Journal of Financial Planning: April 2023
WHO: Melissa Kemp, CFP®, AEP, CNAP, CAP
WHAT: Executive Director, FPA of Greater Phoenix; President, Premium Organization LLC
WHAT'S ON HER MIND: “I think as we become more alert to what it’s going to take to elevate the profession, we wouldn’t hold up our Code of Ethics and Standards of Conduct as the ceiling, we would understand that that’s the floor.”
As an instructor of an ethics course and a member of the CFP Board’s Disciplinary and Ethics Commission, can you share what in our current landscape are the most common ethical dilemmas or conflicts of interest that planners have to manage?
Refrain from adverse conduct is a part of [the CFP Board Code of Ethics and Standards of Conduct] and within that adverse conduct area are bankruptcies. I think most planners are aware of it, but it still shows up with a pretty consistent cadence. Personal bankruptcies they understand, but where they tend to get confused or surprised is [that] it may not be your bankruptcy or even your firm’s bankruptcy; if you’re a control person in another entity, and that entity declares bankruptcy, that is also reportable.
Another area that is catching people by surprise right now is under the adverse conduct [standard]; awards and judgments against you are reportable in your ethics. So are tax liens. Because of the very cyclical nature of some of our CFP® professionals’ business models, it’s all too easy for them to have a really great year, get behind in their tax payments, and then have a really bad year, and that’s what they leave out. So tax liens are reportable, and they surprise people because they figure, “It’s my debt; I’m going to pay it off.”
The other surprise that seems to come up with surprising frequency, to me, are DUIs—driving under the influence or driving while intoxicated. It’s not a transgression that involves your financial skill or your financial advice ability, but it is in most states a felony, and felonies are reportable. So if you have a DUI, unfortunately that is one that catches people by surprise.
Can you tell me a little bit about ethics versus rules and why it matters to financial planners?
I like to use the metaphor of building and building codes. I’ve never heard anybody brag about living in a home that was built to code. You assume that it’s built to code, that it’s going to be safe from fire, electrical damage, flooding, storms, that the walls are solid. And then what you brag about is high ceilings, great fixtures. In the building world, they understand that code is your minimum acceptable standard. When you have a code of ethics, you’re providing that base, that minimum; I call it the floor. If we want to elevate the profession, if we want our professionals to really think through [questions like] what is the highest plane that I would seek to reach? or what are the ethical decisions that I would make of my own volition? then you’re not going to look at the floor, you’re going to look at the ceiling. . . . A lot of our current professional growth around ethics is still focused on the floor. Everything we do looks at who fell through the floor, who didn’t meet the minimum standards. I think as we become more alert to what it’s going to take to elevate the profession, we wouldn’t hold up our Code of Ethics and Standards of Conduct as the ceiling, we would understand that that’s the floor.
What are your thoughts on how consumers perceive financial planning as an ethical profession? What do they feel about financial planners?
Confusion. Distrust. Overwhelmed. “Who do I trust? Where do I go? Is it good advice; is it not?” And then when they find something that they think is good advice, it’s about the person, not about their business model or their ethical standards; it’s a very personal level of trust. It’s not trust for the industry or the profession. Our industry challenge is to help consumers who don’t have financial advisers, or don’t know how to make good choices, gain some very easy decision points on [where trust is worthy].
The Code of Ethics and Standards of Conduct, the new one through the CFP Board, does have a really strong consumer feature to it. It’s a principles-based code of ethics. There are just six principles, and so if they skip the rest of the book completely, if they just have those six principles, that actually starts the conversation we just had: what are the ethical monuments that you would strive toward? Having a principles-based code of ethics that is not full of jargon is a good place to start with consumers. . . . Helping the general public understand the difference between what people say and what they can disclaim or disclose away I think is a critical message. And that also points to the fiduciary duty.
A lot of consumers are confused about what fiduciary means. That introduces a whole new education component to make sure that they understand and appreciate what that means for them.
There’s this constant tug of war between what states control and what the federal government does, and then when it gets too confusing, they come up with a uniform code. So we have a Uniform Commercial Code. If you do business in one state and you move to another state, it’s the same set of rules. We have a Uniform Trust Code for settling trusts, and we have a Uniform Probate Code. We have all kinds of uniform codes, but we haven’t taken a uniform approach to a fiduciary standard. The CFP Board with their definition of the fiduciary duty kind of leaned heavily against what is out there in every state. It’s a three-prong standard: duty of loyalty, duty of care, and duty of obedience. So they’ve actually moved toward what I would call a uniform fiduciary definition. If our industry had a uniform fiduciary definition, along with the Uniform Commercial Code and the Uniform Trust Code, then you could actually point consumers to them and say, “This is what it means to have a fiduciary duty.” It may take a while for them to understand what a fiduciary is, but once they get there, they know that it would be the same in any state with any professional who couldn’t disclaim or disclose that away. Then you find you have a consumer protection point that is meaningful and relevant, and could be enforced in any state.
Does that come back to the minimum acceptable standard question, where if you have something that you’re trying to apply across everyone, every different designation, then you are trying to find that equilibrium where it applies to everyone?
I think that would be the bridge where it’s not just a minimum acceptable standard, but it is the way you would point toward the ceiling not the floor. If you’re going to prove that you fulfilled your fiduciary duty, then the burden is on you always to prove that you avoided conflicts of interest, you acted in their best interest, you were competent, and that you were obedient to what they needed and wanted to do.
