Post By DAZ From TNT Forum
Should a CFP® Be Required to Always Act as a Fiduciary?
Aug 15th, 2014 by sraskie.
Folks interested in engaging a professional for financial planning help and advice should generally seek out the advice of a CFP®. A CFP® has had the education, experience, ethics and exam (the Board’s 4 E’s) that qualifies he or she to hold the mark.
We often encourage clients that they should look for this designation at a minimum before engaging with a financial planner and then meet with the planner to decide if the client and planner are a good fit.
Due to an excellent marketing campaign by the CFP® Board many clients understand what a CFP® is, what they do, and how they may be able to help. Many folks choose to work with a CFP® because they know that the CFP® is held to a higher standard.
Some may believe that the CFP® is always a fiduciary – meaning the CFP® must always put the best interests of the client first. What a potential client may not know is that isn’t the case.
According the CFP® Board’s Rule 1.4: “A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.”
The question is: Why the double-standard? Why not require all CFP® holders to follow the fiduciary standard? The Board’s reply, according to their website is that it would be inappropriate to hold individuals not providing financial planning or material elements of financial planning to the higher fiduciary standard.
A potential scenario where this gets into a grey area is this: A client comes to a CFP® looking for a place to invest their money and looking for the least expensive option available. The CFP® is compensated by commissions from the products he or she sells which include load mutual funds, annuities and life insurance.
Since this isn’t financial planning per se (it’s more asset gathering by the CFP®) the CFP® needn’t act in the “best” interest of the client in this case. He or she may recommend the least expensive of the options they have available.
If held to a fiduciary standard regardless of scope of the engagement the CFP® would have to disclose that their options weren’t the least expensive options available.
Likewise with a fee-only planner that is “asset gathering”. A client may want to invest assets in the least expensive way possible and the planner may recommend low-cost index mutual funds or ETFs with his or her firm to manage.
If not financial planning or material elements of financial planning the fee-only planner needn’t disclose that the cheapest option (from an expense standpoint) would be for the client to invest directly with a custodian.
In both cases the interests of the client were (hopefully) put ahead of the CFP®, but they were not the best interests of client. Big difference.
This is just one of many scenarios where the scope of the engagement falls under the umbrella of not financial planning or material elements of financial planning.
My humble opinion is that the Board should always require the fiduciary standard of care. Always. I’m not sure if this will happen or if it were explored how much push back there would be (I suspect a lot). But I think it would be a necessary step into turning financial planning from a vocation to a profession
A Note About Designations
Oct 18th, 2013 by sraskie.
As you begin to seek advice regarding your savings and investments, you may come across professionals that have designations after their names – some might even have a can of alphabet soup! Here are some common designations you’ll encounter when seeking out a professional. Your advisor should have a qualified designation as a minimum requirement before you start working with him or her.
CFP® – CERTIFIED FINANCIAL PLANNER™. This designation is considered the “gold standard” in the financial services industry. Holders of this designation are required to take college-level financial planning courses, have three years’ experience in financial planning, and must pass a rigorous 10 hour, 2 day examination. The designation is owned and awarded by the CFP Board of Standards. www.cfp.net
ChFC® – Chartered Financial Consultant™. This designation is right in line with the CFP® with regards to the knowledge needed and required to earn the designation. Professionals that earn this mark must undertake 9 college courses in financial planning and endure 18 hours of total examination time. The designation is owned and awarded by The American College. www.chfchigheststandard.com
CPA – Certified Public Accountant. This designation is awarded to individuals that pass the rigorous Uniform Certified Public Accountant exam given by the American Institute of Certified Public Accountants. CPAs may be qualified to prepare tax returns and provide auditing services for companies. CPAs may also represent their clients in proceedings before the IRS. www.aicpa.org
CFA® – Chartered Financial Analyst™. This designation is pursued by individuals who have undertaken studies in security analysis, stocks, bonds, investment management and corporate finance. Individuals must endure three levels of examinations before the designation is awarded. Many mutual fund managers, pension fund managers and endowment managers have this credential.www.cfainstitute.org
EA – Enrolled Agent. The enrolled agent designation is awarded to individuals who pass three different IRS exams involving personal taxation, business taxation and general tax principles. Like CPAs, enrolled agents may also represent their clients in in tax proceedings before the IRS. www.irs.gov/Tax-Professionals/Enrolled-Agents