New standards for better financial advice

Steve Merrell |

How honest is your financial advisor? It is a question worth asking. While most advisors are honest and ethical, a bad one can turn financial dreams into nightmares. You need to protect yourself and one way to do this is to familiarize yourself with the best practices in the financial advice industry. If your advisor isn’t following industry best practices, perhaps you should consider finding one who does.

Some of these best practices are the ethical and professional standards established and enforced by the CFP Board. The CFP Board is the organization that grants the Certified Financial Planner® certification. Its mission is to “benefit the public by fostering professional standards in personal financial planning.” It does this by establishing the curriculum for the CFP® certification, administering the qualifying exam and enforcing the ongoing ethical and professional standards associated with the certification. Effective October 1, the CFP Board issued a revised and updated Code of Ethics and Standards of Conduct for all CFP® professionals.

Among other things, the updated Code of Ethics states that a CFP® professional must 1) Act in the client’s best interests, and 2) Avoid—or disclose and manage—conflicts of interest. In my experience, most ethical lapses in our profession would be remedied by applying these two mandates.

Acting in a client’s best interest and avoiding conflicts of interest—or disclosing and managing those conflicts—are the basis of a true fiduciary standard of care. I have written before about the importance of working with an advisor who is a fiduciary. In the CFP Board’s revised Standards of Conduct, this fiduciary duty is clearly delineated. It entails three specific duties that advisors owe their clients: the duty of loyalty to the client, the duty to act with professional care and competence, and the duty to follow client instructions that are reasonable, lawful and in harmony with the client’s objectives.

Being loyal to the client means that the CFP® professional places the client’s interests ahead of her own or those of her firm. When conflicts of interest arise, it is the duty of the CFP® professional to disclose those conflicts, obtain the client’s informed consent and then properly manage the conflict.

One practical effect of this duty of loyalty is that a CFP® professional, working as a commission-based broker, cannot recommend products that pay sales-related compensation if an identical product is available without those fees. Sales-related compensation includes commissions, trailing commissions, 12b-1 fees, spreads, transaction fees, revenue sharing, referral and solicitor fees. If the CFP® professional earns sales-related compensation, it must be clearly disclosed to the client and the professional must receive the client’s informed consent.

In another important clarification, the CFP Board’s updated rules set a clear standard for how CFP® professionals describe how they get paid. Over the past several years, a growing number of advisors who earn asset management fees and sales-based compensation have resorted to describing themselves as “fee-based” in order to look more like “fee-only” advisors. This terminology has muddied the water for the industry, leading to a lot of confusion among consumers.

Under the CFP Board’s new standards, CFP® professionals who claim to be “fee-based” must make clear that they are not fee-only and that they and their firm earn sales-related compensation in addition to management fees. This enhanced disclosure will go a long way to helping consumers understand exactly where their advisors’ incentives lie.

As you can probably imagine, these updated Standards of Conduct are not popular with many commission-based advisors or their firms. Not surprisingly, eight major brokerage firms wrote to the CFP Board asking them to reconsider the revised standards. Fortunately, the CFP Board did not back down. Though adopting these standards will require significant adjustments for many advisors, the new standards will strengthen the ethical and professional foundations of the financial planning and financial advisory professions.


Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to