A federal court has vacated the Department of Labor’s fiduciary rule for retirement accounts. But the fiduciary principle is far from dead. Not only are state jurisdictions adopting their own fiduciary standards, but the Certified Financial Planner Board of Standards has just approved a new Code of Ethics and Standards of Conduct. The code requires CFP® certificants to uphold a fiduciary standard when providing financial advice to clients. The Board’s prior code only required advisors to act as fiduciaries when performing comprehensive financial planning.

After a two-year process, the CFP-granting organization decided to move to a more comprehensive fiduciary standard that will assure that its 80,000 planners serve the public interest.

“(The) CFP Board took a bold step more than a decade ago in requiring a fiduciary duty when CFP® professionals provide financial planning services. We are raising the bar even higher now with a fiduciary standard that will apply anytime a CFP® professional gives financial advice,” said Richard Salmen, CFP®, Chair of the CFP Board of Directors. “This is a monumental step forward in the evolution of not just the CFP® certification, but also of the profession of financial planning. Consumers, advisors, and firms alike will all benefit from these new standards.”

According to Salmen, the CFP Board spent more than two years working on the revised Code. Starting with the December 2015 formation of the Commission on Standards, the Board held more than 17 public forums and multiple comment periods and received more than 1,500 written comments and hundreds of oral comments. It also conducted a survey and provided multiple opportunities for the public to provide input.

The new CFP Code of Ethics and Standards of Conduct, which will take effect on October 1, 2018, requires CFP® holders to;

  • Place the interests of their clients above their own interests or those of their firms.
  • Strive to avoid conflicts of interest (or if they can’t be avoided, to fully disclose them), to obtain the informed consent of clients regarding the conflicts, and to properly manage the conflicts.
  • Act without regard to the financial or other interests of the CFP® holder, of that person’s firm, or of any individual or entity other than their clients.
  • Perform their duties with integrity, which must transcend personal gain or advantage.
  • Provide professional services with competence, which means with relevant knowledge and skill.
  • Do their jobs with diligence, which entails responding to reasonable client inquiries in a timely and thorough manner.
  • Exercise sound and objective professional judgment, refusing any gift, gratuity, entertainment, non-cash compensation, or other consideration that might compromise a financial planner’s objectivity.
  • Treat all clients, colleagues, and others with dignity, courtesy, and respect.
  • Comply with the laws, rules, and regulations governing the financial-services industry.
  • Keep confidential any non-public personal information about a prospective, current, or former client.
  • Provide sufficient information to all clients confirming the scope of all financial-advice and financial-planning engagements.
  • Provide accurate information to clients in a manner and format that fosters understanding.
  • Refrain from making false or misleading statements regarding methods of compensation, especially regarding claims of operating on a fee-only or fee-based basis.
  • Exercise reasonable care and judgment when selecting, using, or recommending any software, digital advice tools, or other technology to clients.
  • Refrain from borrowing or lending money to a client.

The Code also defines the financial-planning process, applying standards to its seven underlying steps, which include:

  • Understanding the client’s personal and financial circumstances.
  • Identifying and selecting goals.
  • Analyzing the client’s current course of action and potential alternative courses of action.
  • Developing the financial planning recommendation(s).
  • Presenting the financial planning recommendations(s).
  • Implementing the financial planning recommendation(s).
  • Monitoring progress and updating the client.

Finally, the new code reviews a CFP® planner’s duties owed to firms and subordinates, as well as to the CFP Board.

To learn more about the CFP Board’s new Code of Ethics and Standards of Conduct, read the complete document here. You can also review a commentary version, a redline version, and a side-by-side document comparing the new and prior documents.

Continue to keep up to date with ethical practices by reading the latest news on  National Ethics AssociationFor information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com.

