Board to Death: Reloaded

In its new proposed standards, the Board attempts to solve the problem by requiring planners to have a more comprehensive engagement agreement with their clients. Since only practicing financial planners will have clients to engage, this would seem to solve the problem for exceptions such as academics.

Yet by focusing on a detailed client agreement, the proposed standards put a much greater emphasis on "disclosure and transparency," as CFP Board chair Bart Francis calls it. The problem is that when it comes to personal finance, disclosure doesn't really work (see "Disclosure Diversion" sidebar). "What you're really asking," says Francis, "is whether disclosure and transparency are effective means of protecting the public. That's a fair question." I tell ya, these guys are killing me.

Ah, Fiduciary!

Which brings us to the best part: The fiduciary duty clause of the proposed standards. The old standard required a fiduciary duty only of CFPs who take custody of client investment funds, which is to say, virtually nobody. Under the new standards, Rule 1.1e states: "It will be presumed that the duty of care of a fiduciary is to be applied to the professional judgments made by the certificant pursuant to the agreement unless the parties specify in their agreement a different legal standard governing these actions."

On the surface, this looks pretty good: The Board assumes financial planners are fiduciaries. Yet the ability to avoid fiduciary duty simply by getting your client to sign off is a loophole large enough to drive the 5th Armored Division through.

Consider how this would work in practice. If CFPs were required to present their clients with a form that stated: "I understand and agree that as my financial planner you will have no fiduciary duty toward me and therefore you will be under no obligation to offer advice that's in my best interest, nor to put my interests before your own or those of your firm," then maybe it would work.

But who would sign a document worded this way? Most people may not understand what a fiduciary is, but they certainly want their financial advisors to have a duty to put their interests first. So who would ask their client to sign such a document? Again, no one. Instead, clients might get something as simple as a one-page document listing all the "duties" the advisor does have to the client, but omitting a fiduciary duty.

I've been around too long to believe such a disclosure would work to the client's benefit. In the vast majority of normal planner-client relationships, giving CFPs the ability to get their clients to opt out of a fiduciary duty is tantamount to giving stockbrokers and anyone else who cares to use it the right to hold themselves out as a CFP while adhering to far lower standards. Does this start to feel like CFP Lite all over again?

I spoke to Francis, who assured me that someone using the non-fiduciary option to obtain an unlevel playing field had never occurred to the Board in the two years they were drafting the proposal: "We're charged with raising the bar for certificant ethics and conduct, and I think we've done that," he said. "We don't think about how stockbrokers might use them to their advantage or what the public might think."

I've been talking to Board chairs for a long time, and Francis comes across being as honest and straightforward as anybody who's ever held the job. So I'm inclined to take him at his word. Which is even more troubling–and entertaining–than the alternative. Can the experienced financial planners who dominate the CFP Board really be so na??ve, so focused on their own mission, that they don't consider how their standards will affect the bigger picture of professional financial planners trying to establish a level playing field with other so-called "advisors?" If so, that might explain why medicating folks and getting them to gamble to lower their debt would seem like a good idea.

Bob Clark, a former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].