Jeff was recently interviewed by Barron’s again, this time about advisor professionalism, poor training, and malpractice issues among those with designations like CFP, ChFC, and CFA, which are a focus of his ongoing research. He teamed up with two professors and the resulting research into 30,000 Florida brokers uncovered some surprises:
- On Gender: Maleness was the most powerful factor associated with advisor misconduct and that investors are much better off picking a female advisor with a CFP or ChFC than a gender-neutral advisor with a designation.
- On Dual Registration: Holding both commission sales and fiduciary advisor licenses was associated with much higher levels of misconduct
- On Designations: Misconduct went down for ChFCs but not for CFPs –disturbing since the CFP is widely promoted as the “gold standard” of advice
Jeff believes one of the reasons the industry should care about these issues is the social impact. He says, “Money skimmed off in high costs and lost to poor advice won’t be there to help millions of aging boomers pay for their long retirements and expensive health care, right at time when Federal safety net programs like Social Security seemed doomed. This is bad for the boomers and will squeeze Washington even more.” Jeff wants for brokers and advisors to become true professionals, industry-wide and be faithful fiduciaries in all dealings and sees “a real profession developing along these lines, regulated by a state analog to a Medical Association or Bar, requiring at least a Masters degree and maybe a practitioners doctorate…”
Here’s an expanded version of this interview; the emboldened portions were published by Barron’s:
Advisor Center: Jeff, you want brokers and advisors to become true professionals, industry-wide. What would that look like?
JC: From the academic literature, I’ve distilled six standards, all of which must be met to be considered a real professional in the doctor/lawyer/teacher/CPA sense. You need to master a uniform, specialized and rigorous knowledge base. You have to pass demanding tests on this knowledge. You must be a faithful fiduciary in all dealings. The profession is 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. So as an example, to practice as a medical doctor you need to be a licensed MD or DO. If not, 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 Masters and maybe a practitioners doctorate called Wealth Doctor or something like that.
AC: There are by some estimates over a million advisors in the industry. Professionalizing the whole thing seems inconceivable, so where do you start?
JC: I suppose as other professions did, by evolving it out of social need, and eventually driving out the quacks. But this is a really big deal. A Federal study a few years ago estimated that bad advice and abusive sales practices bleed some 17 billion a year out of Americans’ pockets. With the aging baby boom dependent on good advice, and squeezed by the implosions of Social Security, Medicare, and Federal deficits not so far down the road, this is becoming critical. I think I would start by clear and fair disclosure. If you promote yourself as an advisor, you have to be a at least be a dedicated fiduciary. If you sell commission insurance or investment products – nothing wrong with that! – but be clear about it. Don’t misleadingly call yourself an advisor. That really should be reserved for fiduciaries beholden to the 1940 Investment Advisers Act.
When a consumer talks to a car salesperson or a doctor, they understand the relationships. When they talk to an advisor, they don’t – and many advisors have a strong monetary interest in keeping it that way. That wasn’t so much the case back when salespeople called themselves brokers or insurance agents.
AC: Why is that so important.
JC: Because the public – even sophisticated and wealthy people – is so confused, and easily misled. I recently spoke to an elderly lady, a customer of a big wirehouse. She had about $5M with the “advisor”. She swore up and down he told her he was a fiduciary, that even though he was a broker he always put her interests first, charged no commissions, and only took fees. When I looked at her statements, there was $1M in an expensive annuity, loaded up with riders she did not need. It had very adverse tax implications for her, and cost her about 6% – some $60K every year – she knew nothing about. I estimate the broker made an $80K sales commission she was also clueless on. She asked me to talk to the broker, and when I asked him if he was acting as a fiduciary like she believed, he said he was. When I challenged him on the annuity, his response was – I kid you not – “except for that.” Let’s give him the benefit of the doubt, and say he was just confused. But the public is hopelessly confused, and at great risk of abuse, intentional, or otherwise.
AC: Short of full professionalization, aren’t designations like CFP® a big step in the right direction?
JC: Absolutely. Financial planning designations like CFP® and ChFC® foster knowledge and ethical requirements far beyond what the law requires for many if not most advisors. While I think it’s just the first basic step on the long road to professional education, it’s still a step in the right direction. The CFA® investments credential is also really important, and far superior for investment advice to the planning designations. While I would prefer more uniform and rigorous academic requirements like for medicine, law, and public accounting, designations are a tremendous step in the right direction, and I started there myself. But we must remember that these are optional designations, they are not academic, only a minority of advisors have even these, the requirements are private and not government regulated, and that the actual laws to which licensees with or without designations must adhere can be far, far weaker. This dichotomy can breed some unfortunate consequences between what investors expect advisors to do, and what they are actually required to do.
