Tag: Financial Instition

CFP Board Commission On Standards Expands CFP Fiduciary Duties… But Can It Enforce Them?

CFP Board Commission On Standards Expands CFP Fiduciary Duties… But Can It Enforce Them?

Executive Summary

After a nearly 18-month process of working to update its Standards of Professional Conduct, the CFP Board’s Commission on Standards has released newly proposed Conduct Standards for CFP professionals, expanding the breadth of when CFP professionals will be subject to a fiduciary duty, and the depth of the disclosures that must be provided to prospects and clients.

In fact, the new CFP Board Standards of Conduct would require all CFP professionals to provide a written “Introductory Information” document to prospects before becoming clients, and a more in-depth Terms of Engagement written agreement upon becoming a client. In addition, the new rules also refine the compensation definitions for CFP professionals to more clearly define fee-only, limit the use of the term fee-based, and updates the 6-step “EGADIM” financial planning process to a new 7-step process instead.

Overall, the new Standards of Conduct appear to be a positive step to advance financial planning as a profession, more clearly recognizing the importance of a fiduciary duty, the need to manage conflicts of interest, and formalizing how CFP professionals define their scope of engagement with the client.

Ironically, though, the CFP Board’s greatest challenge in issuing its new Standards of Conduct is that the organization still only has limited means to actually enforce them, as the CFP Board can only make public admonishments or choose to suspend or revoke the CFP marks, but cannot actually fine practitioners or limit their ability to practice. And because the CFP Board is not a government-sanctioned regulator, it is still limited in its ability to even gather information to investigate complaints in the first place, especially in instances where the complaint is not from a client but instead comes from a third party (e.g., a fellow CFP professional who identifies an instance of wrong-doing).

In addition, the CFP Board’s new Standards of Conduct rely heavily on evaluating whether the CFP professional’s actions were “reasonable” compared to common practices of other CFP certificants… which is an appropriate peer-based standard for professional conduct, but difficult to assess when the CFP Board’s disciplinary proceedings themselves are private, which means CFP professionals lack access to “case law” and disciplinary precedents that can help guide what is and is not recognized as “acceptable” behavior of professionals. At least until/unless the CFP Board greatly expands the depth and accessibility/indexing of its Anonymous Case Histories database.

Nonetheless, for those who want to see financial planning continue to advance towards becoming a recognized profession, the CFP Board’s refinement of its Standards of Conduct do appear to be a positive step forward. And fortunately, the organization is engaging in a public comment process to gather feedback from CFP certificants to help further refine the proposed rules before becoming final… which means there’s still time, through August 21st, to submit your own public comments for feedback!

CFP Board Commission On Standards Proposes Revised CFP Code Of Ethics And Standards Of Conduct

Back in December of 2015, the CFP Board first announced that it was beginning a process to update its Standards of Professional Conduct, by bringing together a new 12-person “Commission on Standards” (ultimately expanded to 14 individuals), including diverse representation across large and small firms, broker-dealers and RIAs, NAPFA and insurance companies, and even a consumer advocate and former regulator.

The purpose of the new group was to update the CFP Board’s existing Standards of Professional Conduct, which is (currently) broken into four key sections:

– Code of Ethics and Professional Responsibility: The 7 core ethical principles to which all CFP certificants should aspire, including Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, and Diligence

– Rules of Conduct: The specific rules by which the conduct of CFP professionals will be evaluated, including a CFP certificant’s obligations to define the client relationship, disclose conflicts to the client, protect client information, and the overall duty of conduct of the CFP certificant to the client, to employers, and to the CFP Board itself.

– Financial Planning Practice Standards: The standards that the CFP certificant should follow that define what financial planning “is” and how the 6-step financial planning process itself should be delivered.

– Terminology: The definitions of key terms used in the Standards of Professional Conduct, from what constitutes a “financial planning engagement” to what it means to be a “fiduciary” and the definition of “fee-only” and what is considered “compensation” to be disclosed.

The update process would be the first change to the CFP Board’s Standards of Professional Conduct since mid-2007, which at the time was highly controversial, and stretched out for years, but culminated in the first application of a fiduciary duty for CFP professionals.

Under the newly proposed Code of Ethics and Standards of Conduct, which the CFP Board published for public comment last Tuesday, June 20th, the four sections above will be consolidated into two sections – a Code of Ethics, and a Standards of Conduct (which will incorporate the prior Rules of Conduct, Practice Standards, and key Terminology).

The full text of the Proposed Code of Ethics and Standards of Conduct can be viewed here on the CFP Board’s website.

Expanding The Fiduciary Definition Of “Doing” Financial Planning

Under the CFP Board’s current Rules of Conduct for CFP professionals, certificants owe to their clients a fiduciary duty of care when providing financial planning or material elements of financial planning. Accordingly, the reality is that the overwhelming majority of CFPs are already subject to a fiduciary duty when providing financial planning services to clients.

However, the CFP Board’s standard has been criticized as allowing for a “loophole”, in that it’s not based on simply being a CFP professional, but instead tries to identify when people are doing financial planning (or material elements thereof). Which at best isn’t always clear, and at worst allows a subset of CFP professionals to aggressively sell nothing but their own products – knowingly not serving as a fiduciary, despite holding out as a CFP certificant – because a single product recommendation was not deemed to be “doing financial planning”.

New CFP Board Fiduciary Duty When Providing Financial Advice

In its new CFP Code of Ethics and Standards of Conduct, the CFP Board takes a stronger position that CFP certificants should be held to a fiduciary standard when delivering their services. Accordingly, the very first section of its new Standards of Conduct states:

A CFP Professional must at all times act as a fiduciary when providing Financial Advice to a client, and therefore, act in the best interest of the Client.

Notably, under this new rule, the scope of fiduciary obligation is not limited to just when providing “financial planning” or “material elements of financial planning”. Instead, the fiduciary duty will apply anytime a CFP professional is “providing financial advice”, which itself is defined very broadly, as:

Financial Advice (according to CFP Board)

A) Communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion 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 addressing goals, budgeting, risk, health considerations, educational needs, financial security, wealth, taxes, retirement, philanthropy, estate, legacy, or other relevant elements of a Client’s personal or financial circumstances;
  2. The value of or the advisability of investing in, purchasing, holding, or selling 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.

In this definition, the mere suggestion that a client take or refrain from taking any particular course of action is deemed “financial advice”. Notably, the CFP Board does clarify that marketing materials, general financial education materials, or general financial communication “that a reasonable person would not view as Financial Advice” does not constitute Financial Advice. Nonetheless, most classic recommendations – from delivering a comprehensive financial plan, to merely suggesting “this product is right [or not right] for your situation”, would be captured under this definition of Financial Advice, and subjected to a fiduciary duty.

In other words, the expansion of the CFP Board’s application of the fiduciary duty to providing any kind of “financial advice”, and not just delivering “financial planning or material elements of financial planning”, eliminates the current gap where product salespeople could sell a product as a CFP certificant and claim they’re not subject to the fiduciary duty because it wasn’t “financial planning”. Although the fiduciary duty is still not defined by merely being a CFP or holding out as a CFP certificant, this new and far-broader scope of applying the fiduciary duty when “delivering financial advice” still accomplishes a substantively similar result, as even a focused, single-product recommendation, would still constitute “financial advice” under the new rules.

On the other hand, the CFP Board’s new definition of Financial Advice to which a fiduciary duty applies may actually have gone too far, as the new rules have no actual requirement that the client have agreed to engage the CFP professional in order for the fiduciary standard to occur. By contrast, for the fiduciary duty to apply to an RIA under the Investment Advisers Act, the investment adviser must give investment advice for compensation, and the Department of Labor similarly only applies a fiduciary duty to investment advice given to a retirement investor for compensation. The “compensation” requirement helps to ensure that free advice is not subject to a fiduciary duty, and also helps to ensure that suggestions that may be given in the course of soliciting a prospect are not deemed as fiduciary financial advice even if the advisor is never hired. The CFP Board may need to consider adding a similar stipulation to their current rules, to make it clear that the CFP professional’s obligation to deliver fiduciary financial advice only applies if the client ultimately actually engages the professional for advice for which at least some type of compensation is paid!

New Fiduciary Duties Of A CFP Professional

Of course, if CFP certificants are going to be held to a fiduciary duty, it’s still necessary to define exactly what that means. Most financial advisors, thanks to the recent discussions about the Department of Labor’s fiduciary rule, are familiar with the classic requirement that fiduciaries must act in the best interests of their clients, but in reality a fiduciary duty can (and should be) broader than just this Duty of Loyalty to the client.

In its new rules, the CFP Board defines the obligations of the CFP professional as a fiduciary to include:

CFP Professional’s Fiduciary Duty

A) Duty of Loyalty. A CFP® professional must:

  1. Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm;
  2. Seek to 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
  3. 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 interest of the Client and place the Client’s interest 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 and lawful directions of the Client.

