by Rick Adkins, CFP®, ChFC, CLU
Rick Adkins, CFP®, ChFC, CLU, is president and CEO of
The Arkansas Financial Group Inc. in Little Rock, Arkansas. He
served as the 2003 chair of the Board of Governors of Certified
Financial Planner Board of Standards. You can write to Rick at
RickA@ARfinancial.com
.
Part 1 of this article addressed the rules of engagement for all CFP certificants, including those who don't practice financial planning. This article focuses on the additional obligations on CFP certificants who clearly practice financial planning in their engagements, or those deemed to be doing so (whether they realize it or not). This leads me to a Letterman-esque opening question: Is this anything?
Financial Planning or Not: Is This Anything?
There used to be a sketch on The Late Show with David
Letterman called "Is This Anything?" (somewhat similar to
"Stupid Human Tricks") where Dave and Paul watched someone perform
a stunt and then determined whether it was funny or unusual enough
to be deemed "something" or "nothing." No rules; no standards; just
spur of the moment, gut level, make-it-up-as-you-go labeling. That
meant what's "anything" tonight may be "nothing" the next
night.
For some in what I'll loosely refer to as financial services,
financial planning has been viewed in much the same manner. They
don't actually do financial planning, but if a prospect
suggests it might actually be important to his or her future, they
can come up with some explanation such as, "My company has software
and staff to help me with that if it's really needed." Or
as one of my sales managers once told me, "If they want a blue
suit, turn on a blue light."
Fortunately, when the public uses the professional services of a
CFP certificant, there is a standard for determining whether
financial planning has been intended or inferred in an engagement.
Here's the definition of financial planning contained in the
Standards of Professional Conduct:
"Personal financial planning" or "financial planning" denotes
the process of determining whether and how an individual
can meet life goals through the proper management of financial
resources. Financial planning integrates the financial planning
process with the financial planning subject areas. In determining
whether the certificant is providing financial planning or material
elements of financial planning, factors that may be considered
include, but are not limited to:
• The client's understanding and intent in
engaging the certificant.
• The degree to which multiple financial planning
subject areas are involved.
• The comprehensiveness of data
gathering.
• The breadth and depth of recommendations.
Financial planning may occur even if the material elements are not
provided to a client simultaneously, are delivered over a period of
time, or are delivered as distinct subject areas. It is not
necessary to provide a written financial plan to engage in
financial planning.1
—Excerpted from CFP Board's Code of Ethics and
Professional Responsibility
The real issue isn't when both client and professional clearly
intend that financial planning take place. The problem arises when
a client presumes that a financial planning engagement exists but
the CFP certificant doesn't see the relationship that way. How
could this happen? Here are three possible contributors:
- Use of the marks—While the actual placing of the CFP marks after one's name doesn't necessarily cause a presumption that financial planning will occur, with respect to disciplinary matters, how the marks are used or emphasized in marketing material could pose problems in civil cases. My personal advice to anyone who holds the marks with no intention of practicing financial planning is to avoid implying they might perform financial planning by their use of the marks. For the average person there's a logical implication that a Certified Financial Planner™ certificant is actually performing financial planning. To the extent that client "understanding and intent" is further pushed in that direction by the way you use the marks, it could be misleading.
- Marketing materials—Cards, brochures, and advertisements would be the "low-hanging fruit" in a civil trial or arbitration case if a certificant consistently used language or terms to imply that the result of the services would be the client's achievement of key goals in life if he or she works with that adviser. It's unbelievable how carried away people can get when drafting marketing materials, with no realization that they might be held to the very standard of care they created in those materials. Just ask yourself, "Do I really do this for my clients?" "How would I explain my customary conduct to an auditor?"
- Data gathering process—Back in the
1970s and 1980s, one way to demonstrate (or give the illusion) that
you were trying to be a "real" financial planner was to use an
extensive data gathering instrument. The first instrument I used
was 35 pages long and covered everything remotely connected to the
client's financial condition or goals. By implication, if I asked
about it, I planned to address it. You're safest if you don't
obtain data that you never have any intent to use. If it's only
there to look good, take it out.