AC: You did some award-winning research into whether credentialed advisors behave more ethically. What did you find?
JC: The results were pretty surprising. There are two ways to look at this. The intuitive way – probably they way a consumer would look at it – is to pick an advisor based on having a designation, assuming this sends a signal of greater knowledge and higher quality. When done this way, misconduct – fines, suspension, complaints, settlements, etc. – actually went up for those who had at least one of the CFP®, ChFC® or CFA® designations. So picking an advisor solely based on the letters might not be such a good idea. This finding was echoed by a FINRA investigator who attended one of my talks, and said something like “yes, the more letters, the more problems we find…”
AC: And the second way to look at it?
JC: The scientific way, where you control for other variables in the regression. When you unbundle the factors in the data, it turns out that misconduct goes up for 1) males, 2) those with commission annuity sales licenses and 3) those who have licenses to both sell on commission and act as fiduciary advisors, like our friend from the wirehouse in the previous example. When you take those out, misconduct did go meaningfully down when at least one designation is present. But this can be problematic, since the majority of those with designations have those three “bad” factors above, and a consumer will probably not know or dig that deep, but instead rely on the designation signal, and assume it indicates quality. But that’s not the end of the story.
AC: What else did you find?
JC: I teamed up with Ingra Chira, PhD, CFP®, a professor at California State, and Pieter de Jong, PhD, a professor at the University of North Florida, to look more deeply at the gender issue. My initial study showed that maleness was by far the most powerful factor associated with misconduct, trumping the positive effect of having a designation. Remember by far, most designees – and most advisors! – are male. Our joint study demonstrated that consumers, in terms of greatly lowering the odds of misconduct, are much better off picking a female advisor with a CFP® or ChFC® than a gender-neutral advisor with a designation.
AC: Did you compare the different designations in terms of misconduct levels?
JC: Pieter and I dug into this, and came up with some pretty unexpected results. When we looked at the financial planning designations separately, and controlled for the “bad” factors like before, we found that misconduct went down for ChFC®s, but not for CFP®s, whose scores were indistinguishable from advisors with only basic sales licenses. In other words, despite the CFP® training and ethical code, and even controlling out “bad” factors consumers are likely to miss, misconduct levels were no different for CFP®s than ordinary licensees. This was really surprising and more than a little disturbing, since the CFP® is widely promoted as “the gold standard” of advice, with some $10 million spent each year on CFP® Board advertising to send this message to consumers. It is by far the most common designation. By some estimates, one quarter to one third of planners are CFP®s, and this is growing. So because there’s no real profession, there could be a big mismatch between what consumers are getting sold, and what they are really getting.
AC: Any ideas for further research?
JC: We would very much like to expand the research beyond the initial data set, which included every registered securities sales agent in Florida, some thirty thousand reps. While we used the entire Florida population and got findings to very high degrees of statistical significance, we would like to see what national data has to say. Particularly, we would like to see the numbers on the CFA® designation. Unlike the CFP® and ChFC®, we saw better misconduct even without controlling out for the bad factors of maleness, and the two license problems, which CFA®s shared with the other designations. The CFA® – in contrast to the other two – seemed to make a big difference. This finding was tantalizing, but perhaps because there were so few CFA®s in our sample (116 compared to 2534 CFP®s) the findings were not very significant. But this could be so important we really want to drill down. Also interesting is the lack of misconduct improvement for CFP®s even after we controlled the bad factors out. We have a theory that this may be a firm-type effect – CFP® misconduct may be associated with specific types of firms and compensation cultures – we would like to explore. Any interested benefactors with grant money for data, please contact me at j@camarda.com!
AC:Why is this issue important for the industry to grapple with?
JC: The first reason is the moral/ethics issue of misrepresentation. Telling consumers that an advisor or a financial planner knows what they’re doing and is looking out for the investor, then using that perception as cover to sell a high expense/high commission product like an annuity, knowing the consumer probably won’t read the many pages of fine print disclosure to figure out what’s really going on, is just plain wrong. The second reason is the social impact. Money skimmed off in high costs and lost to poor advice won’t be there to help millions of aging boomers pay for their long retirements and expensive health care, right at time when Federal safety net programs like Social Security seemed doomed. This is bad for the boomers and will squeeze Washington even more. And the third is self-preservation. Government pushes to ban commission investment sales in countries like Australia and the UK – transforming industries there – should be a wakeup call. The UK, for instance, banned investment commissions some six years ago. (https://www.law.ox.ac.uk/research-subject-groups/commercial-law-centre/blog/2017/05/uk-ban-commissions-relating-retail)
AC:Why are you personally concerned with issues of advisor conduct and professionalization?