In other words, the CFP Board is, in fact, applying the two core duties of a fiduciary standard: the Duty of Loyalty (to act in the interests of the client), and the Duty of Care (to act with the care, skill, prudence, and diligence of a professional). In addition, the CFP Board still affirms that a CFP professional must follow their clients’ instructions as well. (Which means a CFP professional still has an obligation to follow the clients’ instructions if the client wants to make their own bad financial decision against the advisor’s advice!)

Notably, in the past, the CFP Board’s existing Rules of Conduct for CFP professionals also stated that the CFP certificant – when acting as a fiduciary while providing financial planning or material elements of financial planning – owes to the client a duty of care, and must place the interest of the client ahead of his/her own. However, the new rules go much further in clearly and concretely defining the fiduciary duties of loyalty and care.

Managing Fiduciary Conflicts Of Interest As A CFP Professional

One of the core issues of a fiduciary duty, and the obligation to place the interests of the client above that of the advisor or his/her firm, is how to handle the inevitable conflicts of interest that may arise.

The CFP Board’s new Duty of Loyalty specifically requires that CFP professionals seek to avoid conflicts of interest, or fully disclose any Material conflicts of interest (where “material” is defined as “information that a reasonable client would have considered important in making a decision”).

In addition, a further expansion of the CFP professional’s duties with respect to conflicts of interest, in Section 9 of the new Standards, would obligate the CFP professional to obtain “informed consent” after disclosing any Material conflicts of interest (though informed consent can be handled in conversation in a prospect/client meeting, as written consent is not required).

Furthermore, CFP professionals are expected to “adopt and follow business practices reasonably designed to prevent Material Conflicts of Interest from compromising the CFP professional’s ability to act in the Client’s best interests.” Notably, this is very similar to the “policies and procedures” requirement that the Department of Labor imposes on Financial Institutions engaging in fiduciary advice with respect to retirement accounts – although the DoL fiduciary rule requires the firm to adopt policies and procedures, while the CFP Board’s standards require the individual CFP certificant to adopt those business practices (recognizing that the CFP Board has no jurisdiction over firms, only certificants, and that CFP certificants must comply even if their firms, which may have non-CFPs as well, do not adopt firm-wide policies and procedures).

On the other hand, organizations like the Institute for the Fiduciary Standard have already pointed out that the CFP Board has a history of encouraging CFP professionals to disclose conflicts of interest, but not necessarily urging them to actually avoid or eliminate those conflicts. By contrast, the Department of Labor’s recent fiduciary rule goes into far greater depth about what constitutes an unacceptable (i.e., not realistically manageable) conflict of interest, and outright bans many (as does ERISA’s fiduciary duty). For the CFP Board, though, the new standards have little guidance on whether CFP professionals are actually expected to avoid any conflicts of interest at all, as the focus of the new standards is simply on disclosing material conflicts of interest (and gaining “informed consent” from the client).

In fact, because the CFP Board allows for material conflicts of interest – as long as there is informed consent – there is arguably no requirement that CFP professionals actually avoid any conflict of interest at all, nor necessarily even manage them. After all, while the new rules do suggest that CFP professionals should adopt business practices to prevent material conflicts of interest from compromising their duty of loyalty, the rules also fully permit those material conflicts of interest anyway, as long as the CFP professional can demonstrate that it was disclosed and that the client agreed to the recommendation anyway (i.e., gave informed consent).

Doing Financial Planning And The CFP Board Practice Standards

In addition to the new rules placing on CFP professionals an obligation to act as fiduciaries to clients, including both a Duty of Loyalty and a Duty of Care, the new Practice Standards further emphasize that when providing financial advice, the CFP professional is expected to actually do the financial planning process.

In fact, the new Practice Standards presume that whenever a CFP professional provides financial advice, there should be a financial planning process that integrates together the relevant elements of the Client’s personal and/or financial circumstances to make a recommendation. Or viewed another way… not only are CFP professionals no longer allowed to escape fiduciary duty by providing narrow product recommendations – in an attempt to avoid providing “financial planning” or “material elements of financial planning” – but under the new rules, any (product or other) recommendation or “suggestion to take or refrain from a particular course of action” is presumed to be “financial planning” and necessitates following the full financial planning process, unless the CFP professional can prove that it wasn’t necessary to do so (or that the client refused the comprehensive advice, or limited the scope of engagement to make comprehensive advice unnecessary).

However, it’s important to recognize that “doing” financial planning when giving financial advice still doesn’t necessarily mean every client must be provided a comprehensive financial plan. Under the new conduct standards, “financial planning” itself is defined as:

“Financial Planning: A collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.”

The key term here is “relevant elements” of the client’s personal and financial circumstances. Thus, just as a doctor doesn’t need to conduct a full-body physical exam with blood analysis just to set a broken arm, neither would a CFP professional be required to do a comprehensive financial plan just to help a client set up a 529 college savings plan. Nonetheless, a full evaluation of the relevant circumstances – from the ages of children and time horizon to college, to the risk tolerance of the parents, their tax situation, and available savings and other resources for college – would still be necessary to deliver appropriate financial (planning) advice.

EGADIM 6-Step Process Becomes A 7-Step Financial Planning Process

Perhaps more notable, though, is that the financial planning process itself is changed and updated under the new conduct standards.

In the past, the standard financial planning process was known by the acronym EGADIM: Establish client/planner relationship, Gather data, Analyze the client situation, Develop plan recommendations, Implement the plan, and Monitor the plan. And each of those parts of the 6-step process had 1-3 levels of detailed practice standards about how they should be delivered.

Now, under the new rules, financial planning will entail a 7-step process of:

1) Understand the Client’s Personal and Financial Circumstances (including gathering quantitative and qualitative information, analyzing the information, and identifying any pertinent gaps in the information);

2) Identify and Select Goals (including a discussion on how the selection of one goal may impact other goals)

3) Analyze the Current Course of Action and Potential Recommendations (evaluating based the advantages and disadvantages of the current course of action, and the advantages and disadvantages of potential recommendations)

4) Develop Financial Planning Recommendations (including not only what the client should do, but the timing and priority of recommendations, and whether recommendations are independent or must be implemented jointly)

5) Present Financial Planning Recommendations (and discuss how those recommendations were determined)

6) Implement Recommendations (including which products or services will be used, and who has the responsibility to implement)

7) Monitoring Progress and Updating (including clarifying the scope of the engagement, and which actions, products, or services, will be the CFP professionals’ responsibility to monitor and provide subsequent recommendations)

Unfortunately, the new 7-step process isn’t as conducive to an acronym as EGADIM was, though a new option might be CGADPIM (Circumstances, Goals, Analyze, Develop, Present, Implement, Monitor). In practice, the primary difference under the new rules is that the prior requirement to “establish the scope of the engagement” is not considered part of the financial planning process itself (though it will still be separately required, as discussed below), the “gather client data” phase is now broken out into two standalone steps of the process (first to gather information about the client’s Circumstances, then to identify the client’s Goals), and the CFP Board has similarly separated the prior “Develop and Present Recommendations” of EGADIM into separate “Develop” and “Present” process steps.

Another key distinction of the new 7-step process, though, is that the last two steps – to Implement, and to Monitor – are explicitly defined as optional, and are only an obligation for the CFP professional if the client’s Scope of Engagement specifically dictates that the CFP professional will be responsible for implementation and/or monitoring (although notably, the presumption is that the CFP professional will have such responsibilities, unless they are specifically excluded in the Scope of Engagement).

In other words, if the CFP professional defines the scope of the agreement as only leading up to presenting recommendations (the CGADP part of the new financial planning process), but leaves it up to the client to proceed with implementation and monitoring, that is permitted under the new rules… recognizing that some clients prefer to only engage in more “modular” advice and a “second opinion” from a CFP professional, but may not wish to implement with that CFP professional.

Comparison of Current vs Proposed Financial Planning Process (EGADIM VS CGADPIM)

Introductory Information And Financial Planning Terms (And Scope) Of Engagement

Currently, the CFP Board’s Rules of Conduct when a CFP Professional is engaged by a client to provide financial planning (or material elements of financial planning) include an obligation to provide information to clients (prior to entering into an agreement), including the responsibilities of each party, the compensation that the CFP professional (or any legal affiliates) will or could receive, and, upon being formally engaged by the client for services, the CFP professional was/is expected to enter into a formal written agreement, specifying the (financial planning) services to be provided.

Under the new rules, these disclosure and engagement requirements would be expanded further, into a series of (at least) two written documents: the first is “Introductory Information” to be provided to a prospect (before becoming a client), and the second is a “Terms of Engagement” agreement provided to a client (at the time the client engages the advisor).

The Introductory Information must include:

Introductory Information

1) Description of the CFP professional’s available services and category of financial products;

2) Description of how the client pays, and how the CFP Professional and the Professional’s Firm are compensated for providing services and products;

3) Brief summary of any of the following Conflicts of Interest (if applicable): offering proprietary products; receipt of third-party payments for recommending products; material limitations on the universe of available products; and the receipt of additional compensation when the Client increases the amounts of assets under management; and

4) A link to (or URL for) relevant webpages of any government authorities, SROs, or professional organizations, where the CFP professional’s public disciplinary history or personal/business bankruptcies are displayed (e.g., the SEC’s IAPD, FINRA BrokerCheck, and the CFP Board’s own website).

