Among important questions you should ask a financial advisor are if they have any red flags on their BrokerCheck/FINRA profiles.
A recent Wall Street Journal article about finding a financial advisor revealed a number of red flag concerns related to Certified Financial Planners. The CFP, issued by the CFP Board, was found by the Wall Street Journal to have been associated with a disregard for reporting some conflicts of interest, including charging both fees and commissions, also called double dipping, as well as concerns about planners working for broker-dealers.
Consumers making or receiving phone calls about personal finance to get help with financial goals should be prepared to ask at least one of these important questions if not all of them: are you paid commissions for selling? Do you work for, or get sales leads from, robo advisors or a mutual fund? What is your investment philosophy? Do you charge a flat fee? Can you help with estate plans? Do you charge based on my net worth, other aspects of my financial status, or something else?
Additionally, if you would like to dive a little deeper, consider these questions: How will you assess my financial situation and risk tolerance? Are you a Chartered Financial Analyst? Most importantly how do you stack up against other financial professionals? Are you a CFP? What’s your take on why the CFP Board had turned a blind eye to the thousands of CFPs that have been misrepresenting their misconduct and showing clean on the CFP Board planner search site when the Wall Street Journal actually found thousands of CFPs with red flags consumers should know about? Do you have any disclosures on your FINRA record?
The financial advisory world was rocked by the Wall Street Journal report that thousands of CFPs, nearly ten percent of Certified Financial Planners, promoted as clean on the CFP Board’s “find a planner website,” actually were not clean but had public records of misconduct ranging from customer complaints to crimes. Red flags include thousands of client disputes, fines and suspensions – even criminal child pornography – and including over a hundred felony charges or convictions.
For now, at least, it is clear consumers can’t rely on the “highest standard” representations of the CFP Board when it comes to picking an advisor, and may be wise to conduct their own background checks on advisors they use or are considering.
There’s lots more than this that consumers should consider when shopping for an advisor, of course. For additional tips by this author, click here.
CFP – A Tarnished “Gold Standard” for Financial Advisors?
While the Board “boasts of its high standards and has touted its directory of professionals as a place where people can find a screened, skilled and trustworthy financial planner,” in reality “what they won’t find there is any indication that thousands of the planners bearing the board’s seal of approval have had customer complaints or faced criminal or regulatory problems—often directly related to their work with clients,” according to the Journal report.
This is in marked contrast to the CFP Board’s national TV advertising claims and other consumer marketing that its CFP directory would help them “find a certified financial planner professional who’s thoroughly vetted…” and that using a CFP lets investors “…work with the highest standard.”
Almost $100M Spent to Promote The “Highest Standard” CFP Brand
To communicate this message to consumers, CFP Board has spent a lot on advertising, with a current annual budget pushing $12M. “The CFP Board now has spent more than $10 million a year for almost a decade promoting that the CFP marks are the “gold standard” when it comes to financial planning advice,” according to respected industry blogger Michael Kitces.
That’s about a tenth of a billion dollars. Perhaps because of the substantial advertising effort, the CFP brand increasingly resonates with consumers. The CFP long ago surpassed the CPA as the most-recognized financial credential, and with sustained marketing, could soon top the CPA as the most trusted designation, as well.
Such trust, at least in some cases, may be misplaced.
CFPs with Red Flags Promoted as Clean
In the Journal article Looking for a Financial Planner? The Go-To Website Often Omits Red Flags, reporters Jason Zwieg and Andrea Fuller compared what the CFP Board publishes about CFPs promoted as “thoroughly vetted” to the easily obtainable, public misconduct/malpractice records investment regulator FINRA provides for consumers.
The CFP Board “has been presenting more than 6,300 planners (as clean that were not) … more than 5,000 have faced formal complaints from their clients over investment recommendations or sales practices, and hundreds have been disciplined by financial regulators or left brokerage firms amid allegations of misconduct. At least 140 faced or currently face felony charges, including one who pleaded no contest to a charge of possessing child pornography.”
The number of problem CFPs could be much bigger than just these 6300. Since FINRA, like CFP Board, relies primarily on self-reporting, it is possible that rules-skirting CFPs can’t be easily smoked out by a FINRA check if additional CFPs are as untruthful with FINRA as these 6300 were with CFP Board. In a piece called Stockbrokers Fail to Disclose Red Flags a WSJ analysis reported over 1,600 stockbrokers with undisclosed bankruptcies or criminal matters. The Journal’s investigation was not comprehensive, used data from 21 states and did not include insurance/annuity sales complaints or other problems. This may suggest even deeper problems. There could be thousands of brokers – many of whom are CFPs – that look clean on FINRA, but aren’t.
$1.5M Settlements, Regulatory Suspensions for CFP “Clean” on CFP Board Site
As an example, the Journal piece cited one CFP whose work resulted in the payment of “roughly $1.5 million to settle more than a dozen claims that he misrepresented risks or put clients in unsuitable investments, among other allegations…” The same CFP was fined “$10,000 and suspended…from the brokerage industry for two months after he used a customer’s login and password to trade…”
Investors who had relied on the CFP Board’s find a planner directory would have seen this CFP listed as having a clean record, like thousands of others with documented records of misconduct.
CFP Board: A Tax Free Charity Selling CFP® Trademark, Not Professional Org
While these results are disturbing, they should perhaps not be surprising. Unlike professional organizations like the American Medical Association, the American Bar Association, or the American Institute of CPAs, the CFP Board is actually organized not as a professional membership group or professional regulator, but as a tax-free charity run not by CFPs but rather by long-tenured non-CFP staff and a “self-perpetuating” Board whose directors have short service terms, unlike staff. CFPs who pay for the trademark license are not vetted or governed by peer review. The charity’s cash flow comes almost exclusively from selling the right to use the CFP® brand.
The Board’s primary business function and revenue engine is trademark licensing. CFPs must pay an annual “certification fee” pushing $400. With over 80,000 CFP licensees and counting, those dues generate nearly $30,000,000 a year to the 501(c)3 entity. A big chunk of these trademark license fees go to support advertising to promote the CFP brand and generate sales leads for CFPs.