Your data gathering instrument could become prima facie evidence that you are in a financial planning relationship.
Finally, I'd like to tell you that there is great clarity about all of this and that there are safe harbors with both CFP Board discipline and civil courts … I can't. With respect to the CFP Board disciplinary process, the final arbiter of whether you were or weren't in a financial planning engagement will be a hearing panel, partially composed of your peers. So the best test is to ask yourself, "If I were being reviewed by a hearing panel, how would three of my peers be likely to evaluate and weigh the four factors?"
A Meeting of the Minds: Prelude to a Relationship
The development of a financial planning engagement is actually a
four-step process: (1) all of the verbal and written explanations
of what you can or will do for a client, (2) the written
disclosures of everything that a client might deem to be important
to know before entering into the relationship, (3) the written
agreement that formalizes the relationship, and (4) the timely
disclosure of changes in any of these three items on an ongoing
basis.
Step one is the murky, messy courtship phase. This step can both be
verbal and written. It can cover your phone conversations with
prospective clients. It can, again, include your marketing
materials. It can cover your initial meeting with a prospective
client where you're mutually exploring whether there's a good fit
with that prospect. Here are some of the Rules of Conduct
that might apply:
1.1 The certificant and the prospective client or client shall mutually agree upon the services to be provided by the certificant.
1.2 If the certificant's services include financial planning or material elements of financial planning, prior to entering into an agreement, the certificant shall provide written information or discuss with the prospective client or client the following:
a.The obligations and responsibilities of each party under theagreement with respect to:
i. Defining goals, needs, and objectives,
ii. Gathering and providing appropriate data,
iii. Examining the result of the current course of action without changes,
iv. The formulation of any recommended actions,
v. Implementation responsibilities, and
vi. Monitoring responsibilities
b. Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement; and factors or terms that determine costs, how decisions benefit the certificant, and the relative benefit to the certificant.
c. Terms under which the agreement permits the certificant to offer proprietary products.
d. Terms under which the certificant will use other entities to meet any of the agreement's obligations.2
There are three questions I suggest that you consider whenever you are in this early stage of explaining your services and helping a prospective client make the right hiring decision:
- How can I communicate the fact that, under 1.2 (a), there may be elements of the financial planning process about which the client should have no expectation that I will have any (or limited) obligations or responsibilities?
- How do I best provide accurate information related to:
a. Compensation that I will or could receive?
b. Factors or terms that determine costs?
c. How client decisions benefit me? - How should I address limitations, including use of proprietary products?
Written Disclosures: Everything You Might Want to Know About Me
Back in 2001, when CFP Board was working on revisions to rules
related to disclosure, the Securities and Exchange Commission (SEC)
was simultaneously working on revisions to Form ADV, Part II. There
has always been an inherent problem with Form ADV as a disclosure
document because it discloses information about the
registrant—the firm—and not the individual who is
actually advising the client. The plan was to create a Form ADV,
Part II-A and Part II-B. Part II-A would be much like the current
Part II, disclosing information about the firm. Part II-B would be
for the individual Investment Advisor Representative who was
actually working with the client. Unfortunately, 9/11, Enron,
Worldcom, and Martha Stewart hit, causing this project to be
shelved. To this day Form ADV does virtually nothing to provide
reasonable disclosures about the individual performing client work
in a firm environment.
Rule 2.2 (a) through (d) enumerates the items that are to be
disclosed to prospective clients and to clients. Unfortunately,
Rule 2.2 (e) creates a massive loophole, in that it allows for the
rules to be satisfied by a document that doesn't come close to
disclosing the requirements in those earlier items. Here's the text
of this rule:
2.2 (e) If the services include financial planning or material elements of financial planning, these disclosures must be in writing. The written disclosures may consist of multiple written documents. Written disclosures used by a certificant or certificant's employer that includes [sic] the items listed above, and are used in compliance with state or federal laws, or the rules or requirements of any applicable self-regulatory organization, such as the Securities and Exchange Commission's Form ADV or other disclosure documents, shall satisfy the requirements of this Rule.
