Journal of Financial Planning: June 2018
Richard Salmen, CFP®, is chair of CFP Board’s Board of Directors.
Just as the public trusts the diagnosis of medical doctors who follow the Hippocratic oath and relies on the counsel of lawyers who are duty bound to their client, it is critically important that the public can trust and rely on the advice of a financial planner.
For the public that seeks professional financial planning, an important element of establishing that trust and reliance is the knowledge that the financial planner acts in accordance with rigorous ethical standards. As a result, both CFP Board and FPA share a common goal of enhancing the profession’s relevance by raising the standards for competent and ethical financial planning and advice.
New Ethical Standards for CFP® Professionals
CFP Board’s standards of professional conduct reflect the commitment that all CFP® professionals make to upholding high standards. With CFP Board’s recent release of the revised Code of Ethics and Standards of Conduct (“Standards”), which take effect October 1, 2019, we have raised the bar for the country’s 80,000 CERTIFIED FINANCIAL PLANNERTM professionals.
Consumers expect financial professionals to act in their best interests. Under the new Standards, anytime a CFP® professional gives financial advice, a fiduciary standard will apply. This means that CFP® professionals are required to act in the best interest of their clients not only during the financial planning process—which is what we previously required—but at all times when providing financial advice.
The new Standards benefit and protect the public, elevate expectations for delivering advisory services to clients, and advance financial planning as a distinct and valued profession. This is a bold step forward for CFP Board and the financial planning profession.
Getting It Right—for the Consumer and the Profession
CFP Board spent more than two years thoroughly developing, reviewing, and deliberating proposed revisions to the Standards with the goal of striking the right balance between serving the public interest and ensuring the rules can be practically applied and enforced. And this important effort was not one we undertook alone; we benefitted greatly from input we received from across the profession.
Since the formation of the Commission on Standards in December 2015, CFP Board held more than 17 public forums and two public comment periods focused on the proposed new Standards; received more than 1,500 written comments and hundreds of oral comments; conducted a wide-ranging survey; and provided other opportunities for the public to offer feedback and input.
We appreciate all the comments and input that we received, especially from FPA. Its leadership and membership provided constructive feedback that helped us get it right.
The outcome of the deliberative, transparent, and inclusive approach we took strikes the right balance between ensuring the public is protected by a fiduciary standard and providing CFP® professionals and the firms they work for with sufficient time to implement the new Standards. Financial planning is a relatively young profession, developed after World War II to help meet the financial needs of Americans, and our Standards have evolved over the years.
In 1986, CFP Board’s original Code of Ethics and Standards of Professional Conduct set guidelines for ethical conduct by CFP® professionals and outlined an enforcement process. In the late 1990s through 2001, the CFP® professional community participated in the development of Financial Planning Practice Standards. And in the late 2000s, CFP Board took a monumental step in its evolution as we began holding CFP® professionals to a fiduciary duty when providing financial planning services.
This latest update of the Standards takes a significant step forward: CFP Board has raised the bar even higher to ensure that Americans receive the very best advice.
Practical Applications
The cornerstone of the new Standards is the extension of a CFP® professional’s obligation to act as a fiduciary, and therefore, in the best interest of the client, to all financial advice. This notably eliminates any confusion around when a CFP® professional is required to act as a fiduciary with his or her clients.
Today, many but not all CFP® professionals already hold themselves to a fiduciary standard for all financial advice they provide to clients. In October 2019, we will be able to tell the public that all CFP® professionals agree to provide financial advice at a fiduciary level. In addition to the expanded fiduciary standard, the new Standards include several other key changes that CFP® professionals should take note of, including the following:
CFP® professionals are required to provide information to the client prior to, or at, the time of engagement when providing financial advice that does not require financial planning. The information to be provided includes, among other things, a description of the products and services to be provided; how the client pays for the products and services, and a description of the additional types of costs that the client may incur, such as product management fees, surrender charges, and sales loads; how the CFP® professional, his or her firm, and any related party are compensated for providing the services and products; and the location of relevant public websites where public disciplinary or bankruptcy histories can be found.
The new Standards also require CFP® professionals who are providing (or are required to provide) financial planning to deliver the terms of the engagement between the client and the CFP® professional or the CFP® professional’s firm. Additionally, the CFP® professional is responsible for implementing, monitoring, and updating the financial planning recommendation unless specifically excluded from the scope of engagement.
A more accessible document. The document itself is now more accessible, easier to understand, and is condensed. By merging four documents into one, we have made it easier for CFP® professionals and members of the public to understand our standards and have directly tied the Code of Ethics to our Standards of Conduct in a way that makes it clear to CFP® professionals that they must always put their clients’ interests first.
Financial planning redefined. In 30 very carefully chosen words, the Standards contain a revised financial planning definition that is shorter, without sacrificing clarity, and provides greater accessibility for the public: “Financial planning is a collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.”
Practice standards updated for today’s economy. CFP Board’s practice standards had not been significantly updated in more than a decade. Much has changed over that time, and the new practice standards reflect the modern practice of financial planning, today’s economy, and what clients are looking for in their planning experience. The document also sets forth an easily accessible standard for determining when the practice standards apply.
Technology in focus. The new Standards focus on what a CFP® professional must do when selecting, using, and recommending technology. This is in recognition that technology plays a crucial role in the delivery of financial planning—for clients and CFP® professionals alike.
Updates to enforcement and reporting of misconduct. The new Standards have been updated to provide CFP® professionals additional guidance on the enforcement process. They also have information that provides greater detail about how and what needs to be reported to CFP Board when an issue arises.
Clients need to receive clear and understandable information about compensation. CFP Board is compensation method neutral but has had standards, dating back more than two decades, for when a CFP® professional may represent his or her method as “fee-only.” The new Standards provide more detail about that requirement, and set a standard for the use of the term “fee-based,” which is frequently used in the profession but does not have a universally accepted meaning. The new Standards make clear that “fee-based” is equivalent to “commission and fee.” A CFP® professional who represents his or her compensation method as fee-based must clearly state either that the CFP® professional earns both fees and commissions, or is not fee-only. The new Standards also apply to “any other term that is not fee-only” the same constraints that apply to the term “fee-based.”
This list of changes is by no means comprehensive, and we encourage all CFP® professionals to read the new Standards carefully. As we move toward the new Standards’ effective date of October 1, 2019, CFP Board will be developing materials to assist our CFP® professionals and their firms in complying with the new Standards. We are also working to ensure quality education on the new Standards is made available through our continuing education sponsors and key professional organizations like FPA.
What’s Next? The Future of Fiduciary Advice
These changes come at a time when the advisory landscape is evolving to better serve America’s diverse population. Highly personalized savings goals, longer lifespans, uneven access to defined contribution and pension plans, and new definitions of “family” and “household” mean that Americans need individual access to quality planning advice from a planner they trust.
We are confident that through elevating the Standards by which financial professionals are measured, we are rising to the occasion and meeting the complex needs of the growing body of clients our CFP® professionals serve who are seeking fiduciary-level advice.
By raising the bar today through the new Standards, the CFP® certification and financial planning profession become even more relevant for Americans seeking access to high-quality trusted advice, and for professionals and firms looking for a clear path to set themselves apart.
No matter what is happening in the offices of regulators, CFP Board is focused on the evolution of the financial planning profession for the benefit of the public. This means setting the highest standards for ethics and competency. Our new Standards will serve the CFP® professional community well for many years to come, and we expect they will also inspire others in the financial services industry to follow the lead of our fiduciary, client-centered profession.