This is in marked contrast to the practice for other designations’ “professional groups, such as the American Institute of CPAs, for certified public accountants, and the CFA® Institute, for Chartered Financial Analysts®…” which “…don’t hold themselves out as matchmakers for consumers seeking to find vetted professionals with clean disciplinary histories,” according to the Zweig/Fuller article. It is also somewhat unusual that CFPs themselves have no say in electing directors or formulating policy. The Board’s sitting directors appoint their successors after relatively short service, where a powerful, long-sitting and charismatic CEO has significant influence.
CFP Board Not Run By CFPs
Many if not most of CFP Board staff are not CFPs or apparently even experienced in financial planning. CEO Kevin Keller is not a CFP, and holds degrees described as in “agribusiness.”
According to Ann Marsh writing for Financial Planning, many Directors and “most staff members at the board, including its CEO Kevin Keller, are not CFPs and have not worked as planners.” Marsh quotes “Dave Yeske, a former chairman of the Financial Planning Association and now director of the financial planning program at Golden Gate University in San Francisco: ‘If you are going to get into a situation where you have a string of chairs who have never practiced financial planning, who utterly lack the framework for understanding what the profession is, I think that could be highly problematic,’ Yeske says.”
Of the 21 senior staff listed online by the CFP Board, only 4 report the CFP designation. Of the 15-member CFP Board of Directors, only about half are identified as being CFPs on the Board’s governance page. This page does list the CEO’s major accomplishments during his tenure since 2007, including, “grown the number of CFP® professionals in the U.S. by more than 50 percent to more than 83,000…overhauled the certification’s rules and standards with a new Code of Ethics…launched its first major public awareness campaign to increase awareness of CFP® professionals, funded at about $12 million a year, which has generated consistent and significant signs of positive momentum in consumer awareness of CFP® certification…(and) secured its reputation as a strong advocate for consumer and investor protection…”
Long History of Lapses in Protecting Investing Public
The CFP Board, founded nearly a third of a century ago, has a long and somewhat checkered history of lapses in protecting the public. In 2012, a Wall Street Journal piece called Is the Fiduciary Standard a Joke by CFP Allan Roth reported a case where another CFP was found to have been charging over 5% a year in fees and commissions to a client in the dark about total costs. The CFP in question claimed to be a fiduciary acting in the client’s best interests, while receiving egregious and undisclosed “double-dip” compensation. Multiple complaints were filed with CFP Board, but “over the following year” Roth “was told they had lost the complaint I filed and hadn’t yet gotten to the client’s complaint. Eventually, the client received a letter that no public action would be taken against this CFP.” Roth was later invited to witness the CFP disciplinary process, but only on the condition the Board pre-approve any article he might write; Roth and the Journal declined.
Another observer, commenting on a 2012 trade piece called CFP Board Ethics Scandal, reported that “”ads targeting the word CPA appeared on Google searches. The ads read: “Find A CPA Professional – www.letsmakeaplan.org – Prepare and submit tax returns with the help of a CFP® professional” and directed users to a website promoting Certified Financial Planners. Yes, you read correctly: the ad offered to find a CPA, then directed to a CFP. Should an organization supposedly protecting the public and representing ethical standards produce ads rickrolling the public? Are bait-and-switch ads fair to the professional allies they target? More importantly, are they fair to the public?”
Widespread Compensation Misrepresentation on CFP Board Site
A year later, the Journal’s Zweig reported that many CFPs who could not possibly meet the Board’s definition of fee-only due to commission conflicts of interest were improperly promoting themselves as fee-only on the CFP Board find-a-planner site. “…many of the CFPs listed on LetsMakeAPlan.org who work at major Wall Street banks and brokerages have been identifying themselves as ‘fee only’…Among the firms: Morgan Stanley, UBS, J.P. Morgan Chase, Bank of America, Merrill Lynch, Wells Fargo, LPL Financial Holdings, RBC, Raymond James Financial and Ameriprise Financial. At those firms alone, the Journal identified 661 listed CFPs who call themselves ‘fee only.’”
These firms are all primarily engaged in the non-fiduciary sale of commissionable investments. “Up to 11% of certified financial planners who work at big firms call themselves ‘fee only’ when, by definition, they can’t be.” Commissions create a conflict of interest between reps and clients at such non-fiduciary firms where they may enrich salespeople excessively at client expense. Non-fiduciary firms follow a “suitability” standard that allows higher commissions even when harmful to client wealth. The term fee-only represents to consumers that there are no commissions.
While some would think it obvious and very screenable that wirehouse stockbrokers would have commission conflicts, and that CFP Board could have taken at least some steps to verify the claims made on its website to back up its “thoroughly vetted” advertising claims, the CFP Board’s response was that it “hadn’t been aware of the problem earlier…” and “expects that CFPs “accurately disclose their compensation, know our rules and follow our rules.”
CFP Board Pleads Ignorance, CFP Board Commissioners Say Board Knew ”Forever”
As the fee-only misrepresentation story broke, CFP Board’s CEO Kevin Keller was quoted by Zweig as saying “we wouldn’t have sat on this (compensation misrepresentation) data if we’d known it was there.”
Conflicting reports about CFP Board’s awareness surfaced a day before the Journal piece in a Financial Planning article by Ann Marsh, however.
“Asked how long (CFPs) who typically earn commissions have been marketing themselves as fee-only on the board’s website, Bill Hayes,” a Commissioner on CFP Board’s Disciplinary and Ethics Commission, or DEC, reporting to CFP Board CEO, “says, ‘forever.’ The profiles mislead consumers into equating (CFP) brokers who can sell products for commissions with independent advisors who do the work of comprehensive planning, says Hayes, setting up a maddening situation in the marketplace. ‘People think we (all CFPs) are held to the same standard, and this is just not the case,’ he says.”