The certificant shall timely disclose to the client any material changes to the above information.3
Honestly, the predecessor to this rule was left this way nine years ago because no one dreamed we would be sitting here today with no meaningful professional disclosure obligations for Investment Advisor Representatives. Until this is changed by the SEC, I would hope that CFP Board would review this rule and compel actual disclosure of all items in 2.2 (a)–(d), either omitting reference to Form ADV or clearly noting the elements that are generally not covered in Form ADV and should be disclosed in some other manner. I realize the phrase "that includes the items listed above" appears in the middle of this rule, but over the years certificants have been led to believe that furnishing Form ADV gives them a pass on any further disclosure.
Financial Planning Agreements: Memorializing the Relationship in Writing
I'm amazed at (a) how little information is actually required in written engagement documents and (b) how many advisers think (or hope) that their client agreement is a universal document that forevermore clearly defines the scope of their engagement. Here's the rule:
1.3 If the services include financial planning or material elements of financial planning, the certificant or the certificant's employer shall enter into a written agreement governing the financial planning services ("Agreement"). The Agreement shall specify:
a. The parties to the Agreement,
b. The date of the Agreement and its duration,
c. How and on what terms each party can terminate the Agreement, and
d. The services to be provided as part of the Agreement.
The Agreement may consist of multiple written documents. Written documentation that includes the items above and is used by a certificant or certificant's employer in compliance with state or federal law, or the rules or regulations of any applicable self-regulatory organization, such as the Securities and Exchange Commission's Form ADV or other disclosure documents, shall satisfy the requirements of this Rule.
So if you're concerned that you might be deemed to be in a
financial planning engagement, this rule isn't too onerous. A good
attorney could probably help you comply with this in about two or
three paragraphs (and don't let the last paragraph throw you. Form
ADV has little if any connection to a written agreement. I'm not
sure why it's even necessary here. It looks like it's copied from
the disclosure section and then slightly edited).
Of greater concern in our firm is making sure that our client
agreement and other documents actually clarify and memorialize the
nature of our client relationships. Over the years, our attorneys
have loaded our client agreement with "necessary" wording that adds
nothing to help clients understand our relationship. We include a
cover letter that attempts to actually define the scope of our
engagement relative to that particular client. To me that's far
more important than the limited information included in this
rule.
Fiduciary Duty of Care: That Frightening F-Word
For the first 20 years of CFP Board's existence, this f-word was
taboo in Board of Governors meetings. As recently as 2003, the CPAs
on our governing board said that if we included a fiduciary
standard for practitioners, it would lead to CPAs dropping the
marks. As it turns out, CFP Board may have been just a couple of
years ahead of the curve. One of the ideas circulating in
Washington, D.C., today is that anyone who gives financial advice
to the public will be held to a fiduciary standard. So as feared as
fiduciary duties may be, they may be imposed on all of us
anyway.
One of the great challenges against inclusion of a fiduciary
standard was the issue of "which one?" There isn't just one
universal fiduciary standard. It varies from state to state,
industry to industry, and even regulator to regulator. When CFP
Board courageously chose to impose this standard on all
certificants in a financial planning engagement, they limited it to
their simple and clear definition:
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.
"Fiduciary" One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.
There are just two elements: (a) to act in utmost good faith (b)
as you reasonably believe to be in the client's best interest. Now
that's not too bad, is it? I sense that this is what the public
desperately desires. The events of the past two years have elevated
professionals who believe in and act from such a standard.
My final word of advice: If you want to avoid any obligation
relative to a clear and transparent "meeting of the minds" with
your clients, written disclosures, written agreements, and
fiduciary duties, don't imply that you're a financial planner when
you aren't. Don't even hint at it. Then you can keep doing what
you've been doing.
If, on the other hand, you want to practice financial planning on
either a limited or holistic basis, review these four elements for
what they actually say, not what you've been told they say. In
doing so, ask yourself two simple questions: "What will this
actually or potentially cost me?" "How will this benefit my client,
my firm, my career, and my profession?" I trust you'll perceive
that the scales tip well toward benefits over costs.
Endnotes
1. Emphasis is the author's.
2. Ibid.
3. Ibid.
