CFP Board bolsters ethics curriculum

In a move likely to be closely watched by the financial planning community, a leading adviser-credentialing organization is reforming its ethics requirements to focus on its own conduct and practice standards.

Beginning Oct. 1, continuing-education programs for renewal of the certified financial planner certificate will have to meet new learning objectives that include ensuring that planners can define the financial planning process, describe its material elements, understand a written agreement, articulate disclosure rules and define the fiduciary standard.

The change is designed to give education providers a clearer understanding of what the Certified Financial Planner Board of Standards Inc. wants its certificants to know when they emerge from the ethics courses they must take to retain the designation, according to Michele Warholic, the organization’s managing director for education, examination and talent.

RAISING THE BAR

Other adviser organizations will be watching what the CFP Board does regarding adviser education.

“Raising the bar is a good idea because ethics is so important,” said Linda Gadkowski, chairwoman for ethics for the National Association of Personal Financial Advisors. “Ethics is at the core of what we do.”

NAPFA and other adviser organizations said that they continually review their programs. This year, for instance, NAPFA clarified procedures for addressing ethical lapses by members.

The CFP Board imprimatur “is the gold standard” in financial planning — especially with regard to ethics, Ms. Gadkowski said.

The adjustment is coming at a time when the implementation of the Dodd-Frank financial reform law is placing a greater emphasis on fiduciary duty, and investor confidence in the stock market — and those connected to it — is still recovering from the financial crisis of 2007-08.

According to Hearts and Wallets’ Quantitative Panel: 2010, nearly 60% of 4,000 mid- and late-career investors 28 to 64 said getting ripped off by their advisers is their biggest fear. Likewise, almost half of the surveyed investors near or in retirement are afraid of being cheated by their financial professionals.

But Ms. Gadkowski doubts that there is a chasm of confidence between clients and their advisers. In the wake of the market meltdown, investors seek the reassurance that advisers provide, she said.

“The waters are choppy, and they’re looking for the right help,” she said. “Somebody’s got to steer the ship.”

Of course, that puts more pressure on the captain to be ethical.

The CFP Board also is changing its criteria for instructors. Those teaching a CFP ethics class must have held CFP certification for at least five years and not have been the subject of investigation within the past five years.

The CFP Board requires 30 hours of continuing education from certificants every two years, two of which must focus on ethics. The mission of the organization is to professionalize the planning sector. It awards the CFP certificate to individuals who pass an initial exam and follow-up requirements. About 62,000 people have earned the mark.

INPUT FROM CFP HOLDERS

Ms. Warholic said the continuing-education changes regarding ethics are in response to concerns from CFP professionals who didn’t believe they were getting their money’s worth from the instruction.

“They don’t want to just pay for seat time,” Ms. Warholic said. “They want to leave with information that can help their practices, that makes them better financial planners.”

But one financial planner said that the CFP Board’s strict guidelines will create a curriculum focused on adhering to rules rather than delving into ethical principles.

It will be “very much a compliance-style rules-and-standards-based discussion,” said Michael Kitces, publisher of The Kitces Report and director of research at Pinnacle Advisory Group Inc. He first reported the CFP Board’s ethics program changes on his blog, Nerd’s Eye View (kitces.com/blog).

Mr. Kitces said the CFP Board’s approach will disqualify courses that focus on the writings of great philosophers and will preclude general business ethics.

“We’ve had 2,000 years’ worth of philosophy exploring how to lead a life of integrity,” Mr. Kitces said. “None of that counts.”

But Ms. Gadkowski said ethics training should be focused on everyday examples of conflicts that arise in adviser practices, rather than ethereal principles.

“It needs to be pertinent to a CFP, as opposed to Plato,” Ms. Gadkowski said. “The only way you remember the story is to bring it home. If we can just prevent one Bernie Madoff situation, it will be worth it.”

Ms. Gadkowski, a financial planner at Beacon Financial Planning Inc., said that a typical example in an ethics class is a situation where a client wants to take $500,000 out of his account in order to pay off a mortgage. He’s afraid of losing his job and wants to secure his homeownership.

The adviser, according to fiduciary duty, must follow through for the client if satisfying the mortgage is in his best interests, even though less money in his account will mean less money in fees for the adviser.

Some advisers resist ethics training because such scenarios force them to do some soul-searching, according to Ms. Gadkowski.

“It makes them look inward,” she said. “For some people, that’s a painful process.”

In addition to claiming that philosophers’ writings will be bypassed, Mr. Kitces said that ethics experts who are not CFP certificants will be ineligible to teach the ethics courses, and asserted that the CFP Board’s own code of ethics will not be part of the curriculum.

Ms. Warholic disputed both claims in an e-mail. She said that the organization’s code of ethics should be woven into continuing-education courses. She also noted that 100 of the 120 minutes of ethics education every two years must teach the CFP Board standards.

“Providers have up to 20 minutes to discuss other information and material,” she wrote.

The Investment Management Consultants Association also requires two hours of ethics education every two years but allows more flexibility in the curriculum.

“From my perspective, ethics is an approach to business and life in general,” said Gary Diffendaffer, IMCA’s deputy executive director of certification. “It’s how you go into every interaction — whether personal or business. A lot of fundamentals in ethics are similar around the world.”

Mr. Diffendaffer’s organization issues the certified investment management analyst and certified private wealth adviser credentials.

E-mail Mark Schoeff Jr. at [email protected].

Related Topics: Certified Financial Planner Board Of Standards Inc. (CFP Board)