The new rules state that for RIAs, the delivering of Form ADV Part 2 will satisfy the Introductory Information requirement. Broker-dealers, though, would need to create and distribute their own Introductory Information guidance. (The CFP Board has indicated that it will be creating an Introductory Information template for advisors and brokers to use.) The Introductory Information is expected to be delivered to a prospect at the time of initial consultation, or “as soon as practicable thereafter”, and it may be delivered in writing, electronically, or orally (if appropriate given a [presumably limited] scope of services).

In addition, when a CFP professional is actually engaged to give financial advice, the CFP professional must further provide a written Terms of Engagement agreement, including:

Terms Of Engagement Financial Planning Agreement

– Scope of Engagement (and any limitations), period for which services will be provided, and client responsibilities

– Further disclosures, to the extent not already provided, including:

– More detailed description of costs to the client, including:

– How the client pays, and how the CFP Professional and the Professional’s Firm are compensated for providing services and products;

– Additional types of costs that the Client may incur, including product management fees,

– Identification of any Related Party that will receive compensation for providing services or offering products

– Full disclosure of all Material Conflicts of Interest

– Link to relevant webpages of any government authorities, SROs, or professional organizations, where the CFP professional’s public disciplinary history or personal/business bankruptcies are displayed

– Any other information that would be Material to the client’s decision to engage (or continue to engage) the CFP professional or his/her firm

As mentioned earlier, the CFP Board’s current Standards of Professional Conduct already require that CFP certificants enter into a written agreement with clients that defines the scope of the engagement. But with an expanded fiduciary duty for CFP professionals, it seems likely that financial advisors may become more proactive about clearly defining the scope of what they will, and won’t, do as a part of the client engagement. Especially since the CFP Board’s new 7-step process makes it optional for the CFP to follow through on the implementation and/or monitoring phases of the process, but only if the scope of engagement explicitly excludes those steps of the process.

In addition, the mere delivery of a “comprehensive” financial plan, under a more “comprehensive” fiduciary duty, creates potential new liability exposures for financial advisors. If the advisor’s agreement says the financial plan is “comprehensive”, what, exactly, does that cover? Is it everything in the CFP Board’s current topic list? Does that mean CFP professionals could get themselves into trouble for offering a “comprehensive” financial plan, but failing to review a will or a trust, or an automobile or renter’s insurance policy? Under the new standard in the future, CFP professionals may want to become far more proactive about stating exactly what they will cover in a plan – to more concretely define the scope of engagement – rather than just stating that it will be “comprehensive”.

The new standards of conduct also require that the CFP professional disclose to the client any Material change of information that occurs between the Introductory Information and when the actual Terms of Engagement are signed, along with any Material changes that occur after the engagement begins but during the scope of the (ongoing) engagement. Ongoing updates must be provided at least annually, except for public disciplinary actions or bankruptcy information, which must be disclosed to the client within 90 days (along with a link to the relevant regulatory disclosure websites).

Cleaning Up Fee-Only Definitions And Sales-Related Compensation

One of the most challenging issues for the CFP Board in recent years has been its “compensation definitions” – specifically pertaining to when and how a CFP professional can call themselves “fee-only”, which had led to both a lawsuit against the CFP Board by Jeff and Kim Camarda, the resignation of (now-former) CFP Board chair Alan Goldfarb (who was later publicly admonished), and a series of ongoing debacles for the CFP Board as it kept trying to update its flawed interpretation of the original “fee-only” compensation definition.

The problem was that under the prior rules, “fee-only” was defined as occurring “if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage, or performance-based fees.” And the certificant’s “compensation” was in turn defined as “any non-trivial economic benefit, whether monetary or non-monetary, that a certificant or related party receives or is entitled to receive for providing professional activities.”

The primary problem in this context was that the CFP Board interpreted these rules to mean that if a related party could receive non-fee compensation, the CFP certificant couldn’t call themselves “fee-only”, even if the CFP professional could prove that 100% of their clients paid 100% in fees (and no commissions) for any/all client work. In other words, the CFP Board imputed the possibility of a commission to taint the CFP professional’s status as fee-only, regardless of whether the client ever actually paid a commission to anyone, ever. Such that even being able to prove that all your clients only paid fees wasn’t a legitimate defense to claiming that you were fee-only!

Under the new Standards of Conduct, the overall structure of “fee-only” is substantively similar, but updated in ways that should help to resolve many of the prior problems and misinterpretations of the definition. Now, fee-only is defined as:

Fee-Only. A CFP professional may represent his or her compensation method as “fee-only” only if:

  1. The CFP professional and the Professional’s Firm receive no Sales-Related Compensation; and
  2. Related Parties receive no Sales-Related Compensation in connection with any Professional Services the CFP professional or the CFP Professional’s Firm provides to Clients.

In turn, “Sales-Related Compensation” is defined as:

Sales-Related Compensation. Sales-Related Compensation is more than a de minimis economic benefit for purchasing, holding for purposes other than providing Financial Advice, or selling a Client’s Financial Assets, or for the referral of a Client to any person or entity. Sales-Related Compensation includes, for example, commissions, trailing commissions, 12(b)1 fees, spreads, charges, revenue sharing, referral fees, or similar consideration.

Sales-Related Compensation does not include:

  1. Soft dollars (any research or other benefits received in connection with Client brokerage that qualifies for the “safe harbor” of Section 28(e) of the Securities Exchange Act of 1934);
  2. Reasonable and customary fees for custodial or similar administrative services if the fee or amount of the fee is not determined based on the amount or value of Client transactions; or
  3. The receipt by a Related Party solicitor of a fee for soliciting clients for the CFP® professional or the CFP® Professional’s Firm.

Not surprisingly, “sales-related compensation” is defined as any type of compensation that is paid for any type of purchase or sale related to a client’s financial assets, or for a referral (that might subsequently lead to such outcomes). Thus, for instance, selling an investment or insurance product for a commission would be sales-related compensation, as would referring a client to an insurance agent or broker (or anyone else) who pays the CFP professional for referring the lead. Although under the current rules, using an outsourced investment provider – i.e., a TAMP – might also be deemed a “referral” fee, to the extent that many TAMPs collect the AUM fees and then remit a portion of the CFP professional as a solicitor/referrer fee, which would no longer be allowed, even if the cost is the same to the client as the CFP professional who hires his/her own internal CFA to run the portfolio. Will the CFP Board be compelled to refine its “sales-related compensation” rules to allow for level AUM fees as a part of standard solicitor agreements?

More generally, though, it’s notable that the new “fee-only” rules are not actually defined by whether the CFP professional receives various types of AUM, hourly, or retainer fees; instead, it is defined by not receiving any type of Sales-Related Compensation (such that client fees are all that is left). As a result, the new “fee-only” definition might more aptly be explained as being a “no-commission” (and no-referral-fee) advisor instead.

A key distinction of the new rules, though, is that for a CFP professional to be fee-only, neither the CFP professional nor his/her firm can receive any sales-related compensation, but a related party can receive sales-related compensation as long as it is not “in connection with” the services being provided to the client by the CFP professional or his/her firm. This shift is important, as otherwise, any connection between the CFP professional and any related party to his/her firm could run afoul of the fee-only rules; for instance, if a fee-only RIA was bought by a bank or holding company, which separately had another division that happened to offer mortgages (for a commission), the RIA would lose its fee-only status, even if no clients ever actually did business with the related subsidiary. Under the new rules, external related parties could still co-exist in a manner that doesn’t eliminate the CFP professional’s fee-only status, as long as no clients actually do business with that related party (so no clients ever actually pay a commission to a related party), and the CFP professional’s own firm doesn’t directly accept any type of sales-related compensation.

Notably, under these new definitions, Jeff and Kim Camarda – who had a “fee-only” RIA but referred clients internally to a co-owned insurance subsidiary that earned commissions – would still not have been permitted to call themselves “fee-only” (as clients really were paying commissions to a related party in connection with the Camardas’ financial advice). However, the strange case of former CFP Board chair Alan Goldfarb, who was deemed to violate the fee-only rules because his RIA-parent-company accounting firm also owned a broker-dealer even though it was never stated that a single client of Goldfarb’s ever actually paid a commission to that entity, would have been (appropriately) still allowed to call himself “fee-only”.

On the other hand, it’s not entirely clear whether the CFP Board considered how CFP professionals might shift towards fee-only compensation in the future. For instance, what happens if a CFP professional who currently earns commissions and trails decides to stop doing any commission-based business, and operate solely on a fee-only basis in the future… but doesn’t want to walk away from his/her existing trails for prior business? Under a strict interpretation of the current “sales-related compensation” rules, even old sales-related compensation that has no relationship to current clients would still run afoul of the rules, even though the CFP professional really does work solely on a fee-only basis now. In addition, receiving “old” trails typically still requires the CFP professional to maintain a broker-dealer registration (to remain as Broker of Record), and/or a state Insurance license (and appointment to one or several insurance companies) to remain Agent of Record… which means the CFP professional would still be affiliated with a firm that receives sales-related compensation (which also runs afoul of the rules). Does the CFP Board need to add a further clause that clarifies how CFP professionals who are transitioning to fee-only can keep old commission trails for prior sales, and “old” affiliations to broker-dealers or insurance companies to receive those trails, and still be permitted to hold out as fee-only going forward, as long as no new clients will ever again compensate the advisor via commissions or other sales-related compensation?

