Opinion: 403(b) Vendor Reps and The CFP Designation

The CFP is being used as bait.

Note to reader: I've chosen to redact the name of the company that I'm writing about for two reasons. The first is that this company has a history of threatening lawsuits against financial advisors who write about them negatively and second, I honestly don't believe this company stands alone, most of the commission-based vendors in the 403(b) space have similar or worse conflicts of interests that their CFPs will face.

Recently, a representative of an insurance company with a significant presence in the 403(b) market gave a presentation at my wife's school (she is a teacher at a middle school in Southern California). I asked her to record and send me the audio. When I received the audio and listened to it what struck me was not the typical methods used to get people to work with him, but that he touted one of his credentials.

The representative said that when it comes to a financial plan, "If you don't have one, I'm a Certified Financial Planner." Mind you, this visit was supposed to inform the teachers only about their 457(b) plan, but that's not what's bothering me today. The representative's statement came as a surprise to me because being a Certified Financial Planner (CFP) has specific requirements that working as an insurance agent of an insurance company or even working as a representative of a typical broker/dealer would make difficult if not impossible to fulfill. I thought to myself, this guy is holding himself out to these teachers as if he is in the same business that I am in, teachers won't be able to tell the difference. He's holding himself out to be a fiduciary. I don't see how that is possible.

Don't get me wrong, I think everyone who is in the financial planning business should be a CFP, and I commend the representative for attaining the designation. However, when your primary business is the sale of products, it's nearly impossible to put the best interest of the client ahead of your own, let alone that of your firm, yet that is what being a CFP entails (at least it will, starting in October of 2019).

My wife also sent me a flyer that was put out by the representative and while it listed his name and insurance license number (as well as another paragraph of disclosures) the CFP designation was nowhere to be found. This struck me as odd. The CFP is a real accomplishment, and it provides at least some credibility, why would he mention it out loud, but not in writing? I suspect the company he works for might not want it in writing.

Let's step back for a moment, I left something out.

The Certified Financial Planner designation is the premier financial planning designation in the industry, but, it's not the planning equivalent of the CPA or the CFA, at least not yet. Currently, the CFP designation does not have a strong fiduciary duty requirement. A fiduciary duty requires the advisor to place the client's interests ahead of themselves and their firm. This is one area where the CFP falls short of other professional designations, but this is changing starting in October of 2019 when the updates to the Standards of Conduct are scheduled to take effect.

In the new CFP Standards of Conduct, the first standard is a Fiduciary Duty (A.1). The language is pretty strong (stronger than the SEC Regulation Best Interest by far):

"At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:


Duty of Loyalty. A CFP® professional must:

i. Place the interests of the client above the interests of the CFP® professional and the CFP® Professional's Firm;

ii. Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the client, obtain the client's informed consent, and properly manage the conflict; and

iii. Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional's Firm, or any individual or entity other than the client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the client and place the client's interests above the CFP® professional's.

b. Duty of Care: A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances."

Here is a link to the full Standards: CFP Standards of Professional Conduct

The Duty of Loyalty within the CFP Standards of Conduct is quite strong and rather unambiguous. I suspect complying with this standard while working for a major 403(b) vendor is going to be extremely difficult, if not impossible.

I pulled up the SEC disclosure document for the company the representative speaking at my wife's school works to get an idea of what sort of conflicts he might encounter. What I found was shocking even to me, I see no possible way a person who works for this company could continue to hold themselves out as a CFP.

One reason I'm doubtful they won't be able to fulfill their fiduciary duty is due to the bait and switch system this particular (and I suspect many) 403(b) vendors have in place to fool you into believing you are receiving advice from a fiduciary. I've excerpted an incredible few paragraphs that discloses a considerable conflict of interest. It's the ultimate bait and switch:

"A client may enter into a financial planning engagement with (company name redacted) by signing a financial services client agreement and, in most cases, agreeing to pay a fee in exchange for those services. We offer both fee and non-fee financial planning programs, although in either case (company name redacted) and the Financial Professional generally will receive commissions in their insurance agent, broker-dealer and registered representative capacities if the client decides to purchase any products through the Financial Professional."

Here's where the bait and switch comes in:

"The financial plan or advice will not include investment advice, analysis or recommendations regarding specific securities, or investment or insurance products. Upon delivery of a financial plan or advice to a client, the client will review the plan or advice and provide acknowledgment of their receipt of said plan or advice. Acknowledgment of plan or advice delivery may be done by obtaining a signed delivery receipt or via an electronic acknowledgment. Acknowledgment of receipt will end the financial planning advisory relationship between the client and us.

However, because our Financial Professionals are also registered representatives of (company name redacted), a registered broker-dealer, and licensed insurance agents of (company name redacted), they are able to identify products and securities offered by (company name redacted), its affiliates and various carriers that may be suitable for implementing the plan or advice.

These product-specific implementation recommendations may be prepared in a separate written document, generally following plan delivery. Any document in which they may be set forth is not part of the plan or advice. (company name redacted) generally will receive commissions (or, in some cases, advisory fees) if the client decides to purchase any products through the Financial Professional, and the Financial Professional will receive a portion of any commissions received in his or her capacity as a registered representative of a broker-dealer or as an insurance agent. Clients have no obligation to purchase any products through (company name redacted), its affiliates or other carriers."

Allow me to translate.

