More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
My friend Ron Roge, a veteran independent advisor in Bohemia, N.Y., sent an e-mail in response to my last blog on FINRA’s proposal to test RIAs. He raises an issue that’s well worth exploring. (Perhaps especially now that FSI, the independent broker-dealer organization, has officially endorsed the notion of FINRA serving as the SRO for investment advisors.) Here’s what Ron suggested:
Since we already have testing—it’s called the CFP exam—let’s not reinvent the wheel. This exam will separate the salesmen from the advisors. Those who can’t pass the CFP exam become brokers, who can only transact, not advise. They will continue to be regulated by FINRA. Those who can pass the CFP exam become advisors, who are regulated by SEC and the CFP Board of Standards.
On its face, this makes so much sense, a trait that has always been Ron’s trademark. The Board’s already doing testing, so there would be no startup costs, and it already embraces a fiduciary duty (albeit rather recently), so it would have far fewer conflicts than FINRA. Of course, the CFP Board isn’t an SRO for the brokerage industry, so at least in theory, it doesn’t have the product-pushing, sorry, I meant distribution mentality.
If these were the only issues, Ron’s would be a great suggestion. Unfortunately, it isn’t: there’s the CFP Board itself. As I mentioned, the Board only recently, and reluctantly, applied a fiduciary standard to CFPs, and it’s a fairly watered down version at that. The fact is that since its inception over 20 years ago, the Board has been all too willing to accept the use of financial planning and the CFP marks as tools for selling products, umm, distribution, rather than objective, professional financial advice.
But the biggest problem with using the CFP test for all RIAs is that it’s far too limited. In its myopic drive to keep the conversation on “financial planning,” which it clings to as its raison d’etre, the Board ironically has positioned itself too narrowly to oversee a profession of independent advice. Instead of trying to position itself as the de facto regulator of all things financial planning, which by its definition included virtually all financial advisors, brokers and agents, the Board should have been arguing that financial planning is one element of professional financial advice.
In my view, the financial planning industry has been confused about the role of financial planning since its inception in 1972. The Board simply continues to perpetuate this mistake. Financial planning—the consideration of a client’s entire financial life, together with their needs and goals—is the beginning of professional advice, but not enough on which to base an entire profession. Just as in medicine, where taking a medical history and vital signs are essential to the delivery of good medical care, that’s not all there is to treating patients.
Starting with a financial plan is, in most cases, essential to delivering client-centered financial advice. In fact, I believe the Board missed a huge opportunity by failing to argue that financial planning is an essential element in delivering fiduciary advice. But by focusing just on financial planning, the Board has failed to position itself as the regulator of professional, independent, fiduciary financial advice. Now it’s just too late: We have to look elsewhere. The SEC, heaven help us, is probably our best bet.