Other DEC Commissioners concurred that the problem was well-known. “The fact that so many (CFP) brokers call themselves fee-only on the board website was regular fodder for hallway conversation among commissioners when they gathered to hear disciplinary cases, according to Robert Fleming, a Tucson-based lawyer…”
As part of Marsh’s report, “… Merrill Lynch broker Jeffrey Slothower of New York, was asked via email if he was aware he was using the term fee-only in violation of the terms of his CFP certificate. ‘(the CFP rules and ethical code) doesn’t really apply to me at a wirehouse,’ Slothower emailed back.
‘That’s exactly what I’d expect him to say,’ says Hayes, the disciplinary commissioner.
As to why the board has not addressed such transgressions on its own site, CEO Keller says, ‘Our policy is that there is no audit or examination function…’”
CFP Board Grants Broad “Amnesty” To CFPs Who Misrepresented Their Compensation
In the Journal report about fee-only misrepresentation on the CFP Board site, CEO Keller said that “we take this issue seriously.”
But in the aftermath of the Journal’s and Financial Planning’s fee-only reports, rather than investigating and disciplining such wide misrepresentation, the CFP Board instead “extended a broad amnesty to hundreds of advisors who had been breaking its rules by calling themselves fee-only on the board’s website.”
As of this writing, many CFP’s compensation methods are listed as “None Provided” on the CFP Board site. In 2013 after the fee-only flap, Financial Planning reported that CFP Board “unilaterally (changed) thousands of its certificants’ profiles — removing “fee only,” regardless of the circumstances, and inserting “None Provided.”
Under current policy, CFP Board relies primarily on information provided by CFPs to conduct its vetting procedure, though in response to the Journal red flag report it now says it will review the FINRA and SEC sites “during the certification renewal process” which occurs once every two years.
Some suggest that if the CFP Board is really interested in delivering “the highest standard” it should consider doing its own verification. As mentioned, the Journal reported that other red flags may go entirely unreported even to FINRA, making an independent vetting or “audit” function perhaps even more important to underpin CFP Board’s quality claims.
“No Audit Function”
Despite the 2013 Financial Planning reports of the DEC Commissioners claiming the fee-only problem was “well known,” the Journal reported CFP Board claimed it hadn’t been aware of that problem earlier.
In its response to the Journal’s 2019 red flag reports, CFP Board notes in recent practice it has “relied on CFP® professionals to fully disclose disciplinary matters and other conduct that may be a violation of our standards,” and that “with limited resources and authority, CFP Board has publicly posted disciplinary matters and taken enforcement actions against more than a thousand CFP® professionals in its 30-plus year history.”
Some 6,300 “clean” CFPs were found with problems just in a 2019 sample examined by in Journal’s red flag article, more than six times the number claimed sanctioned by CFP Board over its 34 year watch.
The Journal noted as part of its investigation it discovered “Frank” Norton, a CFP whose CPA license was revoked in 2017 after he plead no contest to felony charges of child pornography, went on probation and was registered as a sex offender. Norton apparently continued to practice as a CFP until the 2019 Journal investigation, when it “asked the CFP Board about Mr. Norton’s record…” after which CFP Board “suspended his certification and began an investigation.” Mr. Norton said in an interview he informed the CFP Board of his accounting suspension when he renewed his CFP; his attorney claimed Norton also told the Board about the felony.
Has the CFP Board Scaled Back Its Vetting Function?
Prior to 2008, the CFP Board appeared to actually conduct “thorough vetting.” It routinely crawled the internet to detect CFPs’ FINRA and other “red flag” activity.
Had this been continued, perhaps the problems recently discovered by the Journal may have been averted.
A circa-2008 whitepaper called “Why We Resigned” penned by five then-CFP Board DEC Commissioners noted that “The CFP Board staff regularly searches the internet, using the name of each CFP Certificant, for any potential actions that have occurred (FINRA, SEC, State regulatory agencies, civil courts, professional organizations, etc.) which could indicate probable cause to investigate potential action against a CFP Certificant for violation of the CFP Code of Ethics. After staff investigation, an action could be brought forward to the DEC.”
This practice apparently changed shortly after CEO Keller came to power and took direct “executive branch” control of the DEC’s judicial function in 2008. Current CFP Board changes responsive to the Journal red flag report seem to fall far short of this prior practice, in that the FINRA and other malpractice databases are proposed to be conducted as part of the “certification renewal” process, which occurs only every two years; prior to the 2008 changes, these were done ongoingly. Notably, Mr. Norton, the registered sex offender, suspended CPA and convicted felon, whose attorney claims CFP Board was apprised of his felony and other flags, apparently survived this “certification renewal” process with his CFP intact!
“Limited resources and authority” are now cited by CFP Board as impediments to more extensive checks to validate its “thoroughly vetted” claim, though the Journal points out that fully a third of the Board’s most recently released $36M annual budget is spent on its “public-awareness” advertising campaign, including driving consumer traffic to the CFP directory site which “neglected to inform the public that thousands of the planners listed there have disclosed customer complaints, criminal histories, financial problems or regulatory proceedings…”
CFP Board rightly claims it is not a regulator and lacks “subpoena power or the authority to obtain documents and information from financial services firms,” and in its rebuttal to the WSJ red flags pieces suggests this explains its inability to conduct routine investigations to back up its “thoroughly vetted” claim. Yet it does have the power to suspend or revoke rights to use its CFP® trademark as a matter of policy if CFPs or their employers stonewall investigations, but has not adopted this stance, even in cases where CFPs or their employers have flat out refused to cooperate regarding consumer complaints by “declining to provide information about their advisors…even on the most grievous disciplinary cases”. Per CFP Board’s trademark contract terms: “I understand that my License is conditioned upon continued compliance with these Terms (including but not limited to my obligation to comply with CFP Board’s Standards and Policies).”
Has Consumer Protection Taken a Back Seat to CFP Board Cash Flow?