CFP Board Cautions Against Marketing “Fee-Based” Compensation

In addition to tightening the CFP Board’s compensation of “fee-only”, the new rules also explicitly caution CFP professionals against the use of the term “fee-based”, which was originally a label for investment wrap accounts where trading costs were “fee-based” rather than a per-trade commission, but in recent years has occasionally been used by brokers to imply they are offering “fee-only” advice (relying on consumers to not understand the difference between fee-based and fee-only).

To limit this, the new CFP Board conduct standards would require that anyone who holds out as “fee-based” to clearly state that the CFP professional either “earns fees and commissions”, or that “the CFP professional is not fee-only”, and that the term should not otherwise be used in a manner that suggests the CFP professional is fee-only. (Recognizing that the term is enshrined in SEC regulations as a part of fee-based wrap accounts, and can’t realistically be eliminated from the investment lexicon altogether.)

The caveat, however, is that while the CFP Board is explicitly cracking down on the use of “fee-based” as a marketing label, the organization is backing away from its prior “Notice to CFP Professionals” guidance from 2013, which grouped all financial advisor compensation into being either “fee-only”, “commission-only”, or “commission and fee”. Which seems concerning, as while grouping CFP professionals into “just” three buckets has limited value – when most are in the middle and operate with some blend of commissions and fees – it’s still better than not requiring consistent definitions at all. Otherwise, what’s to stop CFP professionals from just coming up with another label for being (partially) fee-compensated, that isn’t fee-only, but sounds similar… which is precisely why “fee-based” has been increasingly adopted in recent years anyway.

In other words, if the CFP Board states: “All CFP professionals must disclose that their compensation is fee-only, commission-and-fee, or commission-only, and should provide further compensation disclosure details as appropriate” then at least CFP professionals will disclose their compensation consistently. But with the CFP Board’s current approach, a CFP professional who receives at least some fees might have to stop using “fee-based”, but could just use similar words like “fee-oriented” or “fee-compensated” or “fee-for-service” financial advice, which would still focus on and imply fees (and fee-only) without stating that the actual compensation includes commissions as well (as using the term “fee and commission” is now only required when attached to fee-based).

Enforcement Of The New CFP Board Standards Of Conduct?

Notwithstanding its expansion in the scope of fiduciary duties that would apply to CFP professionals, it’s important to recognize that the CFP Board’s ability to enforce its standards is still somewhat limited.

At most, the CFP Board’s Disciplinary and Ethics Commission (DEC) can only privately censure or publicly admonish a CFP certificant, and/or in more extreme cases to suspend or revoke the CFP marks from that individual. However, that doesn’t mean the CFP Board can actually limit someone’s ability to be a practicing financial advisor, who offers (and is paid for giving) financial advice to the public. Nor can the organization fine or otherwise financially punish a CFP certificant, beyond the financial consequences that might occur to the CFP certificant’s business if he/she is either publicly admonished, or has his/her marks suspended or revoked (which is also part of the public record).

Although the real challenge for the CFP Board is that because it is not an actual government-sanctioned regulator, its ability to collect the information necessary to adjudicate its disciplinary hearings is a significant challenge. Because broker-dealers and advisory firms have in some cases refused to provide the necessary information to the CFP Board regarding a CFP certificant and his/her clients when a client is filed, as the firm fears that actual government regulators (e.g., the SEC and/or FINRA) might discipline them for a breach of client privacy by sharing information with the CFP Board in the first place! In fact, back in 2011 the CFP Board had to seek out a “No-Action” letter from the SEC to affirm that it was permissible for firms to share “background documents” without violating Reg S-P, and continued pushback from firms led the CFP Board to request a follow-up No-Action letter request in 2014 to further expand the scope of what firms even could share with the CFP Board.

Of course, in situations where a client files a complaint with the CFP Board, the client has authorization to release his/her own information to the CFP Board to evaluate the complaint. But the limitations of the CFP Board’s ability to even investigate complaints against CFP certificants, especially in the case of third-party complaints (i.e., where it is not the client who submits the complaint, and his/her information to document it), raise serious concerns about its ability to effectively enforce its new standards. It’s not a coincidence that the overwhelming majority of current CFP Board disciplinary actions are based almost entirely on public information (from bankruptcy filings and DUI convictions, to CFP certificants who are disciplined after the SEC or FINRA already found them publicly guilty), and/or pertain to situations that wouldn’t require client-specific information anyway (e.g., whether the advisor misrepresented his/her compensation in marketing materials).

In other words, the “good” news of the new CFP Conduct Standards is that CFP professionals will be required to meet a fiduciary standard of care when providing any kind of financial advice to clients… but what happens if they don’t? To what extent can the CFP Board enforce against those who don’t effectively comply with the rules, and then simply refuse to provide information – under the guise of Reg S-P – when a complaint is filed? Will the CFP Board have to rely on consumers to file their own complaints, just to get the information necessary to investigate such complaints? And is the CFP Board prepared to enforce against the non-trivial number of CFP certificants who have been acting as non-fiduciaries for years or decades already by using their CFP marks to sell products (which now will be subject to a fiduciary obligation for the first time)? Especially since the CFP Board doesn’t require CFP professionals to state in writing that they’re fiduciaries to their clients, which means the CFP Board’s fiduciary duty still won’t necessarily be grounds for a client to actually sue the financial advisor for breach of fiduciary duty (as the CFP certificant would simply be failing to adhere to the CFP Board’s requirement that he/she act as a fiduciary, and not an actual fiduciary commitment to the client!).

CFP Board Anonymous Case Histories And Case Law Precedents

On the other hand, one of the greatest challenges for the CFP Board may not be the consequences if it can’t investigate claims against CFP professionals, but what happens if it does see an uptick in the number of complaints and enforcement actions under the new CFP Conduct Standards.

The problem is that ultimately, a large swath of the newly proposed Conduct Standards contain potentially subjective labels to determine whether the rules have actually been followed, or not. For instance, the word “reasonable” or “reasonably” is used a whopping 26 times in the new Conduct Standards, pertaining to everything from whether a conflict of interest in Material (based on whether a “reasonable” client would have considered the information important), to whether a related party is related based on whether a “reasonable” CFP professional would interpret it that way, to requirements that CFP professionals diligently respond to “reasonable” client inquiries, follow all “reasonable” and lawful directions of the client, avoid accepting gifts that “reasonably” could be expected to compromise objectivity, and provide introductory information disclosures to prospects the CFP professional “reasonably” anticipates providing subsequent financial advice to. In addition, the entire application of the rules themselves depend on the CFP Board’s “determination” of whether Financial Advice was provided (which triggers the fiduciary obligation for CFP professionals), and CFP professionals with Material conflicts of interest will or will not be found guilty of violating their fiduciary duty based on the CFP Board’s “determination” of whether the client really gave informed consent or not.

In other words, the CFP Board’s new Standards of Conduct leave a lot of room for the Disciplinary and Ethics Commission (DEC) to make determinations of what is and isn’t reasonable in literally several dozen instances of the rules, as well as determining how they will determine when Financial Advice is given and what does and doesn’t really constitute informed consent.

To be fair, the reality is that it’s always the case that regulators and legislators write the rules, and the courts interpret them in the adjudication process. So the idea that the CFP Board’s DEC will have to make interpretations of all these new rules isn’t unique or that out of the ordinary. And frankly, using “reasonableness” as a standard actually helps to reduce the risk that a CFP professional is found guilty of something that is “reasonably” what another CFP professional would have done in the same situation. “Reasonableness” standards actually are peer-based professional standards, which is what you’d want for the evaluation of a professional.

However, when courts interpret laws and regulations, they do so in a public manner, which allows everyone else to see how the court interpreted the rule, and provides crucial guidance for everyone who follows. Because once the court interprets whether a certain action or approach is or isn’t permitted, it provides a legal precedent that everyone thereafter can rely upon. In point of fact, many of the key rules that apply to RIA fiduciaries today, including the fact that a fiduciary duty applies to RIAs in the first place, didn’t actually come from regulators – it came from how the courts interpreted those regulations (which in the case of an RIA’s fiduciary duty, stemmed from the 1963 Supreme Court case of SEC v Capital Gains Research Bureau).

The problem, though, is that the CFP Board’s disciplinary process is not public. Which means even as the DEC adjudicates 26 instances of “reasonableness”, no one will know what the DEC decided, nor the criteria it used… which means there’s a risk that the DEC won’t even honor its own precedents, and that rulings will be inconsistent, and even if the DEC is internally consistent, CFP professionals won’t know how to apply the rules safely to themselves until they’re already in front of the DEC trying to defend themselves!

