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  • Steven Lee

The Professional Status of Financial Services, Part III

Updated: Jan 17

This post is the third part of my four-part blog on the status of financial services when it comes to qualifying as a profession. Originally, this was going to be a trilogy, but because I realize you do not wish to read a 16-minute post in one sitting, I have divided the material into two additional parts. In Part 1, I reviewed the literature and found four distinct elements that constitute a profession: knowledge; admission; organization; and ethics. I concluded that financial services failed on each count to live up to the profession label. Part 2 considered whether financial planning—a subset of financial services—fared any better. After careful analysis, I determined that financial planning also fell short but for different reasons: overall client confusion regarding who regulates financial planners and which of the many hats a financial planner wears at any given moment during the client engagement; the plethora of designations that supposedly signal competence and integrity to the public; and the myriad of complex compensation structures that operate within the industry. In this post, I consider recent events that further distance financial planning from professionhood; In the fourth and final part, I will outline what I believe to be the road to becoming a profession for financial planning.

Recent Events in the Certified Financial Planner (CFP) World

In Part 2 of this mini-series, I outlined the different players in the financial planning space, namely the Securities and Exchange Commission (SEC), the CFP Board, and the Financial Planning Association (FPA). Within the past year, all three of these bodies experienced major issues that were newsworthy. Recent events involving these organizations cast doubt on the viability of financial planning as a profession and calls into question the efficiency of the current regulatory, oversight, and organizational scheme.

The Securities and Exchange Commission

The SEC is an independent agency of the US government. It oversees securities regulation and promulgates rules to keep investment advisors in check. The agency relegates rulemaking power and oversight of broker-dealers (BDs), as well as their registered representatives, to the Financial Industry Regulatory Authority (FINRA). Despite this relegation, on June 5, 2019, the SEC adopted Regulation Best Interest or “Reg BI. This rule establishes a best interest standard of conduct for Broker-Dealers and their reps. This is a quasi-fiduciary standard that is higher, in terms of duty owed to the investor by the advisor, than the suitability standard but lower than a full-fledged fiduciary standard. Think of it like this: suitability means the product must be suitable or fit the client’s investment profile; fiduciary means the recommendation must be in the client’s best interests, and the quasi-fiduciary standard lies somewhere in between. By June 30, 2020, all brokers and their employing firms must comply with Reg BI. You can read more about the four types of obligations reps will have towards their retail customers in Edward Kramer’s and my journal article, “The Forced Registration of Hedge Funds in the United States. Suffice to say that BDs must, at the time of recommendation to their customers, place the customer’s interests ahead of the firm’s.

So far, this sounds like a good deal. After all, greater investor protection is a general win for the industry. The plot thickened when XY Planning, a network of financial advisory firms founded by Michael Kitces and Alan Moore, filed a lawsuit against the SEC on Tuesday, September 10th, 2019. The suit followed similar actions launched by seven separate states as well the District of Columbia the day before. Kitces’ position is that, by implementing Reg BI, the SEC conflated the BD and investment advisor (IA) worlds. Registered investment advisors, as well as their employees, are held to a fiduciary standard when rendering investment advice. As a result, Kitces argues, Reg BI not only confuses consumers but also eliminates much of the competitive edge that investment advisors hold. Based on longstanding securities regulation, such as the Investment Advisers Act of 1940 as well as the Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), product sales and investment advice were always meant to be separate and governed by different standards of conduct (suitability and fiduciary, respectively). With Reg BI, that difference all but disappears. Now, BDs can offer investment advice without a bona fide fiduciary standard. On January 7, 2020, Representative Barney Frank and Senator Chris Dodd, authors of Dodd-Frank (also known as the Wall Street Reform and Consumer Protection Act of 2010), filed an amicus brief in support of Michael Kitces’ lawsuit, stating that Reg BI violated the Dodd-Frank law, specifically section 913, “Study and rulemaking regarding obligations of brokers, dealers, and investment advisers.” The Congressmen’s point is that 913 specifically required that any rule addressing the different standards between BDs and investment advisors must harmonize the duties across all financial practitioners, which Reg BI fails to do. Moreover, they point out that the 2010 Act does not give the SEC the power to make a new rule on this subject.

The CFP Board

The SEC has not been the only one in hot water as of late. For many years, the CFP Board has held its designation out to the public as the gold standard in financial planning, claiming that its certificants operate only under the highest ethical standards. On July 29, 2019, one month following the XY suit against the SEC, the Wall Street Journal broke the story that the CFP Board failed to conduct proper due diligence upon its registrants. Although it asked questions of its marks holders such as any personal bankruptcies or past disciplinary actions imposed by the CFP Board, it took them at their word and did not follow up on FINRA BrokerCheck or the SEC’s Investment Adviser Public Disclosure website. While the CFP Board first refuted the inferences that it had failed the public and later vowed to do a better job, what about the years—decades even—of purported investor protection the CFP Board falsely purported to offer consumers? In total, according to the WSJ article, more than 6,300 of the 72,000 profiles of CFPs had problems that were not disclosed on the CFP Board website. That’s nearly 9%! Of those 6,300, approximately 5,000 profiles contained formal client complaints regarding, “investment recommendations or sales practices.” Moreover, 140 (0.2%) profiles contained past or current felony criminal charges.

