The Certified Financial Planner (CFP®) designation is the most widely recognized certification for financial advisors. However, CFP® certificants vary enormously in the regulatory environments and business models in which they operate. These differences have tremendous implications for the quality of financial advice that a consumer should expect to receive from a given CFP® practitioner.
As strange as this may seem, until a few weeks ago, CFP® certificants did not even have an unequivocal fiduciary obligation to the clients they served. Before October 1, this duty to place client interests first and foremost only applied in certain ambiguously defined financial planning engagements, and not to investment advice. While the CFP Board of Standards has now enacted changes that expand the situations in which its certificants have a fiduciary obligation to clients, these new standards still contain plenty of leeway to put advisor or employer interests first instead.
Recent events highlight that the quality of financial advice furnished by a CFP® certificant is very much a function of the business model in which he/she operates. Certified Financial Planner certificants can work for insurance firms, brokerage firms, registered investment advisory firms, or firms that are hybrids of these. In addition, certificants and their firms can be commission-based, fee-based or Fee-Only. The quality of advice provided, and of the products recommended, by a given CFP® practitioner can only be as good as the work environment and regulatory regime in which he/she operates.
As an example of this, in the last couple of years there was a whistleblower case against J. P. Morgan involving an adviser who says he was fired by his CFP® certificant supervisor after refusing to give in to the latter's pressure to sell some of the firm's high-priced products that the adviser did not believe to be in his clients' best interests. When interviewed, the adviser described the dilemma faced by brokers who want to put their clients' interests first, while their employers judge them on how many high-cost products they sell.
And more recently, Morgan Stanley decided it will no longer allow its brokers to sell Vanguard mutual funds, most likely because Vanguard refuses to pay Morgan Stanley for access to their clients. So while CFP® certificants working as Morgan Stanley financial advisors may well feel that some Vanguard mutual funds are in their clients' best interests, Morgan Stanley executives have decided to place the interests of their shareholders and themselves first.
The CFP Board's new Code of Ethics and Standards of Conduct requires advisors to place the interests of the client above the interests of the CFP® professional and the CFP® professional’s firm, and to act without regard to the financial or other interests of the CFP® professional and the CFP® professional’s firm. However, the examples above should make it very clear to financial advisory clients and prospective clients that the broader fiduciary obligation now imposed on CFP® certificants still doesn't guarantee access to the best investment products and financial planning solutions. In short, the new Code doesn't mandate the open architecture that benefits clients of Fee-Only financial advisors.
To its credit, the CFP Board's new Code does require advisors who are fee-based to clearly disclose to clients that they earn both commissions and fees, and that they are not Fee-Only advisors. This comes after backlash from a Wall St. Journal report concluding that a significant percentage all certified financial planners were misrepresenting themselves as "Fee-Only" (on the CFP Board's own website no less).
Those who hold the CFP® designation have made a commitment to the financial planning profession. However, consumers looking for an objective, professional financial advisor need to view the CFP® certification as a minimum requirement rather than as the sole consideration.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.