The Journal’s red flag report notes that CFP Board’s “revenue more than doubled between 2007 and 2017, the latest year for which tax filings are publicly available. Its chief executive, Kevin Keller, hired in 2007, earned $1.1 million in salary, deferred compensation and benefits in 2017, up from $421,000 in 2008, the filings show.”
Some wonder if quality control takes a backseat to building CFP Board’s trademark licensing business and cash flow. “’There’s much more interest in growing the number of CFPs than there is in vetting them to protect the public,” said a former CFP Board executive to the Journal. The Board’s revenue comes nearly exclusively from the annual trademark license fees planners pay to use the CFP® mark. From 2010-2017, “the number of certified planners rose by nearly one-third, the number of investigations fell by three-quarters.”
The Journal also noted Rudolf Molna, who was certified as a CFP in 2019. In 2012, Molna was fined and suspended by FINRA for impersonating clients, and his insurance sales license was also suspended. Molna is said to have volunteered this history to CFP Board as part of its vetting process, and it is disclosed on the FINRA site which CFP Board claims it checks prior to certification. Still, he was listed as clean on the CFP directory site. The Board told the Journal “the conduct…did not prevent Mr. Molnar from being certified…”
“John Robinson, a financial planner in Honolulu who has written detailed critiques of the Board’s disclosure policies, said, when told of the Journal’s findings, that they suggest ‘there is no vetting.’ Mr. Robinson, who is not a CFP, said, ‘The CFP Board is setting people up to be deceived.”
CFP Board Commissioners: “Why We Resigned”
In the about-11,000-word whitepaper called Why We Resigned, five 2008-era CFP Board Commissioners explained they quit over policy changes they felt compromised the quality and objectivity of the Board’s ethics and enforcement oversight function.
The paper was written by a “majority (and the leadership) of the Disciplinary and Ethics Commission (DEC) of the CFP Board…” including then Chair-Elect Barry Kohler, a Penn grad and Cornell-trained attorney. The DEC is charged with enforcing CFP Board rules. Many concerns noted in the paper foreshadow the problems uncovered in the years since then.
The Commissioners resigned in protest when the quasi-autonomous DEC judicial function was brought under the direct control of the new chief executive, Kevin Keller.
After this change, DEC Commissioners were directly appointed and managed by the CFP Board CEO a practice which continues to this day, per CFP Board’s current Disciplinary Rules and Procedures: the CEO will “appoint the DEC Chair, members and volunteers… (and) oversee the DEC…(including to)…”conduct appropriate background investigations of prospective DEC members…”
When the CEO took over the DEC, the paper’s authors claimed “This procedural action by the Board of Directors…violates the CFP Board’s own Disciplinary Rules” and that it ”…opens the door to the worst kind of political and financial pressures…” and the “potential for a CEO ‘to stack’ the Commission with members whose views are most politically opportune at any particular time is just plain wrong.”
They feared “this change…threatens the integrity and independence of the…disciplinary process…” and “compromised the objective and justice of…enforcement” and might stuff the jury box by “having staff counsel, an employee of the CEO, in the meeting during ratification deliberations opens the door to the very same kind of political influences as having the CEO select the members and officers of the DEC.”
These Commissioners found it “…simply incomprehensible that the Board of Directors could have imagined—at a non-public meeting, without stakeholder input—that they could adopt dramatic changes…not only was there no public comment, the Board of Directors did not even seek comment from the DEC about the changes they were implementing. “
The authors concluded that as a result of these changes, the CFP Board as of 2008 was “now an entirely self-perpetuating body with no oversight, checks, or balances….” and that they “…give rise to concerns about how such an organization can continue to act in secrecy, with no checks and balances, and without true accountability to anyone…”
More Concerns About “Self-Perpetuating/Accountable to No One” CFP Board
Don Trone, a frequent critic of the CFP Board and a leading proponent of the fiduciary advisor movement, has said “The Board doesn’t give a hoot about…the best interests of the public. The Board’s fiduciary initiatives are being fueled by politics, power, ego and greed… “ Trone claims his research has revealed a structure for the CFP Board with practices “that run counter to good governance…”
He notes “there are no open elections for directors” and “directors are required to sign a confidentiality agreement” and “any conversation with a director – public or private – requires the presence of senior staffers.”
He observes “board minutes are not made public” and comments “of particular concern is the absence of minutes identifying the directors who are taking part in determining the exorbitant salaries of senior staffers,” and that “formal ethics complaints against directors are viewed first by the staff and not by an independent ethics committee. This provides the staff the opportunity to bury an ethics complaint against a director who may later have a hand in determining the staff’s compensation.” Again, the Disciplinary and Ethics Commission has reported directly to the CEO since 2008.
In a recent Financial Planning post, Trone suggests “there should be open elections for directors; oversight for the Disciplinary and Ethics Commission needs to be taken out of the hands of the (CEO and) staff and given back to the DEC; and the board needs to start publishing its minutes and be more transparent about its proceedings.”
Former CFP Board Chair Ray Ferrara responded that “It is most unfortunate that Don Trone’s June 20th column suggesting that the CFP Board use 1% of its budget for its own oversight was published…(regarding his allegations of) conflicts of interest, self-dealing and other improper behavior… I find (this) personally offensive, I… can unequivocally confirm that nothing could be further from the truth.”
Are CFP Board Directors Influenced By The “High Life?”
In a piece called “Global Junkets Lavished On Directors Fuel CFP Board High Life,” Financial Advisor reported “some suggest that the board subtly curries favor with CFP Board directors by dangling lavish perks…” and reported “…CFP Board CEOs reportedly have retained CFP Board chairs as their own financial advisors,” and that “some former directors are starting to wonder exactly how high that price is and whether the luxurious junkets and other perks color directors’ judgment.”
Recent former CFP Board Chair Ferrara responded these were “unsubstantiated accusations” and contained “erroneous facts” (sic) that were “willfully biased and inaccurate.” Ferrara went on to say “CFP Board has significantly improved its enforcement policies and practices – all with the goal of being fair to participants and credible to the public.”
