I wrote recently about whether financial planners should be subject to new or additional licensure requirements. Though there is room for debate on that topic, the issue of what duty Minnesota financial planners currently owe to clients—particularly those holding a CFP® designation— is clear. They owe a fiduciary duty, meaning they must act in clients’ best interests and put clients’ interests before their own. No ifs, ands, buts, or exceptions about it.
Existing State Law Applicable to those “holding themselves out” as Financial Planners
Though there is not currently a “financial planning license” that planners must obtain before calling themselves a financial planner, many states, including Minnesota, have laws on the books that impose a fiduciary duty upon those providing financial planning services. Minnesota Statute 45.026 provides that someone is deemed to be “engaged in the business of financial planning” –and therefore subject to a fiduciary duty – if he holds himself out as a financial planner, financial counselor, financial adviser, investment counselor, investment adviser, financial consultant, or “other similar designation, title, or combination.” (That last part suggests financial services professionals/firms engaged in financial planning should not try to get around this rule merely by getting creative with their job titles -- eh hem, I’m looking at you, Financial Associates).
Financial Planners meeting the definition of Investment Adviser
Further, some states’ securities regulations reference and incorporate financial planning in regulations applicable to investment advisers. Minnesota Statute 80A.41(16) includes in the state’s definition of investment adviser “a financial planner or other person that, as an integral component of other financially related services, provides investment advice to others for compensation as part of a business or that holds itself out as providing investment advice to others for compensation.” Investment advisers are subject to state or federal registration requirements—along with robust post-registration compliance requirements— and owe a fiduciary duty to their clients. Financial planners who are not registered investment advisers should double check state regulations in each state where they have clients to ensure that they are not unlawfully acting as unregistered investment advisers when providing financial planning services to those clients.
Rules of Conduct Applicable to Financial Planners holding Professional Designations
Finally, many financial planners choose to obtain a professional designation, specifically the Certified Financial Planner (CFP®) designation, to help distinguish themselves as qualified and experienced planners. Holders of the CFP® designation (“certificants”) are responsible for adhering to the requirements and rules of conduct set forth by the CFP Board of Standards (the “CFP Board”). Failure to do so not only exposes the CFP® professional to discipline by the CFP Board, but also (potentially) to regulatory action and/or civil liability under Minnesota Statute 45.026, Minn. Stat. 80A.69, Minn. Rule 2876.5023, insurance regulations, or other consumer protection regulations if the professional’s use of the designation is misleading or deceptive to clients.
The CFP Board’s existing Code of Ethics and Standards of Professional Conduct (the “Code and Standards”) provides as follows:
Rule 1.4 A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.
Terminology: “Fiduciary.” One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.
Rule 4.5 In addition to the requirements of Rule 1.4, a certificant shall make and/or implement only recommendations that are suitable for the client.
Earlier this year, the CFP Board announced revisions its Code and Standards, which include an expansion and reclarification of the duty certificants owe to clients. The new Code and Standards, which will take effect on October 1, 2019, state as follows:
STANDARDS OF CONDUCT
A. DUTIES OWED TO CLIENTS FIDUCIARY DUTY
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:
a. 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.
c. Duty to Follow Client Instructions. A CFP® professional must comply with all objectives, policies, restrictions, and other terms of the Engagement and all reasonable
In commentary accompanying the revised Code and Standards, the CFP Board was careful to note that a certificant’s fiduciary duty only applies at all times “when providing Financial Advice.” But, the revised Code and Standards defines “Financial Advice” broadly as follows:
A. A communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with respect to:
1. The development or implementation of a financial plan;
2. The value of or the advisability of investing in, purchasing, holding, or selling [securities, insurance products, real estate, bank instruments, commodities contracts, derivative contracts, collectibles, or other financial products (“Financial Assets”)];
3. Investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters;
4. The selection and retention of other persons to provide financial or Professional Services to the Client; or
B. The exercise of discretionary authority over the Financial Assets of a Client.
The determination of whether Financial Advice has been provided is an objective rather than subjective inquiry. The more individually tailored the communication is to the Client, the more likely the communication will be viewed as Financial Advice. The provision of services or the furnishing or making available of marketing materials, general financial education materials, or general financial communications that a reasonable CFP® professional would not view as Financial Advice, does not constitute Financial Advice.
Putting it All Together
In summary, everyone providing financial planning services in Minnesota owes a fiduciary duty to recipients of those services. Those who include “investment advice” in their financial planning services must comply with general fiduciary obligations, as well as specific registration and compliance requirements applicable to investment advisers. And those holding themselves out as CFP® professionals must be prepared to meet the revised Code and Standards to take effect next year. Importantly, a fiduciary duty is not (at least in my view) a hat that a financial planner can take on and off depending on the client, or the product, or the circumstances. Rather, a fiduciary duty is a firmly affixed badge, and one that financial planners should wear (and many already do wear) with pride. Treating it that way is, of course, best for all of us—for financial planners wanting to bolster the reputation of their industry, for regulators aiming to protect consumers, and most importantly, for the clients financial planners aim to serve.
Brian Edstrom is a Shareholder and Attorney at Avisen
Legal, P.A. He brings to Avisen clients the ability to “speak regulator,” having
spent several years working for federal and state regulators in Washington D.C.
and Saint Paul, MN before entering private practice. Brian assists
clients in all aspects of working with securities regulators, whether it be to
obtain a license or registration, prepare for an audit, or respond to an
enforcement investigation. Brian also regularly advises clients on their
general business needs, particularly surrounding raising money through