A Major Insurer Exposes the Weakness in the CFP Board’s Standards

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Q3 2019 hedge fund letters, conferences and more

3844328 / Pixabay

The CFP Board had noble intentions with its new standards that became effective last month. However, its handling of conflicts falls so short that absent significant new guidance the credibility of the standards is in serious doubt. This is clear from the recent publication of a major insurer’s eye-opening disclosure intended to address conflicts.

The CFP Board established the Commission on Standards in December 2015 to recommend changes to the CFPB standards. After an extensive process involving subsequent public forums, proposals, re-proposals and comments, the CFP Board approved new standards in March 2018 that became effective October 1 2019.

CFPB is providing guidance on what they mean. This includes commentary, a roadmap and case studies. Some case studies are already out (see here). Other case studies are in process.

The case studies aim to give the standards meaning for CFPs, investors and consumers, and how the standards will be interpreted and applied. They will be a “roadmap” for compliance that can be understood by an ordinary investor.

Compliance gives conduct standards meaning. State securities administrators and NASAA pointed this out in regard to the SEC’s Regulation BI. According to Andrea Seidt, Ohio commissioner of securities and chair, noted, “If (Reg BI) is going to mean anything, if it’s really going to be a step up from suitability. The way that that’s going to happen is from regulatory examination and enforcement.”

This is especially true of material conflicts of interest that are not avoided or eliminated and remain central to a CFP’s product recommendations. Financial Planning magazine recently reported on such a case in its coverage of Northwestern Mutual’s (NM) disclosure document that was crafted for CFPs. The six-page document is called “My Commitment to you as a CFP Professional.”

The document describes in detail how NM’s jungle of material conflicts that face a CFP who is a NM representative or insurance agent. Those include, for example, the contractual relationship with NM, the compensations-related conflicts, increasing-payout percentages … known as a grid, how “I am incentivized to sell more expensive products and services, ” and that “I have an incentive to recommend an NM variable annuity product for purchases below $50,000, which is a material conflict of interest…”

This is an extraordinary document. It plainly describes the magnitude of the incentives aimed to make NM a powerhouse product distributor. It describes a rep’s relationship of three: NM on one side, customers on another and the agent as the third piece. It openly tells the basic story that reps don’t “advise.” They are hired, trained and incentivized to sell.

NM then argues that, notwithstanding this infestation of material conflicts, CFPs need not mitigate or manage them. The reason? NM conflicts are designed to be self-mitigated or self-managed. How? The disclosure states, “For more than 160 years, NM has been helping individuals, families and businesses, (so that I know) in the long run I will benefit you most by serving you well…. This in itself helps to mitigate the material conflicts …. ” (The emphasis is mine, as is the case in the next paragraph.)

It continues, “The nature of NM and its insurance products also helps to manage material conflicts of interest,” and “My conflicts are further mitigated by NM ‘s compensation practices … specific programs were designed intentionally to minimize compensation that could incent sales behavior that is in material conflict with a client’s best interest. All of these steps help mitigate my conflicts” in selling NM products to you.

Read the full article here by Knut Rostad, Advisor Perspectives


Saved Articles
X
TextTExtLInkTextTExtLInk

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted for being a sophisticated and loyal reader.

Welcome in the new year by signing up up for ValueWalkPremium today and get our exclusive content for 40% off. This is our second biggest discount ever!!

Use coupon code VIP20 or click on the button below

Limited time offer only ENDS 1/31/2019 or after next 30 23 subscribers take advantage whichever comes first – please do not share this discount with others

 

0