The problem is not solely a matter of degree. The fact that the CFP Board relied on certificant self-disclosure when it came to the applicant’s regulatory history suggests a larger issue. The inference that the CFP Board has long dealt in deception when it came to the investing public is arguably warranted. Until the WSJ story broke, CFPs underwent much greater scrutiny by the Board when first gaining certification than they did during the bi-annual recertification process. The debate surrounding the Board’s future role in the financial planning industry continues to unfold. Ron Rhoades, director of the financial planning program at Western Kentucky University, believes financial planning has yet to earn the label of “profession,” but he asserts that the CFP Board can mend its ways and help propel the industry into professional status. John Robinson, owner of Financial Planning Hawaii, believes the CFP Board is irredeemable. Instead, the SEC or a new, self-regulatory organization under the SEC’s authority, should regulate financial planners and thus bring them together under the umbrella of professionhood.

The Financial Planning Association

The CFP Board’s role is to vet applicants, bestow marks, and discipline practitioners for wrongdoing. The Financial Planning Association (FPA) is the trade organization that lobbies for members, offers continuing education (CE) opportunities, and holds regular meetings for members to share tips, frustrations, and fellowship within the industry. Except the CFP Board also provides some of those services as well, thus conflating the differing roles of the two organizations. For instance, the CFP Board now holds annual conferences for academics, practitioners, and administrators in Arlington, VA. Additionally, at those conferences and elsewhere, it makes CE available to its members. On a social media exchange, Michael Kitces agreed with my assessment that the lines between the two were not clear-cut.

The FPA has its own set of problems aside from its identity issues vis-à-vis the CFP Board. The FPA is composed of regional chapters that make up the national organization. This year, it elected Skip Schweiss as its new president-elect for 2020. Despite numerous admirations of Mr. Schweiss by several parties as well as the fact that he’s held in positive regard within the industry, there are several problems with his election. First, he is a managing director for TD Ameritrade, a large-scale vendor in the financial services industry that provides, among other things, services to financial advisors in managing their client books such as a supermarket of third-party asset management platforms. TD is best known for its online trading platform for individual investors. Also, it owns a trust company and has melded with other notable companies within the industry such as purchasing Scottrade in 2017 and announcing it was being purchased by Charles Schwab in November, 2019. The point is that TD is and has been a large-scale vendor for financial advisors; The fact that one of its managing directors will now head the member organization of its clientele constitutes a serious conflict of interest. Additionally, regardless of Schweiss’ personal and professional qualities, admirable though they may be, the fact is he does not hold the CFP designation and is not even a financial planner. There is thus a concern as to his ability in serving as president.

Nobody Escapes Unscathed

So here we are, having just rung-in the new year, 50 years after the initiation of the so-called “financial planning profession,” and neither the regulator, nor the gold-standard-marks grantor, nor the trade organization can operate at the high standards it has set for financial planning practitioners. Many bold voices in financial planning news and social media concur with this assessment, including Michael Kitces, Dr. Jeff Camarda, John Robinson, Ron Rhoades, Jason Zweig, and Andrea Fuller. Recent articles have appeared in top finance journals describing a similar picture authored by the likes of Dr. Jeff Camarda (Camarda Wealth Advisory Group), Dr. Inga Timmerman (California State University Northridge), Dr. Pieter de Jong (University of North Florida), Dr. Derek Tharp (University of Southern Maine), Dr. Colleen Honigsburg (Stanford University), Matthew Jacob (Harvard University), Dr. Stephen Dimmock (Nanyang Tech University), Dr. William Gerken (University of Kentucky), Dr. Nathaniel Graham (Texas A&M International University), Dr. Mark Egan (Harvard University), Dr. Gregor Matvos (University of Texas at Austin), and Dr. Amit Seru (Stanford University).

As we begin 2020, investors brace themselves for yet another shakeup in legislation: the SECURE Act, which revamps many of the country’s retirement plan laws and will go into full force later this year. Touted as offering more flexibility to retirees in the form of extending the age in which required minimum distributions must be initiated as well as permitting penalty-free withdrawals from retirement accounts for a birth or adoption, the Act also accelerates the rate in which an inherited individual retirement account beneficiary must withdraw the funds and also makes it easier for employers to offer annuity options within their corporate plans, which could add fuel to the tinderbox of controversy surrounding employer-sponsored plans, namely the nonsensical, differing standards of care owed to clients by advisors and the cozy relationship between large employers and big-business asset management firms who also happen to be the recordkeepers of the plan. The absence of a financial planning profession has been felt by consumers in the wake of the Department of Labor’s defunct fiduciary rule and the SEC’s Reg BI, which may suffer the same fate. Although SECURE was passed by Congress rather than promulgated by a federal agency, the jury is still out on its latest predecessor, Dodd-Frank. Will this latest attempt bring about the much-needed change to which I have been elucidating in the past 1,700 words, or will the U.S. Government finally become fed-up with the industry’s antics in similar fashion to Australia with the latter’s ban on grandfathered commissions—a relic preserved from the outright, sweeping prohibition on commissions back on July 1, 2013 following industry-wide abuses of investors in the way of stacking fees and lack of transparency. Is there a solution to prevent us from going ‘round in the same circle? Stay tuned to find out in Part IV of this blog series.



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