Do Financial Planning Designations Reduce Advisor … candidate, The American College of Financial...

October 20-21, 2016 Academy of Financial Services 1

Do Financial Planning Designations

Reduce Advisor Misconduct?The Case for Education and Ethics

Jeff Camarda MSFS®, CFA®, E.A., CFP®, ChFC®, CLU®, CFS®, BCM™

PhD candidate, The American College of Financial Services

[email protected]

mailto:[email protected]


Do Financial Planning Designations Reduce Advisor Misconduct?

Introduction

• FINRA registered representatives – commission securities salespeople –have come to be known as financial “advisors”

• Generally not required to put customers’ interests first ahead of their own compensation and other interests, as are fiduciary Registered Investment Advisors.

• The respective codes for CFP®, ChFC®, and CFA® designees require deeper training and higher ethical duties to clients than do FINRA rules, including subordinating their interests to clients’.

• The CFA study and testing cycle is deeper and more investments-concentrated than the financial planning designations.

• Many RR’s hold these designations.

• FINRA requires the public disclosure of registrants’ criminal, regulatory, complaint, and other misconduct history.



Introduction

• Study examines the comparative disclosure magnitude and frequency

of undesignated vs. designated registrants in Florida

• Appears to be the first such study of adverse disclosure

associations with financial designations, so adding to the emerging

literature & policy discussion.

• As the financial advisory profession evolves and regulators seek to

enhance welfare via practice quality and duties to investors, these findings

may offer important policy and consumer choice insight.



Statement of Research Problem:

• Financial advisors’ practice impacts welfare of millions

• Standards of duty and training vary widely• Rules and standards are scattershot across multiple industries, licensing and regulatory structures

• A cohesive advisory profession has yet to emerge

• RR licensees – the most common advisors – signify scant education and no general fiduciary duty

• CFP and CFA designees have rigorous training/testing, fiduciary ethical code, and enforcement obligations

• Consumers are easily confused and can misplace trust

• Advisors & firms with misconduct are likely to be repeat offenders, in contrast to professions like medicine where misconduct appears random (Egan, M., Matvos, G., & Seru, A. (2016). The Market for Financial Adviser Misconduct. Retrieved July 22, 2016, from http://www.nber.org/papers/w22050)

http://www.nber.org/papers/w22050



Statement of Research Problem:

• Advisor misconduct is measurable: FINRA publishes specific disclosure

• Consumers are generally ignorant of the availability and importance of advisor misconduct data

• Several studies have addressed differences in advisors’ duties and training & prevalence of active unethical advisors. Some 1 in 13 disciplined – and these are 5x more likely to be disciplined again

• Relationship between designations and disclosed misconduct appears to have not yet been explored

• If designations are associated with reduced misconduct, they may provide a useful quality signal for consumers to make wiser advisor decisions and hence improve their and social welfare –the credentials may signal a lower probability of a misconduct experience.



Research Purpose:

Is there is a statistically significant difference between

disclosed misconduct magnitude between those that hold

the CFP® ChFC ® and CFA® designations, and those that

do not, in the Florida securities registered representative

population?



Theoretical Foundation:

• Professionalism Theory • What makes for a profession? Do advisors generally conform to accepted tenets of professionalism?

• Does a homogenous advisory profession exist analogous to medicine, law, accountancy, academia, etc?

• Should financial advisory in aggregate be viewed as pseudo-profession comprised of wide spectrum of duties, training, functions and regulations, with practitioners ranging from devout professionals to conflicted salespeople? If so, how can consumers tell “real professionals” from other advisors?

• Established professions (CPA, physician, etc) signal quality via certification branding

• Can consumers avoid advisor malpractice by identifying professional practitioners via similar signaling?

• Signal Theory• Designees undertake costly education to better compete in labor markets & signal “quality” to employers

• Advisors seek designations to gain skill, establish professional credibility & validate their knowledge base

• Advisors’ designations signal expertise, ethics, objectivity, & trustworthiness

• Consumers seek to control risk by using market signals to gather information and infer quality

• Certifications function as brands, signaling quality and skills consistency

• Designees voluntarily professionalize via advanced training and elevated ethical codes

• Do designations send a true consumer value signal? Is lesser malpractice associated with them?



Conceptual Framework:

• Many consumers rely on financial advisors for critical financial security decisions; over 650,000 advisors help manage over $30 trillion of investable assets.

• There are vast differences in ethical duties, training/competence, oversight, and probable financial results associated with different classes of advisors.

• In the aggregate, financial advisory industries’ activity represents a pseudo-rather than a true, uniform profession but most consumers do not accurately discern this

• Some advisors voluntarily undertake advanced training and ethical obligations which differentiates them from the majority of advisors

• Effective financial results have important consumer and social welfare/government burden implications.



Conceptual Framework:

• Advisor misconduct is associated with suboptimal consumer results, even fraud and wasting.

• Disclosed advisor misconduct is measurable, and regressable against other important advisor characteristics, including the study designations of interest.