Notably, this concern – of the lack of disciplinary precedence in CFP Board DEC hearings – was a concern after the last round of practice standard updates in 2008, and did ultimately lead to the start of the CFP Board releasing “Anonymous Case Histories” in 2010 that provide information on the CFP Board’s prior rulings. (The case histories are anonymous, as making them public, especially in situations where there was not a public letter of admonition or a public suspension or revocation, would itself be a potential breach of the CFP professional’s privacy.)

However, the CFP Board’s current Anonymous Case History (ACH) database is still limited (it’s not all cases, but merely a collection of them that the CFP Board has chosen to share), and the database does not allow CFP professionals (or their legal counsel) any way to do even the most basic keyword searches OF the existing case histories (instead, you have to search via a limiting number of pre-selected keywords, or by certain enumerated practice standards… which, notably, will just be even more confusing in the future, as the current proposal would completely re-work the existing practice standard numbering system!).

Which means if the CFP Board is serious about formulating a more expanded Conduct Standards, including the application of a fiduciary duty and a few dozen instances of “reasonableness” to determine whether the CFP professional met that duty, the CFP Board absolutely must expand its Anonymous Case Histories database to include a full listing of all cases (after all, we don’t always know what will turn out to be an important precedent until after the fact!), made available in a manner that is fully indexed and able to be fully searched (not just using a small subset of pre-selected keywords and search criteria). Especially since, with the CFP Board’s unilateral update to its Terms and Conditions of Certification last year, CFP professionals cannot even take the CFP Board to court if they dispute the organization’s findings, and instead are bound to mandatory arbitration (which itself is also non-public!).

Overall Implications Of The CFP Board’s New Fiduciary Standard

Overall, for CFP certificants (including yours truly) who have called for years for the CFP Board to lift its fiduciary standard for its professionals, there’s a lot to be liked in the newly proposed Standards of Conduct. The CFP Board literally leads off the standards with the application of the fiduciary duty to CFP professionals (it’s the first section of the new Standards of Conduct!), and expands the scope of the CFP Board’s standards to cover not just delivering financial planning or material elements of financial planning, but any advice by a CFP professional (for which it is presumed that delivering that advice should entail doing financial planning!).

In addition, the CFP Board has made a substantial step forward on its disclosure requirements for conflicts of interest, particularly regarding the creation of its “Introductory Information” requirement for upfront disclosures to prospects, and its expanded and more detailed requirements for setting the Terms of Engagement for client agreements. (For anyone who still believes the CFP Board is beholden to its large-firm broker-dealers, this should definitively settle the issue – as broker-dealers compliance departments will most definitely not be happy that the CFP Board as a “non-regulator” is imposing disclosure requirements on their CFP brokers! In fact, there’s a non-trivial risk for the CFP Board that some large brokerage or insurance firms may decide to back away from the CFP Board’s expansion of its fiduciary duty, just as State Farm did back in 2009 when the CFP Board first introduced its fiduciary standard.)

On the other hand, it is still notable that despite increasing the disclosure requirements associated with its expanded fiduciary duty for CFP professionals, the CFP Board isn’t actually requiring CFP professionals to change very much from what they do today. Material conflicts of interest must be disclosed, but obtaining informed consent appears to be a legitimate resolution to any actual conflict of interest. And debating whether a conflicted recommendation that the client agreed to with informed consent was still a fiduciary breach or not would quickly come back to a determination of whether the CFP professional’s advice met various standards of “reasonableness” – which, as of now, aren’t entirely clear standards, and if the CFP Board can’t effectively expand its Anonymous Case Histories, may not get much clearer in the future even as the DEC interprets what is “reasonable”, either.

In the meantime, though, to the extent that the CFP Board’s newly expanded fiduciary standard – both the duty of loyalty, and the expanded duty of care – does create at least some new level of accountability for CFP professionals, the real challenge may be the CFP Board’s own ability to enforce and even investigate complaints if and when they do occur. As the saying goes, the CFP Board needs to make sure its mouth isn’t writing checks that its body can’t cash, by promulgating standards of conduct it may struggle to effectively enforce. Whether and how the CFP Board will expand and reinvest into its own disciplinary process and capabilities remains to be seen.

But overall, the CFP Board’s newly proposed Standards of Conduct really do appear to be a good faith effort to step up and improve upon the gaps of the prior/existing standards of professional conduct. The scope of what constitutes “doing” financial planning for the purposes of the fiduciary duty is expanded (and if anything, the CFP Board may have gone too far by not limiting the scope of fiduciary duty to an established financial advice relationship for compensation), the fee-only compensation definition is improved (although the CFP Board may be starting a problematic game of whack-a-mole by just punishing “fee-based” instead of more formally establishing a standardized series of compensation definitions), and although the CFP Board didn’t crack down on material conflicts of interest to the extent of the Department of Labor’s fiduciary rule, it did still move the ball further down the field by more fully highlighting prospective conflicts and increasing the disclosure requirements for both RIAs and especially broker-dealers and insurance firms.

For the time being, though, it’s also important to recognize that these are only proposed standards, and not final. The CFP Board is engaging in a series of eight Public Forums in late July across the country to gather feedback directly from CFP professionals (register for one in your area directly on their website here), and is accepting public comment periods for a 60-day period (ending August 21st), which you can submit either through the CFP Board website here, or by emailing comments@cfpboard.org. Comments and public forum feedback will then be used to re-issue a final version of the standards of conduct (or even re-proposed if the Commission on Standards deems it necessary to have another round of feedback) later this year.

And for those who want to read through a fully annotated version of the proposed Standards of Conduct themselves, the CFP Board has made a version available on their website here.

It’s award season: Best practice and the value of awards

It’s award season: Best practice and the value of awards

In my line of work, I’m constantly thinking about annual reports; I not only read a lot of annual reports but I analyze them every day. And yes, I even believe that annual reports are important! In fact, I’d even say very important- and even useful!

I am also very aware that there is a lot wrong with annual reports – the length, the complexity, the ever changing and demanding legislative and regulatory environment, the list goes on… Despite this, I do firmly believe that you need to see the annual report as an opportunity rather than an obligation. Why? Because it’s a chance to ‘tell your story’. You have to produce an annual report every year so use it as an occasion to get your messaging right. Use the process to stimulate discussion and drive an overarching communications framework that can be used both internally and externally.

I always try to encourage organisations to not only challenge themselves, but to challenge their internal audiences, their Boards and other stakeholders and to look hard at what they are saying to their stakeholders. On top of this, it’s vital companies think about how they are communicating and that they are not missing an opportunity to better communicate their long-term strategy, value creation story and drivers of business performance in a more meaningful, connected way across their communications channels.

This is the reason why I am a huge advocate of Awards that recognise companies that make a proactive effort to promote, clear and consistent investor communications. The Investor Relations Society Best Practice Awards do just that and, now in their 17th year, celebrate those companies that ‘stand out’ across a number of different Awards, including Best Annual Report.

So what are the judges looking for?

Judges last year were looking for evidence of innovative and effective reports that communicate the strategy and investment case of the company. Companies were marked up if they used their Report as a communications tool to provide insight into the company’s main objectives and strategies, the principal risks it faces and how these might affect future prospects. For UK companies there was an additional focus on the objectives set out in the FRC’s Guidance on the Strategic Report.

Recognition across all categories

One of the most popular awards is ‘Best Annual Report’ (there were over 75 entries with 16 companies shortlisted across four categories – FTSE100, FTSE250, Small Cap & Aim and International).

In the FTSE100 category, ARM Holdings came out on top of a very strong shortlist including: British Land, M&S, Pearson, Taylor Wimpey and Sage. The judges stated ARM’s ability to present a complex business model in an easy-to-read Annual Report made them the final recipient of the Award, but it was a close contest and Taylor Wimpey, were highly commended by the judges for a well explained business model which included KPIs and impactful case studies. The judges also congratulated Taylor Wimpey for the concise and engaging presentation of their Report.

In the FTSE250 category there was another competitive shortlist of six, with judges picking DS Smith out from the crowd to win the award due to their clear and easy to understand business model, innovative use of graphics and good communication about sustainability issues.

Here are some of the other shortlists and winners in the other two categories, all which are worth a look for inspiration.

What was apparent across all categories – big and small – is that the best annual reports look to the future and show the vital link between effective governance and the business model, strategy and leadership statements. The very best also show the effectiveness of their business strategy in a way that demonstrates credible management and provide a window into the company and its culture. What is also clear to me and the judges, a good annual report can help differentiate your company, shape your reputation and build confidence with investors. So what’s stopping you? For more information go to irs.gov.

The Financial Report of the United States Government 2016

The Financial Report of the United States Government 2016


In these to graphs they display the financial reports of the U.S. in 2016.   The first message is to beware some of the estimates that you hear, should you hear them at all.  No one wants to talk about this, but what few that do will look at a few headline numbers and leave it there.  Really you have to look at it for years, and look at the footnotes and other explanatory sections in the back when things seemingly change for no good reason.  Also, you have to add all the bits up.  No one will do that for you.  Even with that, you are relying on the assumptions that the government uses, and they are not biased toward making the estimates sound larger.  They tend to make them smaller.

