The F(iduciary) Word
(MoneyWatch) One of the many provisions of the July 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was the creation of the first new federal regulatory agency in a decade, the Consumer Financial Protection Bureau (CFPB), which consolidates most federal consumer financial protection authority in one place. Now approaching its first anniversary, the CFPB's stated mission is: "to make markets for consumer financial products and services work for Americans." Dodd-Frank and the CFPB cover a lot of ground, but the law punted on one issue that is near and dear to me: the concept of a "fiduciary standard."
The fiduciary standard requires financial professionals to act in the best interests of their clients. You may think that your broker or insurance agent is obligated to do so now, but they are generally held to a much looser standard, called "suitability." In other words, the product they are selling needs only to be suitable for you, rather than in your best interests.
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Dodd-Frank gave the Securities and Exchange Commission (SEC) the authority to extend the fiduciary standard of care to any financial professional who provides personalized investment advice to retail customers. The SEC is still working through the proposed implementation of the fiduciary standard, so to find out where things stand, I went to one of the standard's most outspoken proponents, Kevin Keller, CEO of the Certified Financial Planner Board of Standards (CFP Board).
The CFP Board is the organization that bestows the CFP certification onto those financial planners who complete a rigorous course of study, pass a tough exam and maintain ongoing education and ethical requirements. I have been a CFP practitioner since 1998. As Keller reminded me, "the CFP Board is first and foremost a nonprofit public interest organization, which is why it formerly adopted the fiduciary standard in May 2007." By doing so, all CFPs are required to put the interests of their clients first.
The CFP Board has built a coalition with the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA). With one voice, the three groups have argued to the SEC that the public is best served when a standard is in place, and the gold standard, according to Keller, is the fiduciary one.
While many in the brokerage and insurance industries initially opposed fiduciary, there has been positive movement. In March, I interviewed Tim Ryan, the president and chief executive of the Securities Industry and Financial Markets Association (SIFMA), the industry's largest lobbying group, and asked him where the industry stood on fiduciary. In no uncertain terms, he said, "We support a uniform fiduciary standard."
Given investor cynicism and public distrust of financial institutions, it would seem wise to adopt a standard that makes it clear to clients that their interests come first. Keller notes that "the public is best served when financial professionals have standards," which is why he believes that "financial planning should be a recognized and regulated profession." Before you balk at the word "regulation," remember that today, almost anyone can call himself some variation of financial planner or financial consultant, without conforming to specific industry standards. Would you go to a doctor who wasn't held to and regulated by a standard?
To help clarify the issue, the CFP Board is educating consumers with a public awareness campaign that calls attention to the differences among different financial service professionals. The CFPB is also studying how older Americans can protect themselves from being misled by less-than-meaningful designations. The adoption of a fiduciary standard across all financial professionals would go a long way toward increasing transparency, and trust, in the industry.
A fiduciary standard does not mean that you are not responsible for your own financial decisions or that you are guaranteed to make money. It does mean that the recommendations you receive will be based on what is best for you, incorporating your circumstances and risk profile, not what might be in the interests of your broker or his firm. Fiduciary would be a vast improvement over where we are today.
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