Rogue Advisors on Parade

A Dover, Massachusetts life broker is going to jail for filing fraudulent tax returns. The broker, Anthony J. May, 62, was sentenced to eight months in prison and a year of supervised release after being convicted for failing to disclose commissions and other income on his federal tax returns. May owned two businesses: a life insurance agency and a life settlement brokerage, both operated out of an office suite in Hingham, Massachusetts. According to IRS investigators, May filed false income tax returns from 2006 through 2009, concealing $735,000 in income from insurance commissions, broker fees, and lease rental payments.

A former life insurance agent from Lubbock, Texas has received a life prison sentence for scamming his senior clients out of hundreds of thousands of dollars. According to investigators from the Texas Department of Insurance, Joseph Gaines sold annuities to a number of West Texas senior citizens only to confiscate their payments and use them for his own purposes. One of his victims was a 94-year-old woman who gave Gaines a $700,000 check in return for annuity coverage. However, when her family became suspicious, they called the insurer, which advised them they had no record of the woman’s purchase.

A San Diego life insurance agent submitted a guilty plea in February 2018 for stealing $1.5 million from senior citizens and other clients. The agent sold them various investment funds, but instead of passing their checks to the appropriate investment firms, he used them to buy personal items such as a luxury car, jewelry, and three rental properties.  The agent, Shawn Heffernan, 43, is facing a nine-year state prison sentence after his sentencing on March 7, 2018. According to authorities, Heffernan began his scams by selling clients annuities. However, before the policies expired, he would persuade them to replace the policies with new ones, generating new commissions for himself and surrender penalties for his clients. He also persuaded other clients to cash out their annuity policies and give him the proceeds for investing in other instruments. However, rather than making the promised investments, he pocketed the money, using it to buy a Maserati sports car, jewelry, and real estate. He also used Ponzi techniques to fulfill redemption requests from prior clients with new-client money.

To read more about ethical business practices, visit the Ethics Center at the National Ethics Association, sponsor of EOforLess. 

As a financial professional, you understand why it’s important to maintain a clean compliance record. Without one, it’s hard to grow your business from among today’s skeptical prospects. But do you also know why it’s equally crucial for all of your intermediary firms to be as committed to compliance as you are? Unless your broker-dealer, registered investment advisor (RIA), and insurance field marketing organization (FMO) are as squeaky-clean as you, you may face regulatory trouble down the road.

Here’s the problem. When your intermediary firm has a checkered compliance history, they automatically become the focus of regulator attention. And when regulators become suspicious of your broker-dealer, RIA, or FMO, they tend to also become suspicious of you. This has real consequences for your ability to do business, says Jon Henschen, in a recent ThinkAdvisor.com article.

  • First, intermediaries who don’t comply with regulations or that hire agents or advisors with the same disregard spark extra regulatory sweeps and audits. These will distract their management teams and make it harder for advisors with clean backgrounds to get their business on the books and their compensation processed.
  • Second, the more regulatory scrutiny a firm receives, the more money it will spend on legal and compliance services. These costs will ultimately come out of advisor compensation—out of your wallet or pocketbook.
  • Third, when regulators find evidence of wrongdoing, they often will push for the removal of the responsible parties. If they have long tenure, their leaving will weaken the company’s institutional memory and bench strength. This may not bode well for its ability to compete in the future.
  • Fourth and finally, every time a broker-dealer, RIA, or FMO gets into regulatory hot water, it will generate negative publicity that lives forever on the Internet. As the firm’s reputation weakens, so will yours because you are tied to the firm. It’s hard enough to generate new clients without giving prospects an additional reason to question your integrity.

Solution? Do thorough research on any intermediary firm before joining it. If you’re considering a broker-dealer, conduct a thorough BrokerCheck review to uncover the scope of disclosure events among its registered representatives. Simply go to Brokercheck.finra.org, click on the individual tab, then type in the broker-dealer’s name where indicated. The result will be pages showing all the firm’s registered reps and indicating those with disclosure events. If you see “yes” in the disclosures field, click on “more details” to learn about the person’s infractions.