Questions of impropriety at the top of CFP Board are not new.
About the time the Journal broke the story about CFP Board’s website misrepresenting some CFPs’ compensation as fee only, the sitting Chairman of CFP Board resigned under mysterious circumstances related to a disciplinary investigation against him; he was later found to have been misrepresenting his own compensation but viewed as a scapegoat to divert attention from CFP Board’s blind eye to past compensation misrepresentation issues.
Surrounding the forced CFP Board Chairman’s resignation was also suspicion a similar concern of compensation misrepresentation applied to several members of CFP Board’s quasi-judicial Disciplinary and Ethics Commission, involving Commissioners charged with applying and enforcing CFP Board rules: “two DEC members could possibly have had similar disclosure issues (to the Chairman) that led them to resign…the board’s website recently displayed the names of seven members of the DEC, while earlier it listed nine members. Absent from the latest version are Christina Florence, CFP, of Lane Florence LLC in Folsom, Calif., and Mary McFadden Hastings, CFP, of Wells Fargo Advisors, Waltham, Mass. Florence and Hastings did not return calls and e-mails for comment on whether they resigned from the DEC.”
Hastings had history of alleged FINRA misconduct prior to being presumably vetted and appointed to the DEC by the CFP Board CEO Keller. Both have had held non-fiduciary commission sales and fiduciary investment advisor licenses, precluding a fee-only representation, since well before appointment to the DEC, yet still represented their compensation as “fee-only.”
“Florence and another commission member were sanctioned privately… for misrepresenting how they were compensated.” Neither DEC member was publicly disciplined by the CFP Board for compensation misrepresentation. Florence chose to tell her story publicly, and said Keller asked for her resignation as the fee-only scandal developed in 2013. “They sacrificed us,” Florence said of herself and (Chairman) Goldfarb. As the fee-only scandal broke, (CFP Board) “rushed to create the appearance that they were being tough on anyone found to be misrepresenting their fees.
“Our Primary Goal Is to Keep (CFPs) Out Of Trouble”
In the wake of the Journal “red flag” reports, an op-ed piece for Financial Planning called “The CFP Board ‘inexcusably protects certificants at the expense of the public” by Allan Roth, CFP, suggests “CFP Board doesn’t even bother to sufficiently review public records while advertising to the public that certificants have been thoroughly vetted,” and quotes CEO Kevin Keller as saying “our primary goal is to keep certificants out of trouble” when pressed on why “actually enforcing standards” is not a priority.
Industry pundit Michael Kitces notes “the need for better enforcement mechanisms is especially critical with the new CFP Code of Ethics and Standards of Conduct going into effect in October, 2019, which will only increase the stakes further.” But in a move widely viewed as accommodating the wirehouse industry, CFP Board will now delay enforcing the new rules until nine months after they become effective, until mid-2020.
Industry titan and noted commenter Ric Edelman has been a longstanding critic of CFP Board, saying “It is little more than a self-serving entity operating under the guise of serving the public interest. The interests it actually serves are merely those of itself and its members” back when it launched its $100M+ marketing blitz.
Can CFP Fiduciary Ever Mean “Real” Fiduciary?
The current CFP ethics code will be replaced by new “fiduciary” standards “effective” October of 2019, but, in a concession to the wirehouse/broker dealer industry, which won’t be enforced until at least June of 2020, effectively giving blanket amnesty to CFPs who choose to ignore the new ethics rules. Prior to the extension, some firms had been rumored to be considering requiring their reps to give up the CFP marks, which would cost CFP Board revenue.
The current standards require CFPs to “at all times place the interest of the client ahead of his or her own.” In a Q&A on the Board’s site, the new standards are said to be different because they “expand the application of the fiduciary standard to all financial advice, and requires a CFP® professional to act in the best interests of the client at all times when providing financial advice.”
The current standards underscore this nuance for CFPs rendering planning, as opposed to financial advice to consumers: “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”. The Board defines fiduciary as “one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client”.
As to when the CFP fiduciary duty is triggered by planning, a CFP Board Q&A explains “the question of whether a client relationship involves financial planning is one that CFP Board determines on a case-by case basis.”
These two different CFP standards seem to be functionally equivalent, with the only nuance the duty of “upmost good faith,” which observers might assume to be implied in all dealings with CFPs given that good faith reflects an absence of malice or intent to defraud, and is a standard non-fiduciary requirement in U.S. business dealings.
Still the general, practical, and widely-held interpretation of the current rules it that unless planning is being done – and arguably consumers may believe this occurs whenever they get advice from a Certified Financial Planner – the fiduciary obligation does not apply.
A CFP® Board-sponsored study found that clients of CFPs may believe they receive fiduciary advice when in reality they receive suitability-governed product sales, which allows higher compensation and firm profits to the detriment of clients’ best interests. Of note, the study attempts to assuage the perceived legal risk that some firms may fear that the employment of CFPs, and association with CFP Board advertising claims, implies: “Clients may believe they are receiving a financial planning service…when they are instead receiving a service that is narrow in scope and incidental to the transaction…. some brokerage firms believe CFP® professionals present more legal risk to a firm compared to other registered representatives at their firm. This section .. shows that CFP® professionals do not present greater legal risks to a firm.”
However, the CFP Board’s $100M “public awareness” marketing campaign was launched after the last financial crisis and deep bear market of 2008. Since then, many consumers may have been induced to trust non-fiduciary CFPs with their money based on its “thoroughly vetted” “committed to working in your best interest” and similar representations over many years. In the next crisis, it is possible the CFP Board’s marketing claims may expose both it – and its $30M a year revenue machine – and CFP employer firms to massive claims of investor damage stemming from deceptive advertising.
The Question Of Social Welfare – Is the CFP Brand a “False Quality Signal?”
For better or worse, the CFP Board is at this point in time best, if not well, positioned as a fulcrum to professionalize a very fragmented – and arguably consumer-abusive – industry.
