In Practice June 21, 2017

Window Opens to Comment on CFP Conduct Standards

CFP Board released a draft of proposed revisions to its Standards of Professional Conduct for a 60-day public comment period, running through August 21, 2017.
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The Certified Financial Professional (CFP) Board this week called for industry and public comments on proposed revisions to its formal standards of professional conduct, which set the ethical requirements for all CFP professionals working with individual and institutional investors.

As the certification and monitoring organization lays out, “CFP Board’s standards for ethics and practice are an essential part of the CFP certification and an important element of the public’s trust and confidence in CFP professionals.” As such, the board promises a “deliberate and inclusive process” for reforming the key conduct standards.

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Newly released, a draft of the proposed revisions directly acknowledges the fact that the Department of Labor (DOL) has recently taken the bold—if perhaps temporary—step of revamping its own adviser conduct standards under the Employee Retirement Income Security Act (ERISA). CFP Board officials freely admit their own efforts, like those at DOL, represents a significant revision and strengthening of the standards with “a range of important changes being implemented.” 

At a high level the changes broaden the application of the fiduciary standard for CFP professionals, “effectively requiring CFP professionals to put a client’s interest first at all times … and enhancing and updating standards related to [personalized] financial planning.”

CFP Board says it will carefully consider feedback received during the comment period—so now is the time for interested parties to speak up and speak clearly. “The final revised standards will be announced at a later date along with an effective date for implementation,” CFP Board says.

NEXT: Highlights of the stronger CFP standards 

The CFP Board provided the following highlights of the proposed conduct standard revisions:

    • A broader fiduciary standard requires CFP professionals to act in the best interest of the client at all times. Under the current standards, CFP professionals are required to act as a fiduciary when providing personal financial planning. However, since the definition of financial advice, per DOL, is now much broader than the definition of financial planning, the draft revised standards expands the commitment that all CFP professionals make to acting in their client’s best interest.
    • A shorter definition of financial planning and a presumption that financial planning is required. The new standards presents a new definition of financial planning that is intended to be “brief and comprehensive.” Financial planning is defined as “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.”
    • The revised standards sets forth a presumption that CFP professionals are required to provide financial planning when providing financial advice, while also outlining the factors CFP Board will weigh in determining whether financial planning is required.
    • More specific practice standards for the delivery of financial planning. The changes update the CFP practice standards, “presenting them more efficiently,” with the financial planning process beginning after the engagement has been formed and with goals selected after the CFP professional has developed an understanding of the client’s personal and financial circumstances.”

Other revisions address more esoteric subjects, such as client treatment and recordkeeping during practice bankruptcies, as well as the “types of adverse conduct to be handled through the disciplinary process.” Finally, the changes consolidate four sections of the current standards into a single document. Following a brief Preamble, the Code of Ethics announces ethical principles, the Standards of Conduct sets forth specific standards governing the conduct of CFP professionals, and a Glossary defines key terms.

NEXT: Quiet but positive industry reaction 

For context, compared to the huge number of comments submitted to PLANADVISER by advice providers and other financial services interests in the wake of the DOL fiduciary rule draft publication, far fewer have spoken up regarding the new CFP standards. This probably reflects the fact that a great many CFP professionals, given the major reforms mandated by the fiduciary rule, will already be in a position to comply with these new requirement. 

The National Association of Personal Financial Advisors (NAPFA) seems to agree, describing itself as “a full-throated supporter of fiduciary principles from its inception.” The group “sees the expansion of a standard for CFP certificants as a big step in the right direction.” 

“NAPFA has always believed that financial advice should be delivered according to fiduciary principles,” NAPFA CEO Geoffrey Brown argues.  “Working in the best interest of the client is the most transparent—and we think the most objective—way of serving the public. Consumers have recently come to expect advice delivered in their best interest and now, because of the broadening of the CFP Board’s fiduciary requirements, will be able to count on CFP professionals to act as a fiduciary when providing financial advice to a client.”

