New board promoting the fiduciary standard would oversee 75,000

March 10, 2010 — 9:46 AM UTC by Sara Hansard

1 Comment

Editor’s note: The story was updated, midday on Tuesday, in the fifth paragraph, to better explain that the language of the draft amendment is ambiguous on the question of what actions or business models would trigger oversight by the new board.

A fiduciary standard is becoming the phoenix of financial service reform.

This time, it’s rising in the form of legislation floated late last week by Senate Banking Committee member Herb Kohl, D-Wisc. The draft amendment to financial services reform legislation would require brokers, RIAs or planners who perform financial planning duties to be regulated by a new board that would promote adherence to a fiduciary standard.

The legislation, which is generating opposition from many quarters, faces an uphill battle. Still, it represents a triumph for the Financial Planning Coalition. The group, which was formed last year, includes the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Planners. Together, they have been pushing against all odds for creation of an oversight body to regulate financial planning. They also are strong supporters of the fiduciary standard.

Apparently, they have found a champion in Sen. Kohl, who plans to offer the draft as an amendment to financial service reform legislation that could be introduced late this week. To see a copy of the draft, click here.

Expands the definition

The draft amendment would, for the first time, make financial planners subject to regulation. It also expands the definition of financial planners to include investment advisers as well as brokers or others who hold themselves out as financial advisors and, in the case of advisors, perform at least two financial planning functions, including investment planning, income tax planning, education planning, retirement planning estate planning and risk management. It’s not clear in the draft exactly what actions would cause an advisor or broker to be considered as holding themselves out as financial planners; indeed, the ambiguity of the language is stirring some of the opposition.

The Financial Planning Coalition says only advisors and brokers who hold themselves out as financial planners would fall under the new board.

“There are people who call themselves financial planners, much like mortgage brokers, who have no way of knowing what kind of standards these people follow,” said a Hill staff member with knowledge of the draft amendment. “There’s an accountability issue.”

All financial planners would be governed by a Financial Planning Oversight Board overseen by the Securities and Exchange Commission. The board would be required to “promote adherence by registered financial planners to a fiduciary standard.” Financial planners would be charged fees to cover the cost of regulation.

Financial planners would be required to disclose conflicts of interest, and compensation received, and the board would have the power to establish qualifications and sanction planners for violations of standards.

Argued for decades

The Consumer Federation of America has not taken a position on the legislation. Barbara Roper, director of investor protection, said, “We’ve argued for decades that the term financial planning should either be defined or regulated. So in that sense it’s consistent with that. But I think on these things the details tend to make a difference.”

The proposal has generated opposition from all quarters. Brokers and insurance groups are reportedly fighting the proposal, according to a knowledgeable source on Capitol Hill. Insurance groups, which have likely succeeded in killing an earlier proposal requiring all brokers who give advice to register as investment advisers, are arguing, along with brokers, that the proposal is a backdoor way to bring them under fiduciary standards, which they oppose. They argue that imposing fiduciary standards would limit consumer choices of products and raise fees to consumers.

State regulators are concerned that the proposal would pre-empt their powers over investment advisers. Sen. Kohl’s staff hopes to address their concerns by making it clear in the language that any complaints filed against investment advisers that act as financial planners would be referred to state securities enforcement authorities.

IAA is also unhappy

The Investment Advisers Association is also unhappy with the proposal because, as it is currently written, it would sweep registered advisers, including SEC-registered advisers who are IAA members, into a common regulatory pool with financial planners.

Under the new definition, approximately 75,000 people would be regulated as financial planners under the draft, according to an estimate by a Hill staffer.

According to a source on the Hill, one measure in the draft is a reaction to the criticism of Financial Industry Regulatory Authority, which is governed by people from the industry it regulates. Members of the Financial Planning Oversight Board could not be members of the industry they regulate, and the board would have to contain at least one state securities regulator and representatives of investor or consumer groups.

If the proposal were to be adopted, an open question is whether the CFP Board would become the FPOB. The CFP Board, which governs Certified Financial Planners, has suggested in the past that it would be a logical body to regulate financial planning.

Protecting seniors

The draft also includes legislation introduced earlier this year by Sen. Kohl, who is also chairman of the Senate Special Aging Committee, that would provide money to states to beef up regulation geared toward protecting seniors.

In order to get the funding, states would have to adopt standards put forward by the North American Securities Administrators Association banning “senior” designations that are not backed by rigorous standards, as well as suitability standards for life insurance and annuity products that are likely to be adopted by the end of the month by the National Association of Insurance Commissioners.

No people referenced

Mentioned in this article:

Financial Planning Association
Top Executive: Lauren S. Schadle, CAE, Executive Director and CEO

National Association of Personal Finance Advisors
Top Executive: Ellen Turf

Share your thoughts and opinions with the author or other readers.


Stephen Winks said:

March 10, 2010 — 3:04 PM UTC


The challenge is the industry is trying to make advice homogenous when in truth the client plays an important role in determining the depth and breadth of the relationship they have with their advisor. There are four distinctly different levels of counsel routinely provided: (1) a transactions relationship where no advice is rendered, (2) a financial planning relationship which is needs based selling unless it is continuous comprehensive in nature in supoport of fiduciary standing entailing technology beyond the reach of 99% of planners, (3) a investment management consulting relationship which treats advice as a product the broker sells or (4) a fiduciary relationship in which advice is treated as a process the advisor manages.

The problem is that every advisor wants to say they are acting in a fiduciary capacity in the best interest of their clients when it is literally not possible in brokerage firms, both wirehouses and independents, because of structural conflicts of interest. The reality is the industry is structured to treat advice as being incidental to trade execution when today trade execution is incidental to advice. This fundamentally changes the industry and to no ones suprise there is massive cultural push back on changing how business is being done.

The hard truth is there will be no meaningful solution until:
(1) trade execution is treated as a cost center in the consumer’s best interest rather than a profit center in the best interest of the advisor’s firm required in fiduciary accounts, (2) securities lending must either cease or if done, revenues should accrue to the consumer’s account,
(3) the free use of client assets and interest earned on those assets between trade execution and settlement should be eliminated and credited to the client’s account,
(4) cease the penalization of brokers in acknowledging their fiduciary obligations to act in the consumer’s best interest,
(5) providing the necessary enabling resources which would safely bring fiduciary standing within the reach of every advisor: (i) prudent processes tied to statutory documentation and expert opinion letters opining to the fidelity of the prudent process to fiduciary standing for each of the ten major market segments in which advisors serve. (ii) technology necessary to support continuous comprehensive counsel. (iii) a functional division of labor (Advisor, CAO, CIO) which simplifies the execution of fiduciary counsel. (iv) expert advisory services support for each of the ten major market segments (Mass, Retail, HNW, Ultra HNW, DC, DB, Foundation and Endowments, Public Funds, Profit Sharing, Taft-Hartley). (v) an easily understood characterization of the nature of the client/advisor relationship which would establish a hierarchy of advice from transactions to planning to consulting to fidiciary standing to remove any confusion for regulators, legislators and consumers to protect advisors and their supporting firm.

This importantly (a) eliminates conflicts of interest, (b) restores investor confidence, (c) results in a different compensation protocol suggested over a decade ago by the famous Tully Committee Report to the SEC on Compensation Practices, (d) gives consumers choice in the nature of the advisory relationships they wish and (e) makes it easier for advisors and their supporting firm to support advisory services without denigrating the fiduciary standard of care.


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