Quality, objective, and well-schooled financial advice is desperately needed by an aging US population at increasing risk of retirement crisis. Incompetence, abuse, and predatory “practice” abound, sadly, even, at the hands of perhaps thousands of “thoroughly vetted” CFPs.
But can CFP Board overcome its perennial misfires and gain traction as a standards enforcing institution? While hope springs eternal, the track record under the current governance and charity structure is not good, and the apparent lack of accountability, the robust and growing cash flow, and secretive governance may not provide meaningful incentive for real change.
As has been the case for other professions like medicine, law and accounting, perhaps the best path lies through government licensure and regulation of defined professional conduct, rather than relying on an operation based primarily on trademark rental, and lacking real representation by practitioners trying to ethically serve the public and professionalize practice.
Somewhat ironically, in 2008, the year the current CFP Board CEO consolidated control, an academic paper called “The Financial Planning Act of 2008” was published by the Journal of Financial Planning. In it, the author argued rather persuasively that “the public simply cannot distinguish legitimate professional planners from faux planners,” and that if a true profession of financial advisory is to emerge, it would likely be built on the CPA model. He offers a model state legislature act on which to build a true, monopolistic, well-defined and regulated profession, analogous to those enabled by states’ bars, and boards of accountancy and medicine.
In the eleven years since, one might wonder how well the CFP Board has helped the public discern between legitimate CFPs and “faux” CFPs using the broadly-promoted badge to bait and switch.
From a social welfare perspective, what really matters now is the utility of CFPs in reliably and honestly solving consumers’ problems, and the proficiency of the CFP Board in facilitating effective and consistent consumer outcomes.
Sadly, as the Journal’s ongoing articles like the red flag pieces have reported, this is too often not the case. Consumers relying solely on the CFP “brand” as a quality signal may too-frequently encounter problem planners they may trust because CFP Board did not deliver on its promises.
There may be a real danger the CFP is sending a false, or at least inconsistent quality signal, and consumers are well-advised to consider it with jaundiced eye.
At this point in time, the CFP Board claims are simply not trustworthy enough to be relied upon without independent consumer investigation.
Do CFP Standards Really Rise Above All Other Authorities?
The Wall Street Journal reported that Leo G. Rydzewski, senior member of the Board’s Professional Standards & Legal department, recently stated “federal regulation (was) on the lowest level and the CFP Board’s standards (were) at the apex, ‘rising above’ all other authorities.”
Rydzewski is CFP Board’s General Counsel, and oversees the enforcement of CFP Board’s Standards of Professional Conduct. When queried by the Journal on the statement, in light of FINRAs more accurate reporting of CFP red flags, the Board said “Mr. Rydzewski’s reference to superior standards refers to education and ethics among CFPs that ‘go beyond what is required by the government at the federal or state level.’”
While actual delivery on this “rising above” is clearly spotty, the basic premise is certainly true.
The scope and rigor of the CFP coursework is far more comprehensive and sophisticated than that required to pass the government license exams. The exams are hard and designees who honestly test must demonstrate a degree of education far beyond that required of ordinary financial advisors.
And the CFP standards require much deeper duties to clients than the law applying to most advisors, arguably a true fiduciary standard in that they have been for years required to “at all times” – and “all” surely must include when selling commission products – place the client’s interests ahead of their own. These standards apply even when there is no legal fiduciary requirement, such as for FINRA reps.
But this is where the rub is. Do CFPs take this ethical code seriously? Does CFP Board? Or is it merely bait or an afterthought to juicy commission comp in the former case, and just a slick marketing pitch in the latter?
No Statistical Evidence To Support CFP Board Claims Of “Highest Standard”
When I conducted my PhD research in advisor training, education, professionalism and misconduct, I found FINRA black marks were more frequent for advisors who were male, licensed to sell insurance products like annuities, and dually registered with both fiduciary and non-fiduciary commission sales securities licenses. (This sometimes profound “dual registration” conflict of interest explored in my article called When Fiduciary’s Really A Four-Letter Word).
With co-researchers Dr. Inga Timmerman (Assistant Professor of Finance, California State University, Northridge) and Dr. Pieter de Jong (Associate Professor of Accounting and Finance, University of North Florida), we explored the gender effect in an academic paper called “Who Is Less Likely to Be Involved In Financial Advisor Misconduct?” which was published in the Journal of Wealth Management (Fall 2018, 21(2), 85-96). We found that females with designations had far fewer FINRA flags than men.
Building on our prior research, we then explored the relation between having the CFP designation and records of FINRA misconduct. We used all of the FINRA securities salespeople (stockbroker-type financial advisors, technically “registered representatives” [RRs] of “broker dealers”) in Florida. This was an about-35,000 person sample representing the entire Florida RR advisor population, skinnied down to the around 27,000 modeled to be in retail sales work. In a new paper to be published in the Spring 2020 edition of the academic Journal of Personal Finance which will be presented in October 2019 at the Academy of Financial Services scholarly conference, we focused on CFPs that held stockbroker-type commissions sales licenses (though many also are dually registered with fiduciary licenses). We did this to see if the CFP training and ethical code made a difference in misconduct where there was no legal obligation to act as a fiduciary in the clients’ best interests, as suggested by Mr. Rydzewski, and by common sense.
We expected a better misconduct showing for CFPs. As Rydzewski points out, they are trained to know more and behave better, and had pledged to abide by the applicable CFP Board ethical code that imposes a de facto fiduciary requirement: “The CFP® Board Standards of Professional Conduct requires certificants (sic) to “at all times place the interest of the client ahead of his or her own,” (Rule 1.4) even when not conducting financial planning.”
To try to isolate the expected CFP halo effect, we “factored out” the gender, dual registration, insurance license, and other characteristics that were found to be associated with elevated misconduct in my dissertation paper.
