English: Halo (Photo credit: Wikipedia)
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.