Thus you will see two things that adjust the headline figures.  In 2004, when Medicare part D was created, the Financial Report of the US Government began mentioning the Infinite Horizon Increment.  Now, that liability always existed, but the actuaries began calculating how solvent is the system as a whole if it were permanent, as opposed to lasting 75 years.

The second is the Alternative Medicare Scenario.  When the PPACA (Obamacare) was created in 2010, there was considerable chicanery in the cost estimates.  The biggest part was that they assumed Medicare Part A (HI) would cost a lot less because they would reduce the amount that they would reimburse.  They legislated away costs by assuming them away, and then each year Congress would restore the funding so that there wouldn’t be a firestorm when doctors stopped taking Medicare.  But they left it in for budget and forecast purposes, and showed what the projections would be like if these cuts never took place in what they called the Alternative Medicare Scenario.

So, did the cuts to Medicare part A take place? No.

Graph Credit: The Boards of Trustees of the Federal Hospital Insurance Trust Fund

As you can see they have gone up almost every year since 2010. The liability should not have gone down. If you think the Alternative Medicare Scenario is conservative enough, the liability has remained relatively constant since 2010, not diminished dramatically.

How is the load relative to GDP?  It keeps growing, but since 2010 at a less frantic clip.  The adjusted ratio below includes the Alternative Medicare Scenario.

Final Notes

Remember that we have had a recovery since 2009.  The statistics never assume that we will have another recession, much less a full fledged crisis like 2008-9.  Without adjustment, the Medicare part A trust fund will run out in 2028.  There is no provision for what the reimbursements will be made if the trust fund runs dry.  Social Security’s trust fund will run out a few years after that, and instead of getting 12 checks a year, people will only get 9 of that same amount.  If there is a significant recession, those statistics will move forward by an unknown number of years.  Without congressional action, because there will be a recession, I would expect that both will run out somewhere in the middle of the 2020s, and then the real political fun will begin.

The tendency has been over time to turn these from entitlements to old age welfare schemes.  FDR always wanted them to be self funded entitlements with everybody getting roughly the same treatment by formula, because he wanted the program to have widespread legitimacy across all classes, and no sense of stigma for being a poor old person on the dole.

Given the strategies that exist around qualifying for Medicaid, those days are gone, so I would expect that benefits will be limited for those better off, inflation adjustments eliminated, taxes raised to some degree, eligibility ages quickly raised a few more years, with elimination of strategies that allow people to get more out of the system by being clever.  (As an example, expect the favorable late retirement factors to get reduced, and the early retirement factors to go down even more.)

Does this sound fun?  Of course not, but remember that cultures are larger than economies, which are larger than governments.  The cultural need for supporting poor elderly people will lead funding to continue, unless it makes the government, and the culture as a whole fail in the process, and that would never happen, right?


Cash Cows Of The Dow

Cash Cows Of The Dow

Long time readers know that I have been a shareholder yield advocate on the blog for almost a decade.  (We used to call it net payout yield back then, and we define it as the combination of dividends and net buyacks.)

People are slow to change of course, but my hopes are that eventually you all come around to a little common sense.  Sometimes books and white papers are too much, and all that is needed is a simple chart or table that will change people’s minds.

Remember the old Dogs of the Dow strategy where you just invest in the 10 highest yielding Dow stocks each year?  This strategy was popularized by O’Higgins, and historically beat the market.  But as you all know, a shareholder yield approach does even better historically.

Below we list all 30 Dow stocks, their dividend yield, their net buyback yield, and their total shareholder yield.



We then group the Dow stocks into the Dogs strategy and the shareholder yield strategy (what we call the Cash Cows.)  Not surprisingly, the Dogs have the highest yield.  However, they also have the lowest buyback yield.  Overall the Dogs have a very similar shareholder yield to the entire Dow, but actually is slightly lower.

The Cash Cows, despite having the lowest dividend yield, have by far the largest buyback yield resulting in a total shareholder yield that is nearly double that of the Dogs and about a third higher than the Dow.

Click to enlarge


Here’s where it gets even more interesting.  The Cash Cows strategy also has the cheapest valuations (median) across all variables except P/E ratio (and then it only nearly misses.

So a much higher total yield, and lower valuations.  What’s not to like?

Squaring-The-Survival-Curve And What It Means For Retirement Planning

Squaring-The-Survival-Curve And What It Means For Retirement Planning


It’s become a well-recognized phenomenon that life expectancies are on the rise, and have been for more than a century now. For many, this leads to the “inevitable” conclusion that someday we’ll all be living to age 150 and beyond, and that we need to plan for drastically longer retirement time horizons – or even that retirement itself will be transformed (or become irrelevant) if medical breakthroughs allow us all to enjoy 100+ years of active lifestyles. However, a fresh look at the data reveals that this may not actually be the likely outcome.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University  delves into the nuances behind the changes in mortality rates over the past century and in recent decades, and what they imply about the future.

Because the interesting phenomenon of recent advances in life expectancy in particular is that while overall life expectancies have been rising, most of the gains are attributable to people living closer to the maximum human lifespan (rising up towards about 115 years), and not as much from increases in the maximum age itself. And in the past two decades, the empirical data suggests that the maximum lifespan of human beings has stopped increasing altogether, peaking out around age 115. As a result, future medical advances may simply make us more and more likely to live to that maximum age, but there’s little evidence to suggest that anyone is ever going to live to 150 and beyond… a phenomenon known as “squaring the (survival) curve”.

The significance of rising life expectancy being due primarily to an increasing likelihood of living to maximum age, but not increasing the maximum age itself, is that retirement planning may need to adjust for a longer active phase of life… or more pessimistically, for prolonged periods of substandard health as what might have killed us in the past now simply slows us down! The potential for continued squaring the curve may also dramatically change the pricing and even the relevance of various types of insurance products, as long term care insurance becomes less necessary (if we’re healthy for more of our lifespan), and annuity mortality credits become less available (because people die close together at the end of their maximum lifespan).

But the fundamental point is simply to understand that the ongoing rise in life expectancies doesn’t necessarily mean that someday everyone is going to live to age 150 and beyond. It may simply mean that more of us will live to approach what appears to be a “maximum” human lifespan around age 115… and in fact, recent shifts in who is living longer (and who is not) suggests that we may have already hit that longevity wall.

Squaring-The-Survival-Curve And What It Means For Retirement Planning



It’s become a well-recognized phenomenon that life expectancies are on the rise, and have been for more than a century now. For many, this leads to the “inevitable” conclusion that someday we’ll all be living to age 150 and beyond, and that we need to plan for drastically longer retirement time horizons – or even that retirement itself will be transformed (or become irrelevant) if medical breakthroughs allow us all to enjoy 100+ years of active lifestyles. However, a fresh look at the data reveals that this may not actually be the likely outcome.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University  delves into the nuances behind the changes in mortality rates over the past century and in recent decades, and what they imply about the future.

Because the interesting phenomenon of recent advances in life expectancy in particular is that while overall life expectancies have been rising, most of the gains are attributable to people living closer to the maximum human lifespan (rising up towards about 115 years), and not as much from increases in the maximum age itself. And in the past two decades, the empirical data suggests that the maximum lifespan of human beings has stopped increasing altogether, peaking out around age 115. As a result, future medical advances may simply make us more and more likely to live to that maximum age, but there’s little evidence to suggest that anyone is ever going to live to 150 and beyond… a phenomenon known as “squaring the (survival) curve”.

The significance of rising life expectancy being due primarily to an increasing likelihood of living to maximum age, but not increasing the maximum age itself, is that retirement planning may need to adjust for a longer active phase of life… or more pessimistically, for prolonged periods of substandard health as what might have killed us in the past now simply slows us down! The potential for continued squaring the curve may also dramatically change the pricing and even the relevance of various types of insurance products, as long term care insurance becomes less necessary (if we’re healthy for more of our lifespan), and annuity mortality credits become less available (because people die close together at the end of their maximum lifespan).

But the fundamental point is simply to understand that the ongoing rise in life expectancies doesn’t necessarily mean that someday everyone is going to live to age 150 and beyond. It may simply mean that more of us will live to approach what appears to be a “maximum” human lifespan around age 115… and in fact, recent shifts in who is living longer (and who is not) suggests that we may have already hit that longevity wall.

(Derek Tharp Headshot PhotoMichael’s Note: This post was written by Derek Tharp, our new Research Associate at Kitces.com. In addition to his work on this site, Derek is finishing up his Ph.D. in the Personal Financial Planning program at Kansas State University, and assists clients through his RIA Conscious Capital. Derek is a Certified Financial Planner, and can be reached at derek@kitces.com.)

Life Expectancy Assumptions In Retirement

One of the most important assumptions in any financial plan is life expectancy. Assuming too short of a lifespan can result in an excessively high withdrawal rate that depletes all of a client’s assets prior to death. However, despite a desire from financial planners to avoid ever seeing clients run out of money, assuming an unrealistically long lifespan is problematic as well. Excessively low withdrawal rates may lead to a lower quality of life in retirement, a larger than desired legacy inheritance (which the heirs probably won’t complain about, but the retiree might regret!), unfulfilled life goals, and—assuming there may be a relationship between life satisfaction and longevity—possibly even a reduction in lifespan itself!