First, you should know that insurance agents and registered representatives of broker/dealers owe no fiduciary duty to their client when acting in those capacities (this is not to say they won't, simply that they are held to a different standard). They are required by law to offer suitable recommendations, which allows them the flexibility to sell you almost anything. The products do not have to be in your interest, let alone your best interest. Yet, these individuals are allowed to call themselves "Advisors," "Financial Consultants," "Financial Planner" and all sorts of other professional sounding names.

Without getting technical, your financial planner should work as a fiduciary 100% of the time.

The "Advisor" in the above paragraphs is not a true advisor since they won't commit to acting in your interest at all times. What the company is attempting to disclose above is that when writing and delivering the financial plan they will act as a fiduciary. This is not the controversial part. You are likely paying them a fee for the plan, they are acting in a fiduciary capacity to deliver it. What you might not understand from the above disclosure is that after the plan is delivered, your "advisor" is no longer a fiduciary to you. It's quite clear when they state "Acknowledgement of receipt will end the financial planning advisory relationship between the client and us." The company means this quite literally, they now no longer are working in your best interest as a fiduciary. The next paragraph states "… our Financial Professionals…are able to identify products and securities offered by (company name redacted), its affiliates and various carriers that may be suitable for implementing the plan or advice." This is the point in the relationship where your advisor transforms into a salesperson of the companies product.

Don't believe me? Read the next paragraph of their ADV:

"These product-specific implementation recommendations may be prepared in a separate written document, generally following plan delivery. Any document in which they may be set forth is not part of the plan or advice. (company name redacted) generally will receive commissions (or, in some cases, advisory fees) if the client decides to purchase any products through the Financial Professional, and the Financial Professional will receive a portion of any commissions received in his or her capacity as a registered representative of a broker-dealer or as an insurance agent."

Recommendations for how to implement the plan ARE delivered at the same time as the plan, but they are NOT part of the plan ("any document in which they may be set forth is not part of the plan or advice"). They can't be; otherwise, they would be fiduciary in nature. The advisor is no longer acting in the capacity of an investment advisor, but as an insurance agent or registered representative (or both) of the company and is now selling you commission based products or fee-based products that have significant conflicts.

There is no possible way, in my opinion, a Certified Financial Planner can operate under such a regime come October 1, 2019.

While this company does say that you can continue on in an "advisory capacity" by being placed into one of their fee-based programs, the conflicts of interest involved in these fee-based programs are significant, and again, in my opinion, there is no way a CFP could operate in such an environment.

One disclosure, in particular, got my attention:

"(Company name redacted) and its Financial Professional may receive non-cash compensation from investment advisory asset management program sponsors. Such compensation may include such items as gifts of nominal value, an occasional dinner or ticket to a sporting event, or reimbursement in connection with educational meetings or marketing or advertising initiatives. Such sponsors may also pay for education or training events that may be attended by Financial Professional and (company name redacted) employees."

In other words, there are incentives in place to recommend one particular "asset management" program over another.

It gets worse. Check out the following provision:

"Financial Professional and their managers may receive higher levels of cash compensation or other incentives for selling products issued by (company name redacted) and/or its affiliates ("proprietary products") rather than products issued by third parties. Among other things, they may qualify for certain benefits, such as health and retirement benefits, based solely on sales of these proprietary products."

You read that right. It appears that health insurance could be subject to a proprietary sales requirement at this company. Since the disclosure doesn't go deeper into what this means, we can only infer that if an "advisor" doesn't sell enough proprietary products, they will have to pay for health insurance out of pocket. This is a very tough conflict to endure, an advisor shouldn't have to make this type of decision. In my opinion, a CFP designee cannot operate under the new Standards of Conduct while working in such an environment.

So what will CFP designee holders do? What will companies do? I've emailed the company that the representative works for to ask them what they will do, I've yet to receive a response. I can only see a few paths. The CFP designee resigns or stops holding themselves out as a CFP.

Why do I hold this view? I don't believe these companies have the foresight to create the room necessary for their representatives to be true fiduciaries. It conflicts with their business model. Let me give you an example. What follows is an excerpt from the CFP Code of Standards and Professional Conduct:

Sound and Objective Professional Judgement

"A CFP® professional must exercise professional judgment on behalf of the client that is not subordinated to the interest of the CFP® professional or others. A CFP® professional may not solicit or accept any gift, gratuity, entertainment, non-cash compensation, or other consideration that reasonably could be expected to compromise the CFP® professional's objectivity."

Contrast this provision with the following excerpt from the (company name redacted) (SEC Disclosure document):

(Company name redacted) ADV:

"(company name redacted) and its Financial Professional may receive non-cash compensation from investment advisory asset management program sponsors. Such compensation may include such items as gifts of nominal value, an occasional dinner or ticket to a sporting event, or reimbursement in connection with educational meetings or marketing or advertising initiatives. Such sponsors may also pay for education or training events that may be attended by Financial Professional and (company name redacted) employees."

This provision directly conflicts with the CFP Code of Conduct policy. Can a (company name redacted) representative who intends to comply with the CFP Code of Conduct successfully operate in the (company name redacted) environment? It would seem very difficult. I'm not saying they can't, but they would face a callous work environment without significant help from (company name redacted). Perhaps (company name redacted) is going to create this space, if so, they should outline it publicly and soon as their Form ADV disclosure document is a landmine for a fiduciary.

If you come across a salesperson who represents themselves in writing or orally as a CFP Designee, you must ask them how they intend to comply with the CFP Code. While this situation might resolve itself, if a representative from a 403(b) vendor represents themselves as a CFP, you should be very skeptical.
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