CFP Board’s proposal to expand fiduciary duty draws praise, carries risks

Some question whether brokers will drop the CFP mark or if the CFP Board will strictly enforce its new standard.

A proposal to extend fiduciary duty to all certified financial planners, including brokers who hold the mark, garnered praise for the organization that grants the designation, even as planners highlighted the risks involved.

On Tuesday, the Certified Financial Planner Board of Standards Inc., released a draft code of ethics and standards of conduct to update CFP policies for the first time since 2009. Under the new rules, CFPs would have to act in the best interests clients at all times while providing investment advice, not just while constructing financial plans as in the past.

“It’s a pretty bold step,” said Rick Kahler, a CFP and owner of Kahler Financial Group in Rapid City, S.D. “They’ve tried to have it both ways. They’ve tried to serve the sales constituents and the fiduciary constituents. It’s caused a lot of confusion for consumers and practitioners.”

The CFP Board acted less than two weeks after partial implementation of the Labor Department’s fiduciary rule, which requires financial advisers to act in the best interests of their clients in retirement accounts. While the DOL rule remains under review and could be changed, the Securities and Exchange Commission has put out a request for comment while mulling its own fiduciary standard for retail investment advice.

“That’s a big step forward, and I applaud the CFP Board for extending that fiduciary standard to the financial advice component of the engagement,” said Skip Schweiss, managing director of adviser advocacy and industry affairs at TD Ameritrade Institutional. “Clearly, the fiduciary standard is on the march.”

The revision is meant to close a loophole that allowed CFPs to adhere to a fiduciary standard during planning but switch to a less stringent “suitability standard,” which governs brokers, when selling investment products.

Many of the approximately 77,000 CFPs in the United States are brokers, and the change in the advice standard could alienate some of them.

“It means they’re going to lose a lot of CFPs,” Mr. Kahler said.

One CFP broker is not fazed.

“We should act like a fiduciary, regardless of what our title is,” said Levent Durmus, a broker at Charles Schwab & Co. Inc. in McLean, Va. “It’s something you have to do anyway.”

Shannon J. Pike, president of the Financial Planning Association, is not sure how the brokers who are among the nearly 24,000 FPA members will react, but he backs the proposal.

“What the CFP Board is doing is good for the profession,” said Mr. Pike, vice president of Tanglewood Legacy Advisors in Houston.

A critic of the current CFP Board fiduciary formulation says the organization still has a long way to go.

“CFPs are reminded of the existing Grand Canyon gap between current CFP Board standards and a bona fide fiduciary standard,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “This is not a light-switch policy change. It’s a matter of changing a culture, and that doesn’t happen overnight.”

The 17-page proposal is open to public comment until Aug. 21. The CFP Board will hold eight public forums around the country between July 24 and July 27. After gathering feedback, it will modify or finalize the proposal.

What happens next presents a challenge, said Michael Kitces, partner and director of research at Pinnacle Advisory Group Inc.

“Will large firms take the CFP Board’s expanded fiduciary duty seriously, and really make the necessary adaptations to comply with it?” Mr. Kitces wrote in an email. “And if they don’t, is the CFP Board really prepared to enforce and discipline the CFP certificants who are not in compliance with the new CFP fiduciary rules?”

The rule proposal also includes compensation definitions. The board said that it hasn’t made material changes but clarified how they work, especially the fee-only label that has caused much controversy for advisers like Mr. Kahler. He had to sell his stake in a real estate firm to his wife’s trust in order to remain a fee-only adviser.

“I still think we need to step back and take a broader look,” Mr. Kahler said about CFP pay rules. “It’s serving a client in a fiduciary manner that matters most.”