Thus cleansed, surprisingly, we found no statistical difference in misconduct for CFPs vs “regular” commission investment sales reps who lacked CFP education and had not pledged to put clients’ interests above their own compensation. From these findings, one might expect about as much chicanery from a CFP as from a broker with no more training than a week’s worth of study for the Series 7 (like how I passed mine, as a dewy-eyed graduate chemist, back when dinosaurs roamed the earth in the ‘80s).
We observed no CFP misconduct suppression effect. Records of customer complaints, fines, suspensions, revocations, convictions, and other misconduct were statistically identical to garden variety advisors in our data. This was most surprising.
Screening Advisors By CFP Alone Could Lead To Worse Outcomes
Sadly, the situation may be worse from the practical consumer perspective, since in the real-world shoppers may not know or choose to isolate a research independent variable.
Based on CFP Board claims of “thorough vetting” they may be influenced to use the CFP alone as a selection heuristic, assuming this means pre-screening and a higher quality advisor. Ads that have said CFPs are “held to the highest ethical and educational standards” and are “required to make financial planning recommendations in your best interest” can induce consumers to rely on the CFP signal alone.
But since the CFPs in our study were overwhelmingly male, dually registered, and also licensed to sell commission insurance and annuities besides commission securities, picking a planner solely based on having a CFP appears to actually increase the odds of getting a planner with a record of problems like complaints and abusive sales practices.
This is exactly the opposite of the CFP Board’s widely-broadcast message that CFPs are “thoroughly vetted” and operate at the “highest standard.”
The reality uncovered by the WSJ’s reporting is that CFPs have clearly not been well-vetted, at least not by the CFP board, and many CFPs do not operate at the highest standard.
It also runs counter to the rational expectation (and likely legions of individual CFPs’ personal pitches) that higher education and professional standards should produce more ethical results. Intentional or otherwise, this may set up a potentially dangerous bait and switch trap.
In my dissertation research, I ran uncontrolled regressions to look just at the CFP effect, as a consumer might when relying only on this piece of information to choose an advisor. Looked at this way, I found the b coefficient for findings of FINRA misconduct for CFPs to be over 3.5x higher than for non-CFPs, to extremely high levels of significance (p < .0001). This can be interpreted that the CFP group was associated with misconduct levels that were more than 3.5 higher than those associated with all others in the data sample, in this case 24,133 others contrasted to 2,534 CFPs. Most of these others – 23,470 – held no reported designation, and hence were not known to be obligated to higher ethical codes or have education beyond that needed to obtain basic government licenses; they were free to maximize their compensation at client expense so long as products were “suitable.” Still, the non-CFP others were associated with much lower misconduct than “highest standard” CFPs. Using another regression method called logit, it appeared the odds of finding misconduct were nearly 2x greater for CFPs than others. This was based on the Florida data; my research partners and I are now undertaking to confirm this and other effects with fresh national data.
Abusive Advisors Well-Known in Industry
Unexpected or otherwise, our academic findings are very similar to those in the Wall Street Journal’s report. Many in the field were perhaps not surprised. “For many CFP certificants, it was not surprising to read” of the recent WSJ red flag news, “as many advisors see problematic ‘fellow (CFP) advisors’ when new clients come in having been harmed by one.”
I once presented an unrelated paper at an academic conference, and a FINRA investigator was in my audience. After the talk, we got to discussing designations, and he told me his field experience was very similar to our findings. “The more letters, the more problems,” he said.
This is not to say many if not most CFPs may not be fine, ethical, well-trained and deeply caring practitioners who do what’s right and put their clients first. I am proud to call many such my friends. But, based on the emerging research, it would seem these folks are this way because of who they are, not because they bear the CFP brand, which at least for now, seems as easily worn by scoundrels as by the trustworthy and competent.
No “Profession” of Financial Planning or Financial Advice
Unfortunately, the amalgam of activity we refer to as financial advisory is far from gelling as a profession.
Actors as diverse as bank tellers, insurance and commodities salespeople, fiduciary investment advisors (those that seem to know what they are doing, and those that do not), even funeral home staff, all may purport to offer financial advice. These players operate in a patchwork of industries, from fiduciary trust officers right down to shameless hucksters and outright con(wo)men. Regulation, at best, is uncoordinated, and at worst, absent. Even astute investors have a hard time figuring this out and knowing whom to trust. The recent sagas of Bernie Madoff and Jeffrey Epstein, to name just two, with their trusting trails of high net worth, presumably-sophisticated dupes, is bitter food for thought.
Advisors can be banned from one part, like FINRA securities licensure, but easily jump to another, like the sale of high-commission equity index annuities using an insurance license. These are the kind with the pitch “your investment is guaranteed, but if the market goes up you make big profits.” While technically non-securities/fixed life insurance products, they all look like investments to the public. The small print often reveals the guarantee is a guaranteed loss after commissions and other factors. And the people that sell them can seem very trustworthy and competent, smile brilliantly, and look very professional in a suit, indeed.
Yet another Journal investigative report began with “a loophole that allows brokers who have been barred from the securities industry to sell insurance and other financial products.” It tells the story of advisor Simon to whom client Sigler gave her savings to invest. Statements showed returns of nearly 12%, but “the money disappeared.” Simon pled guilty to securities fraud and (was) currently serving two years in prison. While FINRA eventually banned Simon from selling securities, at the time of the report prisoner Simon still had an active insurance license good for another year! In fact, the Journal report found that at least 13% of brokers permanently banned by FINRA still had active life insurance sales licenses.
One of my early academic papers was called “Why Financial Advisors Have Yet to Leap the Professionalism Bar” (Journal of Personal Finance, Volume 17 Issue 1 2018). It found the financial advisory profession fails each of the six tests, derived from the academic literature, of what is required to make a true profession like medicine or law – both of which, for instance, are clearly defined and government regulated. PhD candidate Steven Lee’s research has found similar conclusions, as have others such as Michael Kitces’s.
To be a physician, you have to go to medical school, pass Boards, survive residency, and cleave to strict regulations to be allowed to practice without committing a crime. An MD or DO gets a monopolistic government license. To have one, you have to cleave to a social welfare contract.
