Of Two Minds

More and more reps are becoming certified financial planners (CFPs). Trouble is that many wirehouse brokers with CFPs don't actually act as fiduciaries, as the designation currently requires. Should a wirehouse CFP be able to use the prestigious initials on his card and then “opt out” of CFP practice standards with clients? An internecine argument at the FPA gets to the heart of one of the industry's more vexing problems: Should brokers be able to position themselves as financial planners?

Dan Moisand, president of the Financial Planning Association, heads to his family's vacation home in the Blue Ridge Mountains every Thursday in the summer to relax — and to catch up on a little work. On a Thursday this past July, Moisand was sitting in his rocking chair on the porch of the house, sipping his morning coffee and sifting through a backlog of emails. One of the missives was from Barton Francis, the new chairman of the Certified Financial Planning Board of Standards, and it included the board's long expected update of the practice standards and code of ethics governing CFP certificants. After reading it several times, it became clear that this was more than just an update: In fact, the CFP Board was loosening the CFP standards and code of ethics, because, among other things, it proposed weakening the fiduciary standard of a CFP-holder.

To the FPA's way of thinking, the proposed code would eliminate many of the core tenets of being a CFP, central to which is its fiduciary provision. The whole point of being a CFP, planners argue, is to act in a fiduciary manner all the time — in short hand: your client first, you second and full disclosure of any potential conflicts. (The FPA is a trade organization for financial planners and has no formal relationship with the CFP Board, which oversees the CFP designation.)

“It was very surprising,” says Moisand, who has since railed against the proposal at conferences and in the financial media. Meanwhile, hundreds of planners have flooded the FPA Web site and CFP Board and other financial-planning organizations with comments slamming the proposal.

The wording that has some planners upset is a proposed change to the code of ethics that would allow CFP certificants to opt out of their fiduciary duty to the client as long as the client agreed it to in writing. The board suggested the intent was to allow nonpracticing CFP-holders, like academics, to remain CFPs. That's fine, says Moisand, but it would also come at the expense of the investing public.

That's because, “The way it's written it lets everybody opt out of fiduciary duty — and that's simply wrong,” Moisand says. By everyone, Moisand means registered reps — Series 7-holders and dually registered investment advisors at big firms who have also achieved a CFP designation. Moreover, most big firms, such as Merrill Lynch, do not allow the vast majority of their reps to act as fiduciaries, anyway.

That leads many in the financial-planning community to one conclusion: The CFP Board's new proposal is designed to accommodate broker/dealer registered reps — Series 7-holders — who do not have fiduciary duties to their clients (only “know your customer” or suitability standard requirements, which, legally, is less binding). Those critics say that the CFP Board is simply looking out for its own interests as opposed to those of the public. After all, there are several associations competing for members; the most well-known are IMCA (CIMA) and the National Association of Personal Financial Advisors (NAPFA).

One popular industry consultant told Registered Rep. magazine that, indeed, it was essentially a battle for certificants that was behind the move to soften the CFP Board's language. To the high-minded financial planner, the proposed code change is, in essence, allowing the barbarian — the lowly Series 7-holder — inside the elite planning gate.

The CFP Board, of course, disagrees. (A task force is currently working on the question, with more discussions planned for January.) Yes, wirehouse reps are among the fastest-growing cohort winning the CFP designation (to their credit), but they are still a minority, says the CFP Board's Francis. Of the approximately 49,000 CFP-holders, 18,500, or 37 percent, are affiliated with the top 30 brokerages, insurance and mutual fund companies, he says.

I'm OK, You're Not

Why does this internecine argument matter to non-FPA members and CFP-holders? Because the tussle reflects a much larger, ongoing fight in the industry — between the brokerage community and the registered investment advisor community over the different legal statutes that regulate them, their roles in the industry and how they should portray themselves to the public.