As to other areas of the proposed standards, including the more specific practice standards for the delivery of financial planning, and a revised process for addressing bankruptcies, NAPFA “plans to review the changes thoroughly, and survey its members to capture their feedback on all of the proposed changes.”

The Financial Planning Association, known as the largest membership association for CFP pros, also commends the CFP Board for the move.

“We applaud their efforts in seeking to raise the bar in the profession,” says 2017 FPA President Shannon J. Pike. “FPA has been a staunch advocate for an unambiguous fiduciary standard for years and has proudly worked collaboratively with CFP Board and NAPFA as partners in the Financial Planning Coalition to advocate for this high standard. FPA’s actions over the years to advocate for a fiduciary standard have led to meaningful awareness and advancement of the profession.”

More information on the initiative, and the forms for submitting comments, are available here. 

In Practice June 20, 2017

SEI Recommends Advisers Incorporate Advisory Model

The recent study suggests advisers base their decisions on company goals and client needs to maximize potential growth. 
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The latest report from SEI Advisor Network finds that most advisers are implementing an enterprising advisory model—but only because they feel as if they should.

According to the study, “The Purposeful Advisory Firm: Maximize your firm by design, not by default,” a majority of the 400 U.S. financial advisers, business owners and managing partners surveyed own an enterprise firm solely because press articles and presentations favor the model. Instead of considering a lifestyle model, where an emphasis is laid on maximizing cash flows and remaining involved in a client’s retirement plan, these advisers are risking company goals and consumer needs.

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“The tradeoffs are clear between enterprise and lifestyle – higher revenue with lower valuation or lower short-term revenue with higher valuation,” said John Anderson, managing director and head of practice management solutions for the SEI Advisor Network. “In making this decision, an adviser should be able to direct its firm’s financial future to match their goals and clients’ needs – there is no right or wrong choice.”

The SEI report recommends advisers evaluate what model type they currently embody, whether enterprising or lifestyle, as well as future objectives and goals. In doing so, advisers can maximize model value and prospective growth within a client’s retirement plan. If an adviser fails to choose an advisory model, value potential or cash flow may be diminished, according to the study.

While SEI believes a lifestyle approach may bring profitable and fulfilling futures for certain firms, they warn those advisers who utilize a lifestyle model (74% of survey respondents) to focus on long-term valuation, especially if they believe their firm will live beyond their careers. Additionally, the SEI report urged these advisers to mark succession as a top concern. For those who incorporate an enterprising approach, SEI research said these advisers can expect better value for owners upon transfer and sale.

“Advisor owners have to choose a path or their firms will become limited lifestyle defaults; representing the worst of both worlds: they won’t have much to sell, and the owners won’t have as much revenue as they hope,” said Bob Veres, co-author of the study. “There is nothing wrong with optimizing a lifestyle practice, and these firms will continue to be the backbone of the profession. If advisers choose to follow the road more traveled of an enterprise firm, then they must be intentional in their decision and consider their own unique goals and skillset.”

To recognize which model best fits their company needs, SEI provides four components critical to advisory businesses: people, value proposition/brand, investment philosophy, and technology.

NEXT: Firm phases to consider

The study connects four integral phases in company progression: Startup, Emerging, Mature Lifestyle and Mature Enterprise. Before reaching either maturity stage, companies will go through both Startup and Emerging phases until a sustainable business is formed, the report says.

For advisers concerned over profitability levels with both models, survey results show the two firms can generate a generous amount of profit. “Twenty-five percent of mature enterprise firms experience profitability levels in the 31% to 50% range and 37% experience profit margins of more than 50%,” and “53% of mature lifestyle firms have profitability of more than 31%,” SEI reports. Additionally, “59% of enterprise firms hold revenue greater than one million dollars, compared to 55% of lifestyle firms,” according to the report.

More information on the report can be found here. 

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