But to be a “financial advisor,” you merely need to call yourself one.
Designations like CFP, in my view, are mere baby steps beyond this. The designation education is meaningful, but the lack of a requirement for a finance-related undergraduate degree, and for any graduate study, is troubling. The CFP code of ethics is promising fruit for development, but black-box governance of the CFP Board charity, the spotty-to-blind-eye record and chaotic enforcement makes it a deceptive shadow of professional standards. I wish it were otherwise, but there is little evidence things have changed much since Mr. Roth’s 2012 piece on apparent CFP Board disciplinary bungling or cover-ups, and lots that they haven’t.
In a follow-up piece to the Journal’s “red flag” article called Investors Need This Cop to Get Off Its Duff, two CFPs were described as selling a $6.2M death benefit life insurance policy – with an annual cost of $140,000 – to an already well-insured man whose wife had terminal cancer and little need to be protected by more life insurance on her husband. This author estimates the commission on such an insurance sale could have approached as much as $200K to the CFPs, on a product for which the client seemed to have no need.
After some time, the client became “concerned that (the CFPs) hadn’t done good planning” and filed a complaint with CFP Board. Four years after he complained, the CFP Board finally told the client that it finished its investigation which “did not result in a public sanction” against the CFPs.
The client has an advanced degree from the University of Chicago’s Booth School, was a CEO of a major company, and sits on the Board of a major publicly traded company. “I’m a well-to-do guy who should have known better, but it was a difficult time in my life” as his wife was dying.
His conclusion? “I got the impression (CFP Board’s public messages and highest standards pledge)… was more of a marketing campaign, than an earnest commitment to making sure that CFPs perform in full compliance with the standards of ethics the CFP Board sets forth.”
For a real, accountable, financial advisory profession to emerge, experiences like this need to disappear, or at least become rare and swiftly adjudicated.
The Deep Social Problem of Unprofessional Financial Advice
More than 650,000 financial advisors help manage over $30 trillion of investable assets in the U.S. with over one-half of all households and nearly 90% of consumers with investable assets over $100,000 seeking such help. Quality financial advice has grave consumer and social welfare implications. Bad advisors drain resources, compromise lives and burden the government as the financial security provider of last resort.
The advisory industry has long been troubled by poor consumer experiences, widespread abuse and fraud, persistent accusations of abuse, regulatory sanctions, and wide misconduct. A found FINRA advisors – legions of CFPs among them – exhibit a high level of documented misconduct, and an anomalous concentration of repeat offenders, compared to the medical profession: “misconduct is much more concentrated, suggesting that some advisers are more prone to misconduct than others…(with a) high incidence of repeat offenders…. evidence suggests that some firms specialize in misconduct…misconduct is widespread in regions with relatively high incomes, low education, and elderly populations…and that firms that consistently engage in misconduct are likely targeting vulnerable consumers…”
Ethically challenged advisor behavior has been estimated to waste some $17 billion per year of consumer savings. Researchers have found widespread instances where advisors misleadingly couched product pitches as objective advice. These recommendations tended to increase advisors’ compensation to the detriment of the client.
As America ages, quality wealth care becomes indispensable. Unfortunately, it is quite difficult to find and identify, as “advice” continues to be marketed with the same cavalier, caveat emptor gusto as cigarettes, beer, or automobiles – and regulators regularly acquiesce in this, even to the point of letting non-fiduciary sales reps improperly use the term “investment advisor” – which inspires much more consumer trust than more accurate descriptions like life insurance agent or stockbroker. To download an advisor selection guide by this author, click here.
Solving America’s Wealth Care Problem
Commission sales of investment products are big, big business. Reduced transparency makes for easier sales. When New York recently imposed a rule requiring insurance companies to provide consumers cost-comparison information between commission annuities and their fee analogs, several companies instead chose to suspend sales of the less profitable fee products in order to avoid the requirement. Expensive annuities can have adverse consumer outcomes. To download a detailed annuities guidebook to help better understand these complicated products, click here.
While countries like Australia, the U.K., India, Norway, Finland and Denmark have long banned commissions on the sale of investment products in order to reduce conflicts and protect the public, such a goal may be effectively illusionary given the US political system and the remarkable lobbying might of Big Financial.
What is, perhaps, more attainable, is codification, professionalization, and regulation of financial planners/advisors. They should be distinguished from vendors in a way that pharmaceutical sales reps are from physicians. The Wild West application of these terms is confusing and damaging to consumers.
I think state regulation is a critical issue and realistic goal. There are some things government does really well, and professional regulation is one of them. The CPA, MD/DO, attorney, and other state-regulated professional models work reasonably well, and far better than the financial advisory chaos. While the national Financial Planning Association supports state regulation, perhaps not surprisingly, CFP Board is strongly opposed to such a model, which clearly could wreak havoc with its own revenue machine.
As I said when Barron’s interviewed me on advisor professionalism, “professions are institutionalized, overseen, and enforced by government. The profession exists to serve society. The government grants monopoly power to qualifying professionals, and only they may practice. … to practice as a medical doctor you need to be…licensed (or) you commit a crime. Ultimately, I see a real profession developing along these lines, regulated by a state analog to a Medical Association or Bar, requiring at least a Master’s degree and maybe a practitioners doctorate called Wealth Doctor or something like that.”
As mentioned, the CFP Board is in the best, if not a good, position to facilitate this. If it truly wants to achieve its mission to “…benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning,” it must consider converting itself from a secretive charity to a true membership organization whereby CFPs have real voice and power in selecting leadership and shaping the profession. This is how real professions do it. With state license regulation to protect the public, and strong professional membership organizations like the AMA to define and evolve the profession.
As this article has tried to demonstrate, if the CFP Board ever had one, it seems to have lost its way long ago in terms of delivering on its quality promise.
It is time to try something new – there is far, far too much at stake.
 (Moisand, D. (2008). Journal of Financial Planning, 21(10), 78-90).
 (“CFP Standards,” 2008/2014, p. 9).