However, “life expectancy” can be a somewhat misleading term. Many people hear the term and think of it as a measure of how long they can “expect to live”. In reality, though, life expectancy is a measure of theaverage time a person within some particular population is expected to live. While the average is meaningful in many respects, it may not always provide the best measure for setting expectations about the actual age someone is likely to reach. Because mortality rates aren’t constant across a lifespan and the distribution of ages at death are heavily skewed (i.e., more people die old than young), commonly cited life expectancy measures—particularly life expectancy at birth, which is most often cited in the media—may result in misleading expectations.

For instance, a child born in 2014 has a life expectancy (average age at death) of 79. However, the median age of death for the same child is 83, and the modal (most common) age at death is 89! Given the shape of the distribution of ages at death (negatively skewed), it’s simply a mathematical fact that the mean is going to be lower than the median or the mode.

Life Expectancy and Projected Deaths Per 100,000 For Children Born In 2014

Understanding Longevity Expectations With Survival Curves

One way to explore some of the nuances within mortality figures is to visualize that data through the use of a survival curve – a figure which plots percentage of people still alive (i.e., the “survival rates” of a population) over time. Looking at the trends in how survival curves change over time can help us to not just see whether life expectancy is changing, but specifically where changes are occurring across the lifespan.

Projected Survival Curve For Children Born In 2014

As you can see in the survival curve above, only roughly 1-in-10 people born in 2014 is expected to die prior to age 60 (i.e., 90% are still alive), but beyond that point, the rate of death begins to increase substantially. However, over 60% of children born in 2014 are still expected to be alive when the cohort reaches their “life expectancy” (i.e., average age at death) of 79. The median (age 83) is equivalent to the 50th percentile, and the mode (89) is roughly around the 30th percentile. By age 100, only 2% of people born in 2014 are expected to still be alive. While simple statistics like life expectancy certainly serve a purpose, survival curves give us a much better look at the “story” behind the data.

Demographers and population biologists identify two broad forms of change that can influence the shape of survival curves over time. There can be a “scale effect”, which refers to an increase in maximum age attained (i.e., the oldest people are reaching older ages), or a “shape effect”, which refers to changes in the curvature of a survival curve (i.e., more people are surviving long enough to approach or reach those maximum ages but not necessarily living longer than the maximum age).

Shape And Scale Effects

This distinction is important because people often talk about rising life expectancy as though it goes hand-in-hand with increasing maximum age, but that’s not necessarily the case. In fact, when we look at how survival curves have shifted over time, changes have been attributable to both the shape effect (i.e., living closer to maximum age) and the scale effect (i.e., increasing the maximum age) at varying rates.

Historical Changes In Survival Curves

The graphic above shows experienced and projected survival curves from 1851 through 2031. The trends over time reveal one of the more interesting changes humans are experiencing in survival rates: while there has been some increase in the maximum ages, most of the change over time appears to be a “squaring-of-the-survival-curve” (which is also known as “rectangularization”). Squaring-the-survival-curve refers to the change in shape that results from people living closer to their maximum age without an equivalent increase in their maximum age. In a perfectly squared survival curve, nearly 100% of a population would survive to the maximum human lifespan and then suddenly pass away, forming a “curve” that takes the shape of a right angle (hence, “squaring-the-curve”).

The Impact Of Shape And Scale Effects On Historical Changes In Survival Curves

Current Changes In Survival Curves

Survival curves are constantly evolving and subject to significant variation globally. A 2012 study published in Nature found evidence of variations in scale effects and shape effects even among relatively similar, wealthy capitalist societies. Though variations exist among societies, the long-term trends over the past several hundred years have shown both increases in maximum age attained and increases in the percentage of the population living closer to their maximum age, as noted in the chart above.

However, it’s possible humans in developed nations have recently reached a pivotal point in the evolution of our mortality. A 2016 study in Nature found evidence that the lifespan was increasing up until 1990, but has not increased since. In fact, the trend since 1990 has actually been a slight decrease in lifespan.

There is disagreement among researchers regarding whether a true maximum human lifespan exists, and exactly what that lifespan might be, but the same 2016 study in Nature found evidence that the human lifespan has plateaued around 115 years. This doesn’t mean no one will live beyond 115—Jeanne Calment was the oldest documented human at an age of 122 and few other exceptions have joined her living past 115—but the maximum age for all but truly the rarest exceptions appears to be stabilizing at 115, despite continued advancements in medical science.


It’s important to note that researchers are dealing with a relatively small sample when evaluating those approaching a maximum lifespan, so it is possible we are currently just experiencing some noisy data and lifespan will continue to increase in the future. Still, what we do know is that since 1990, almost all of the gains in life expectancy have been due to people living closer to their maximum age, rather than increases in maximum age. In other words, squaring-the-survival-curve now seems to be the sole driver of increasing life expectancies in developed nations.

The crucial insight from the phenomenon of squaring-of-the-survival curve is that increasing life expectancy does not necessarily mean increasing lifespans. At some point, we may see many (perhaps even the most!) people living beyond age 100, yet the likelihood of living to 125 may still essentially be zero! That’s not to say that we won’t encounter dramatic breakthroughs that fundamentally change these dynamics—for instance, technology that literally reverses aging—but barring any such technological breakthroughs, there is currently little foreseeable reason to forecast life expectancies beyond 115, even with ongoing medical advances. In other words, rising life expectancies don’t necessarily mean we’re likely eventually be living to age 150 and beyond… it may just be that we’re increasingly likely to all make it right up to a “maximum” age around 115!

One potentially concerning behavioral consideration is the role that theavailability bias may play in influencing longevity forecasts. Many clients forecast their own life expectancy based on the longevity of family members. While it appears that genetics play a significant role in longevity and it’s reasonable to take family health history into consideration, ironically, squaring-the-curve may mean that individuals with the lowest longevity expectations are actually the most prone to significantly outlive their expectations!

The reason is that people with longevity in their family already tend to die of old age, whereas families with without longevity often die of other health conditions. Yet, if squaring-the-curve results in increasing survival rates without a corresponding increase in maximum age, then the bulk of the gains in survival rates will go to those who aren’t dying of the same ailments that claimed the lives of previous generations. In other words, someone who has a family history of living into their 90s of 100s may have a good reason to believe they will also live that long, but there isn’t a huge risk they will live significantly longer. However, someone without longevity in their family who believes they will die in their 70s likely has the biggest “risk” of living 20-30 years beyond their expectations.

Individuals should also understand that average trends may not apply to them if their demographics make them significantly different from average. A recent report from the National Center of Health Statistics found that overall U.S. life expectancy dropped in 2015 for the first time since 1993. While it’s still possible this was just some statistical noise (and there’s some evidence that may be the case), it’s important to acknowledge that not every demographic experienced a decline in 2015. People seem relatively aware that differences exist among factors like gender, but it’s important to remember that race, education, wealth, income, and occupation are all important factors as well. Given the “typical” client of a financial advisor, these factors tend to be associated with more favorable life expectancies (relative to the average).

How Squaring-The-Curve Changes Retirement Planning

If we aren’t on a trajectory to live to 150, but instead, we’re on a path towards more and more people living into their 90s and 100s (and perhaps just a decade beyond), then this has some important retirement planning considerations. Most obvious, if we’re all dead by 115 but almost certain to be alive into our 90s or 100s, then (assuming norms surrounding retirement age don’t change) this will have the practical effect of increasing the length of the distribution phase of retirement, and, as a result, the assets needed for those entering retirement.

However, the good news is that for anyone who is already planning in accordance with distribution phase best practices, material changes to a plan may not be needed (at least not yet!). Most distribution research has historically used an assumption of a 30-year time horizon in retirement. Assuming a retirement age of 65, this still runs projections out until age 95, and for an average couple who has attained age 65, current joint mortality tables suggest that even just one of them living to age 95 or longer is only a 1-in-5 chance . And even with some continued squaring-of-the-curve, this assumption may be reasonably conservative for some time to come, particularly in light of how conservative the assumptions are that underlie the safe withdrawal rate, and the high likelihood that money withdrawn under the 4% rule will last more than 30 years anyway.

The more direct impact of increasing longevity will likely be on spending patterns throughout retirement. Just as we are starting to get a better grip on actual declining spending patterns of individuals in retirement, continued change among lifestyle factors may change these spending patterns further.

Notably, though, there are competing viewpoints on what these changes may look like. Some predict that squaring-the-curve will come from the ability to merely keep people alive (albeit possibly in a minimally-conscious and highly sedentary state). Under this scenario, life expectancies would be extended and healthcare expenses would increase, but it’s likely annual spending would decrease significantly within these final years of life.

More optimistic viewpoints see the extension of life coupled with more years of healthy life. In fact, gerontologists speak of different form of “squaring-the-curve” that comes from plotting quality of life over time – with an ideal of maintaining a high-quality lifestyle right up until death. Under this scenario, the decrease in retirement spending that is currently seen over time would be diminished. Not only would retirees live longer, but they would live longer with more years of higher levels of spending.