Now, this process can be unwieldy because there’s no way to retrieve a summary report showing the percentage of reps at a firm with disciplinary issues. Best you can do is scan the individual reports and then click on the “Yes” to see how and why an individual representative got into trouble. However, if you scan the broker-dealer’s registered representative summaries long enough, you’ll be able to see if the firm has dubious ethics.

According to Jim Eccleston of Eccleston Law, as you’re doing this, watch for disclosures that indicate:

  • Serious negligence or financial abuse of clients, including churning, borrowing from a client, forging documents, or selling unapproved products from an outside organization (selling away).
  • A pattern of paying fines for violating industry rules.
  • Personal bankruptcy or other credit-related problems that suggest the representative is financially stressed or has exercised poor financial judgment.
  • Repeated firings from prior broker-dealers and/or working for many different firms in various states over a short period of time.

It’s also important to evaluate a broker dealer’s own compliance record, not just those of its representatives. To do that, return to the main BrokerCheck page, click on the “Firm” tab, and then enter the firm name or CRD# where indicated. Hitting “search” will return the firm’s disclosure history (if any), where you’ll get a sense of its own adherence to industry regulations and business ethics.

You can do the same individual and firm-level analysis for investment advisor representatives and their RIA firms by visiting the SEC’s Investment Adviser Public Disclosure website. For insurance FMOs, your sleuthing will be much trickier because there is no single government agency or database to check. Since FMOs often operate in multiple state jurisdictions, it can be tough to get a handle on how many of their agents have run afoul of the law . . . or whether the firm itself has. Best advice: let Google be your friend.

Hopefully, researching FINRA, SEC, and state insurance compliance records will reveal whether signing with an intermediary firm is risky. If so, doing business anyway might result in you paying more for your E&O insurance. On that basis alone, it’s wise not only to do your due diligence before joining a broker-dealer, RIA, or insurance FMO, but also to take what you find seriously. No point paying more than necessary for your E&O insurance.

For information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.

ADVISOR ALERT: Identity Thieves May Be Targeting Your Annuity Clients

Insurance regulators in several states have issued warnings regarding attempted looting of annuity accounts. If you sell such products, warn your clients now to carefully review their insurer statements going forward.

Earlier this year, officials at the Nebraska Department of Insurance, along with the Kansas Insurance Department, warned that they had received reports of identity thieves attempting to withdraw money from consumer accounts in their states. Ken Selzer, the Kansas insurance commissioner, revealed last fall that attempts had been made to access annuities at four different insurance companies domiciled in his state.

What’s alarming about these actions is that the fraudsters contacted the insurers for redemptions using actual consumer names, dates of birth, Social Security Numbers, and account numbers. According to Selzer, one of the four attempts was successful, costing one insurer several thousand dollars.

In Nebraska, criminals tried several times to withdraw funds from annuity contracts held by state residents, without the contract owners’ knowledge. Fortunately, the insurer involved was able to detect the fraud, block the transactions, and issue a public alert.

In Colorado, Michael Conway, interim Insurance Commissioner, issued a consumer alert about similar attempts in his state. “This is another area where people need to be on their guard,” said Conway. “Identity theft can cost thousands and shatter lives. Consumers should pay attention to all correspondence about their annuities and be sure that account balances and personal information are correct.”

The Colorado Division of Insurance also warned consumers that being aware of such scams is important, but not enough. They should contact their companies and ask what is being done to prevent large-scale breaches like those seen in the news. They should also ask about protections that can prevent access to their individual accounts and what steps policyholders and account holders should take to add additional security to those accounts.

Warning your clients about fake annuity disbursements is just one thing to discuss with your clients about securing their money. Another is how to prevent identity theft for all of their financial accounts, credit cards, and the like.  To that end, members of the National Ethics Association, sponsor of EOforLess.com, should consider purchasing NEA’s consumer booklet “Identity Theft Prevention” for all of their clients. The brochure is available for a nominal cost at ethics.net.