It's more than just an academic question. The public wants — and needs — financial advice, especially as the oldest of the 76 million baby boom generation begins to retire. It is also clear that brokers and advisors want to serve them (“I'm a retirement specialist”) and that many on both sides — Series 7s and RIAs (and their reps) — are perfectly capable of doing so. What isn't clear to the public, and is getting muddier with each “clarification,” is what differentiates the Series 7 (with its suitability requirement) from the Series 65 (the fiduciary) — or so argues retail investor advocacies, the Consumer Federation of America (CFA) and the AARP.

But brokerages counter that there is, in fact, no longer any practical difference between the Series 7-holder and the Series 65-holder or registered investment advisor. It's true that there are decades-old regulatory acts governing each group — the Securities and Exchange Act of 1934 regulates brokers, and the Investment Advisers Act of 1940 regulates RIAs. And, yes, the former is “know your client” and the latter is a fiduciary standard where all conflicts have to be disclosed. Still, the modern regulatory climate has eroded the difference, b/ds say. Brokerage management argue that the NASD and NYSE, who also regulate brokers, are so onerous in their requirement that that their supposedly lower legal standard to the client is now very high and strict: It protects the clients' interests adequately and forces reps to act with integrity.

Not so, says the FPA, and the public is confused. It wants the SEC to solve the confusion, essentially by undoing some of what it has done, particularly in the past couple years. Backed by powerful consumer lobbying organizations like the CFA and AARP, the FPA tried unsuccessfully to persuade the SEC not to adopt the “broker/dealer exemption rule” (what is also known as the “Merrill rule”), which it did in April 2005. That rule officially allows brokers to use fee-based accounts without being subject to the Investment Advisers Act of 1940, assuming the advice they provide is incidental and certain disclosures are made. The FPA sued the SEC in response, contending it essentially rewrote the rule and overstepped its authority. A judge heard arguments this past October and will issue its decision within 12 months.

This “now-I'm-a-broker, now-I'm-a-fiduciary” disclosure to clients is plain ridiculous, planners argue. Ron Rhoades, a fee-only registered investment advisor and CFP with Joseph Capital Management in Hernando, Fla., isn't convinced that fine-print disclosures are sufficient. It may only be confusing clients further, since they see so many pages of disclosures already. Says Rhoades: “We'll always have product sellers — in fact, we need them. But the question is, ‘Are you representing the seller with the product or the purchaser?’ Right now, investors have no clue.”

They are in good company: A lot of brokers and advisors are confused, too. For instance, the SEC's Robert Plaze, associate director, Division of Investment Management, stated in December 2005 in response to a question about the “Merrill Rule” that, if you hold yourself out to be a financial planner, you have to register with the SEC as an investment advisor (under the 1940 IA act). But in a clarification he made later, Plaze said that just because a person carries the CFP designation does not mean he is holding himself out as a financial planner. Yet, that's precisely why advisors seek the prestigious designation: To prove aptitude in financial planning. “Pretty confusing, isn't it?” says Moisand.

Apparently so, because when it passed the rule, the SEC said it would continue to study the situation. The Rand Corporation is currently conducting the research to, among other things, find “the most effective legal and regulatory approach to regulating investment professionals in today's marketplace,” as the SEC study proposal stipulates. Data will be collected and analyzed over the next 12 months, followed by six-month peer review, according to SEC spokesman John Heine. In short, the rules could change again.

Don Trone, the founder of Fiduciary360, a fiduciary training and consulting firm for investment professionals, says he's “hopeful” the study will help clarify the debate, but he's not holding his breath, either. In fact, he says the SEC is largely at fault for the current mess. “Fiduciary standards have evolved, the industry has evolved, the public has evolved, even the courts have evolved — what hasn't is the SEC and the 65 year-old statutes we're relying on,” he says.