Of course, the optimistic and pessimistic views of squaring-the-curve are not mutually exclusive. It’s also possible—and perhaps, more realistic—that we’ll see a combination of longer time spent in good health and increased possibilities for extending life in poor health. Rather than the more gradual decline commonly seen in spending now, there may be an increased prevalence of steep declines in spending as the result of quicker and more dramatic lifestyle changes that coincide with rarer but more dramatic changes in health (that still can’t be overcome by future medical science).

Another consideration is that if lifestyles become healthier and more active in old age, perhaps people will “retire” less—instead opting for“semi-retirement” consisting of scaled-back or different forms of work—and the nature of the need for income in retirement will begin to change. After all, retirement originated as something for people who were too old to work and became “obsolete” as workers. Its use as a time of leisure is a recent phenomenon.

It’s likely the meaning and conceptions of retirement will continue to change as well. When a retiree’s 60s and 70s are no longer their twilight years, will retirement itself become a less relevant milestone? Will new careers, civic engagement, or philanthropic work become even more prevalent in these stages of life? Will retirement become an even more popular transition as healthier retirees have even more to look forward to? Will the prospects of a longer, but perhaps less stressful career be more enticing than trying to save up enough to not work for many decades? Cultural shifts are hard to predict, but afforded the assurance that one is likely to live into their 90s or beyond (particularly in good health), it’s hard to imagine that cultural views on retirement wouldn’t change.

Farther Reaching Consequences Of Squaring-The-Survival-Curve

While squaring-the-survival-curve has many practical implications that affect the assumptions and practice of retirement planning, there are also some farther-reaching consequences that could influence the financial services industry more broadly, and are worthy of consideration.


One of the key benefits of annuitization is the ability to earn mortality credits. Mortality credits serve as a way to pool and spread out risk. However, in a world with a perfectly squared mortality curve, there would be no way to earn mortality credits. Everyone would live to their forecasted maximum age and then immediately pass away. Of course, this is an extreme example we are unlikely to see for a very long time (if ever!), but the general principle remains. As the distribution of age at death becomes more concentrated and uncertainty surrounding life expectancy is reduced, the conditions that make it possible to earn mortality credits are reduced as well. This may mean it’s a good idea to lock in mortality credit pricing in annuities today, but it may also mean that credit quality of the insurer is even more important, as low-quality annuity providers could be financially threatened if there is a dramatic squaring-of-the-curve with future medical breakthroughs!

Of course, the flip side of this is that as life expectancy becomes more predictable, the need to hedge against longevity is also reduced. If at some point in the future 95% of people are surviving to, and then dying between, the ages of 95-105, then retirement planning will have become a lot easier (at least from the perspective of dealing with one of the biggest planning contingencies of an unknown time horizon until death). It’s possible that future generations will look back and have as hard of a time fathoming our current mid-life mortality rates as we have looking back and fathoming maternal and infant mortality rates from as recently as the early 1900s.


Squaring-the-curve could have a tremendous impact on long-term care insurance, but the impact it has will ultimately depend on whether the optimistic or pessimistic perspectives on squaring-the-curve end up being more accurate.

If squaring-the-curve happens among both mortality and quality of life, then long-term care insurance could become largely obsolete. In fact, this may be what today’s still-struggling-to-be-profitable long-term care insurers are betting on (medical breakthroughs that turn their existing unprofitable policies into more profitable ones as claims decline)!

Alternatively, scenarios short of curve-squaring perfection could greatly enhance the risk characteristics of long-term care from a risk-transfer perspective. Ideally, insurable risks are high severity and low probability occurrences. With the expectation that 1-in-3 retirees will need some type of long-term care, the current characteristics actually aren’t great for creating products for the pooling and transfer of risk. However, with a healthier aging population and reduced need for long-term care services, long-term care insurance could significantly decrease in cost and begin to look much more like life or disability insurance does today – primarily used to address low frequency but high severity risks.


While living to 95 or 100 isn’t necessarily disastrous for the assumptions that go into current retirement distribution best practices, the reality remains that many Americans are simply not financially prepared for this type of longevity. As a result, squaring-the-curve will likely increase the amount of stress that already exists on social safety nets, such as extending and increasing the duration and amount of claims from Social Security and Medicare, not to mention the potential need to rely on Medicaid.

Of course, squaring-the-curve may have other effects that influence social safety nets as well. People in better health living more vibrant and active retirements may opt to delay retirement or engage in more work during retirement. Additionally, people may retain the ability to go back to work, even in “old” age. Particularly if the quality of life curve is squared as well, a retiree in their 90s may be much better equipped to re-enter the workforce in the event that they run out of money. Less extensive health care needs could reduce stress on certain social safety nets that provide health care as well.


Squaring-the-curve will likely influence generational family dynamics. Families with three, four, and possibly even five living generations will become more common. As families play an increased role as financial or personal caregivers across more generations, family relationships and support systems may become more complex.

Beyond pooling resources between generations, these changes could influence housing, caregiving, and child rearing. Multi-generational homesteads could become more common, and housing may need to adapt to provide the balance of independence and cohabitation families may desire. Adult children may continue to take a more active role in caring for elderly parents or grandparents, but at the same time, more active grandparents and great grandparents may play a larger role in raising and caring for children as well.

Generational transfers of wealth may also begin to change – not only because people are living longer, spending down their assets, and bequeathing less, but because of the greater need for assets to transfer up a generation or for inheritances to skip past generations (perhaps because children may commonly be in their 60s or 70s when their parents die and grandchildren or great grandchildren will be at a stage where they have greater needs for the inheritance). Or perhaps the ability to work longer will diminish the need for generational transfers as people can remain financially independent longer.


Few people today would seriously consider the possibility of going to medical school at age 50, but what would happen if they were relatively confident they would live to age 90? Four years of medical school and four years of residency may not seem so daunting to a 50-year old if they have a dream to be a doctor and the potential to still have a 20-year career with 10+ years in “retirement”.

In fact, a severe career reboot may be helpful in not only helping people pursue careers once they have a better idea of “who they are” and “what they want to do with their life” (i.e., they aren’t young adults with still developing frontal lobes), but also help facilitate a more efficient allocation of human capital. The effects of a higher willingness to re-invest in human capital mid-career likely wouldn’t be isolated to older adults either. The increased prevalence of older adults (even those in their 30s or 40s) pursuing entry-level positions in new fields or going back to school would likely result in competition that directly affects younger adults’ abilities to pursue these same economic opportunities.

The fact that life expectancy is rising is common knowledge, but the nuances behind that change are not. People are, on average, living longer, but that change isn’t necessarily the result of increasing lifespans. Rather, it is now the result of successfully living to our potential maximum lifespan and avoiding premature death.

That trend appears likely to continue, but if people are going to live healthy lifestyles into their 70s, 80s, and even 90s, there are implications for all areas of financial planning. Whether it’s our patterns of saving and dissaving across our life cycle, the financial products we use to achieve our goals, our living arrangements and family dynamics, or even our conceptions of work and retirement itself – squaring-the-survival-curve has profound implications to our clients’ finances and the goals we help them achieve.

The 4 Different Types Of Fiduciary Financial Advisors

The 4 Different Types Of Fiduciary Financial Advisors

While the looming DoL fiduciary rule has heightened consumer awareness of the concept of fiduciary duty, the reality is that being a “fiduciary” (or not) isn’t actually a singular concept. While conceptually, it’s about acting in the interests of the client, and honoring the fiduciary duties of loyalty and care, not all regulators define (nor enforce) those terms consistently.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I explore four different types of financial advisor fiduciaries, including RIAs that are SEC fiduciaries, DoL fiduciaries serving retirement investors, CFP fiduciaries providing financial planning, and voluntary fiduciaries who decide to step up to honor private/third-party fiduciary standards.

One reason for varying fiduciary standards is the fact that different industry channels are regulated by different overseers – each of which defines fiduciary obligations in their own way. Registered Investment Advisers (RIAs) are overseen by the SEC and state regulators, which have both adopted a disclosure and transparency oriented approach to fiduciary duty, but only to investment advice and investment management. While the DoL fiduciary rule impacts anyone giving advice on retirement accounts (and not taxable investment accounts), but is more stringent in its limitations on conflict of interest. And the CFP Board requires that certificants often adhere to a fiduciary duty, but the requirement depends on specifically whether the certificant is actually doing “finanical planning” for a client.

And organizations with voluntary fiduciary standard for their advisor members – like NAPFA and the XY Planning Network – have their own definitions of when a fiduciary duty applies, and what conflicts are and aren’t permitted. In addition, RIAs who are struggling to differentiate as fiduciaries – now that DoL fiduciary will apply the rule to more advisors in the future – are looking to even more stringent versions of voluntary fiduciary rules, such as the new Fiduciary Registry from the Institute for the Fiduciary Standard, or CEFEX certification.

The bottom line, though, is simply that there are many different definitions of fiduciary duties, and two advisors who are both “fiduciaries” might still have very different fiduciary obligations. And unfortunately, given the research showing that consumers struggle even to understand the difference between fiduciary and suitability standards, it’s not likely most will grasp the nuances of the many different types of fiduciary duties anytime soon.