financial planning financial advice. And under these standards, again, there’s not even a requirement that this limited scope of engagement be disclosed to the clients, although maybe at least that’s a loophole we can close with the final revision.

All of these CFP professionals, including those who provide non-financial planning financial advice, will still be subject to a fiduciary standard, but frankly, I don’t know how the CFP Board intends to enforce that when there are no Practice Standards or any existing case law to explain how you apply a fiduciary duty to non-financial planning financial advice. I mean, this is a horrible can of worms that the CFP Board is opening for itself, at the same time it’s allowing salespeople to continue to market themselves as Certified Financial Planner professionals while not doing any actual financial planning. Which I think is horribly confusing and misleading to the public.

The point here is not literally to say every CFP professional should always have to do a comprehensive financial plan for every client, because not every client wants or needs a full scope financial plan, but the presumption that a CFP professional is doing a financial plan, unless proven otherwise, and a requirement that there’ll be a written scope of engagement to clearly define when the CFP professional is not doing financial planning, is basic consumer protection. Otherwise, the CFP Board is just encouraging misleading advertising for people to use the CFP marks to say they’re a financial planner and then not do financial planning.

30-Day Second Comment Period For CFP Board Proposed Standards Starts January 2nd [Time – 17:56]

Ultimately, this is where I intend to focus at least my public comment letter when the second comment period opens up on January 2nd. And if all of you agree this is concerning, I hope that you’ll submit a public comment letter as well. Not to say that every CFP professional must do financial planning for every client, but to emphasize to the CFP Board that when a CFP professional holds out to the public as a CFP, the consumer should be able to safely assume they’re going to be getting financial planning to the full standards that apply to financial planning unless a clear agreement stipulates that they’re not and the CFP professional discloses, “This is not financial planning advice.” In other words, this is both a disclosure issue and an issue of the presumption of planning when you hold out as a CFP professional in the first place.

In the meantime, for those you want to check out the full revisions to the proposed Standards of Professional Conduct, the CFP Board actually did a really good job providing a lot of detail on not just the revised proposal, but a redline version of the revisions between prior versus current… and a side-by-side document showing all the changes comparing the now proposed standards versus the ones that exist today. The 30-day comment period itself opens up January 2nd, in just a week and a half. You can submit comments directly on the CFP Board’s website, or you can email them to: Comments@CFPBoard.org. And I hope all of you will!

I hope this is food for thought around this first look at the new Standards of Professional Conduct that, once implemented, are going to guide our obligations as CFP professionals for many years to come. The good news is that the fiduciary standard remains, but the bad news is that the detail still matter in how it’s defined, when it’s applied, the standards that are used to evaluate fiduciary conduct if an enforcement action comes, and the manner in which it’s enforced.

So I hope you’ll all take your time to submit your own public comment letter and state your views and how you think this should work in the future. You know, for all of you that still have concerns about CFP Board, it’s not a reason to drop your CFP marks. It’s a reason to get involved, including and especially in moments like this, and submit your comments so they’re heard. The CFP Board is reading them.

In any event, thank you for joining us today. This is Office Hours with Michael Kitces. Normally 1 p.m. East Coast time on Tuesdays, but I delayed our broadcast to Wednesday this week so we could talk about the release of these new standards. Thanks for joining us, everyone, and have a great day!

So what do you think? Are the revised Standards of Professional Conduct an improvement over the first draft? Are there things the CFP Board still needs to improve? What will you focus on in your comment letter to the CFP Board? Please share your thoughts in the comments below!