The Visigoths Have Crossed the Rhine

Across the industry it seems the one thing everyone agrees on is that the times have changed. Many brokers are giving advice, and it's not always “incidental” as the Merrill exemption and 1940 Act require. One of Smith Barney's $1 billion-plus wealth-management teams — which includes a CFP-holder — is a good example. While most of the team's revenues come from discretionary asset management, that is the limit of their capacity as fiduciaries. “We can't hold ourselves out as fiduciaries,” says the lead FA, so his team hands out the disclosure. “It's a joke, but we have to do it. It says the advice is incidental, but that's bulls---, we give advice.”

And, besides, he takes issue with the idea that the label “fiduciary” automatically qualifies a person as some sophisticated planner, as the investment advisor community claims. He says, “Whether you accept fiduciary status or not, it's how you behave in the end that's important. Fiduciaries are not angels by default.” He also says his team puts the client first anyway, disclosing all conflicts of interest in writing. And if they're managing an equity portfolio, they put in writing an approximation of their fees for each quarter. If they buy bonds for the client and it's not fee-based, he tells them the approximate cost of the transactions. But if all that fails, he says, and a broker does decide to try to take a client for a ride, there are “legions” of attorneys watching over them — better supervisory capacities than your average mom-and-pop RIA someplace.

“If I became a fiduciary today it wouldn't make a single bit of difference in the way we conduct our business,” he says. “We view ourselves as fiduciaries to our clients, even if the company makes us issue a disclaimer that says we're not.”

In fact, there's no legal prohibition that keeps reps from accepting fiduciary status, says the FPA's Moisand. It's just that many of their firms don't want the extra liability, he says. Fiduciary is Latin for “trust,” and certainly most brokers are, in fact, trusted by their clients and do right by them. In fact, the FPA polled its more than 28,000 members — 68 percent of which have brokerage licenses, 3,000 of whom reside in wirehouses. “The overwhelming majority of them want to be fiduciaries,” Moisand says. Anyway, the Pension Protection Act, signed by the president in August, already allows reps to serve as fiduciaries to ERISA retirement-plan participants — but only if the rep discloses all conflicts and either accepts a level fee arrangement or uses an independently audited computer model to provide the advice. If the PPA could be designed for all accounts, not just those dealing with retirement assets, the “f” word might not seem so dirty to brokerage firms.

Referring to the flap over the opt-out provision in the CFP Board's proposal, Stephen Winks, publisher of Senior Consultant, an online newsletter for the financial-advice industry, says that kind of lopsided compromise should and can be avoided: “I think we're going to see a solution emerge that won't require one community to acquiesce to another.”

Ultimately, it's Congress and the SEC who would make any changes to the SEC regulations. But Winks argues the firms should take the lead. “The free market is the only way to solve this,” he says. “Regardless of how it happens, it's in the financial-advice industry's best interest and the consumer's best interest to allow brokers to be fiduciaries.”

Broker CFPs

The number of CFPs at brokerage and other financial services firms increased 15 percent in 2005 and now accounts for 37 percent of the more than 50,000 CFP-holders, according to the CFP Board of Standards.

Vive La Difference!

What's the difference between a Series 7-holder and an IAR? A look at the rules:

Investment Advisers Act of 1940. Congressional Act that requires all investment advisors to register with the SEC by filing a Form ADV Parts I & II. (Advisors with less than $25 million need only file with state regulators.) The Act was intended to protect the public from misrepresentation by financial advisors. Stipulates that all conflicts of interest must be disclosed.

Investment Advisor Representative (IAR): A financial advisor who passed the Series 65 exam and works for a registered investment advisor (RIA), a financial-advisory firm registered according to the IA Act of 1940. He has a fiduciary responsibility to the client.

Registered Rep: An advisor, once known as a stockbroker, who has passed the NASD's Series 7 exam and who is affiliated with a broker/dealer. He recommends to clients which securities to buy and sell. Series 6-holders may execute trades for variable annuities and mutual funds; Series 7-holders sell general securities, but may not offer comprehensive financial advice unless it is “incidental” to a trade. Reps who do not want to abandon their Series 7 take the Series 66 instead of the Series 65. These reps are dually licensed.