CFP Board reminds advisors of the differences between fiduciary and best interest

As more states rush to adopt best-interest annuity sales standards, the Certified Financial Planner Board of Standards is reminding advisors that it has a higher standard.

The CFP Board's Code of Ethics and Standards of Conduct takes precedence over the best-interest regulation created by the National Association of Insurance Commissioners. Forty-seven states have either adopted or are in discussions to adopt the NAIC best-interest model.

Last month, the CFP Board put out guidance with a side-by-side comparison of its code and standards and the NAIC model regulation.

"We wanted to make clear that the scope of these documents is different," explained Leo G. Rydzewski, general counsel for the CFP Board. "The scope of the code and standards is broader than the [NAIC] model regulation. We made clear that we weren't examining any of the laws, rules or regulations that might apply. We literally were just examining these two documents."

The guidance notes that a CFP professional who is an agent or broker licensed to sell annuity products will be subject to both the code and standards and the NAIC model regulation (if the CFP professional practices in a state that has adopted the NAIC model).

The guidance points out five areas the code and standards differs from the NAIC best-interest model:

1. The scope of the code and standards is broader than the NAIC model regulation. 

The NAIC model applies only to annuities, not other types of insurance, and excludes annuities in many workplace retirement plans. The code and standards applies to all financial advice.

2. The code and standards employs a fiduciary standard, while the NAIC regulation does not.

The NAIC model explicitly states that it is not a fiduciary standard. Many insurance-focused industry trade groups oppose Department of Labor attempts to extend fiduciary standard to insurance transactions.

3. The code and standards applies a prudent professional standard, while the NAIC regulation does not. 

"The Model Regulation allows a producer to recommend products that other insurance professionals would determine effectively address a consumer’s financial situation, insurance needs and financial objectives, even if a prudent professional would not recommend the product," the CFP Board guidance states.

4. The code and standards restricts the circumstances in which a CFP professional may recommend a product from a limited menu of options. The NAIC model does not.

The NAIC model allows a producer to recommend an annuity from a limited menu of products, without consideration of what is generally available in the marketplace. The code and standards would not permit a CFP professional to make any recommendation in these circumstances.

5. The code and standards treats compensation as a material conflict of interest, but the NAIC model does not.

The CFP Board "considers conflicts related to cash and non-cash compensation to be among the most prevalent and significant conflicts of interest," the guidance states. So while the NAIC model aexcludes cash and non-cash compensation from the scope of material conflicts of
interest, it does not require producers to manage compensation-related conflicts.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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