JC: I think because I’ve seen so much of the spectrum of the industry, the good and bad, and sometimes pretty ugly. I began as a commission guy, and did pretty well. But as my career progressed, as I saw client non-optimal outcomes, and developed my education beginning with the Certified Financial Planner™ coursework and finishing with a Master’s and the PhD in Financial and Retirement Planning – some 9 programs in total – I developed a pretty good idea of how the business works, and why I think it needs to change. PhD material like advanced ethics and social justice really sparked the lamp. Working with other professionals like CPAs and attorneys gave me a lot of insight into how a true professional business model worked, and the real benefits potential for clients and society. Its not that I’m against high compensation – my firm does very nicely – I just think it should be earned, with a legitimate value impact for the client. Making $80K for a half-hour annuity pitch really doesn’t do that.
AC: Why did your study of all of the some 30,000 brokers in Florida not include state- or SEC-registered advisers?
JC: We looked at the advisors with commissions sales licenses, since in this role they are not required to be fiduciaries or put clients first. Holders of designations like CFP®, ChFC®, and CFA® have much greater training than ordinary licensees, and are ethically required to put clients first. So we wanted to see if the designation education and ethical codes made a difference where there was no legal requirement to put clients first. This seem like a very clear test of whether designations made any impact.
Registered investment advisors are already fiduciaries, so using them did not seem as good a test of the differences designations might make. I should point out that holding both commission sales and fiduciary advisor licensees is very common, and was one of the big problems our research highlighted. More than half the brokers had both. Unfortunately, this dual-hat situation – very common for those with designations – was associated with much higher levels of misconduct.
AC: Professionalization seems like a higher bar to hurdle for brokers, since they’re sales based. Isn’t this unfair to brokers?
JC: I guess that’s for them to decide. It’s as unfair as making pharmaceutical sales reps go to medical school and get physician’s licenses – unless they want to do surgery and say they practice medicine. I don’t think anyone’s arguing that commission sales reps need to be forced to pay the price to become professionals. There’s nothing wrong with selling on commission, so long as the relationship and conflict is clear to the consumer. No problem if the relationship is transparent and brokers are upfront about sales agent role and disclose commission, which is rare.
But if you say you’re a fiduciary, and that you don’t take commissions, but then pitch a high-chop annuity with big commissions and stratosphere costs, all they while saying “I represent only you…and put your interests first….” and, if asked about commissions, say “…why no, you don’t pay any commission, I’m paid directly by the company….” that’s really wrong. But this is still too common now, and some use the illusion of a profession that does not exist to take advantage of investors.
AC: What are the three top requirements advisors would have to meet to claim professional status?
JC: I think state regulation is a critical issue. There are some things government does really well, and I think professional regulation is one of them. Of note, the CFP® Board came out rather strongly against this in the past week, in contrast to many CFP®s and even the Financial Planning Association who are actively exploring or supporting government regulation as the path to true professionalism. But one must remember the CFP® Board is not a regulator or even a professional membership org like the AMA or AICPA, but a private trademark licensing operation*. Deep, sustained, expert academic education would be next, with at least a specialized practitioner’s Master’s required. Finally, a drop-dead exclusive fiduciary requirement to call oneself an advisor.
*unlike the CPA for instance which is a government professional license, the CFP® – like most designations – is a contractual right to purchase a trademark for limited use.
AC: Don’t some advisors already check all the boxes required of professionals? And if so, can’t they use that as a differentiator and let the market decide?
JC: Well, not really, since recognized professions require that all who use a term such as “medical doctor” hit all the requirements, and if they don’t they can’t call themselves doctors without breaking the law.
Since anyone can call themselves a financial advisor, there can be no financial advisor profession, since it is not clear what an advisor really is.
This is not to say that some don’t try to professionalize themselves. For instance, I’d done a PhD and Masters in financial planning, am an active CFA® investments expert and EA tax expert, and moved beyond the CFP®, ChFC®, CLU®, CFS®, and BCM™ basic designations’ requirements long ago. But standing next to an advisor who’s spent maybe only a few weeks getting a Series 7 or 65, and all the public really can tell is if we both look good (I hope!) in a suit.