• Study designations require training and ethical behavior which is much more consumer favorable than that for undesignated advisors.

• Study designations have robust ethical codes and enforcement not present for non- designated advisors

•If misconduct is lower for designees than other advisors, designations may provide an important signal of lower misconduct probability for consumers.

• If so, designations and advanced academic advisor training have important social welfare implications, and should be encouraged or required as a matter of policy.



Major Hypotheses/Research Questions:

• Ho: no statistical difference between CFP ChFC and CFA designees’ misconduct

and the general RR advisor population in Florida

• H1’s: misconduct measures decline from non-designees to designees, and from

ChFC®'s to CFP®’s to CFA®’s to those who hold both:



Significance of Study:

• Seeks to affirm designations’ signal value to consumers

• Alert and model for troubled advisory industry to standardize and elevate before perhaps being forced by government/regulators with unintended consequences

• Contributes to nurturing path to true professionalism analogous to accounting, law and medicine

• Impetus to raise advisory competency bar to designation or academic minimums

• Evidentiary justification to adopt true and broad-based education and fiduciary duty across advisory industry channels

• Promotes social welfare and policy objectives by conserving and protecting, instead of wasting and risking, consumer financial resources by encouraging competent and ethical practice.



Academic Importance:

• Links many key studies in emerging literature, connecting advisor misconduct, advisor duties, education and credentialing, and consumer protection and education

• Seeks evidence, perhaps for the first time, that advanced education and ethical codes legitimately signal superior advice and conduct – something long surmised but not demonstrated.

• Provides support for expansion of nascent financial planning academic discipline, and justification for the requirement of academic credentials as the profession coalesces and evolves.



Delimitations:• National or other states’ FINRA database

• Other characteristics associated with designees

• DIS and business mix

• Other financial planning or investment designations

• DIS and “pure” IAR’s who are un-conflicted fiduciaries

• DIS and other education

• DIS and insurance commission or other regulatory misconduct history

• DIS and designator discipline records

• Panel data was not assembled

• Multiple “count” DIS scores were not compiled (i.e. multiple yeses to same question)

• Non-U4 negative background check information not collected

• Correlation firm types (wirehouse, insurance co., independent) and letters

• “Economics of misconduct” effects “good” and “bad” firms

• In state vs. out of state domiciled registrants in Florida

• Qualitative and mixed-method supplemental information

• Designator selection bias re DIS impact on designation qualification (i.e. DIS’ers disqualified)

• Designee selection bias re designation acquisition - designations and low DIS f(x) character?



Key Theoretical Foundation Literature Review: • Costly education intended to signal quality/value premium

• Spence, M. (1973). Job Market Signaling. The Quarterly Journal of Economics, 87(3), 355-374.

• Designations signal planners ethics, knowledge, objectivity & professionalism

• Mauldin, D., Wilder, W., & Stocks, M. (2000). Does AICPA Accreditation of Nonaudit Services Add Value? The Case of Personal Financial Planning. Accounting Horizons, 14(1), 49-67.

• Smith, R., Vibhakar, A., & Terry, A. (2008). Demarcating designations: Chartered Financial Analyst and Certified Financial Planner. Journal of Financial Services Marketing, 12(4), 299-310.

• Brockman, C., & Brooks, R. (1998). The CFA Charter: Adding Value to the Market. Financial Analysts Journal, 54(6), 81-85.• Miller, K., & Tobe, C. (1999). Value of the CFA Designation to Public Pensions. Financial Analysts Journal, 55(2), 21-25.

• Professions have specific defining characteristics

• Bruce, K., Ahmed, A., & Huntley, H. (2011). An approach to understanding the professionalism of financial planners. Journal of Business Systems, Governance & Ethics, 6(3).

• Boatright, J., Davis, M., & Stark, A. (1999). Conflict of Interest in the Professions. Oxford, England: Oxford University Press.

• Dean, P. (1997). Examining the Profession and Practice of Business Ethics. Journal of Business Ethics, 16(15), 1637-1649.

• Frumento, A., & Korenman, S. (2013). Professionalism and Investment Advisors. Journal of Investment Compliance , 14(1), 32-41.



Data:

• Data from U4 filings re BrokerCheck item public disclosures

• Aggregated raw data have been provided by commercial vendor serving advisor firms’ recruiting and other needs

• States provided data by FINRA to discharge states’ regulatory duties

• Florida sells data to vendors who resell to industry for recruiting and other uses

• Data reprocessed by researcher to:

• exclude extraneous and identifier information

• model for retail advisors only (exclude analysts, compliance etc)

• render amendable to numeric analysis (X to 1, blank to 0, etc)

• compile model DIS and other DV metrics



Target Population & Sampling:

• Those licensed as registered representatives by FINRA in Florida to transact in securities products who actually provide retail advice.

• The data set comprises the entire registered population, but those modeled to not be engaged in direct retail financial advice are excluded from regression data

35,361 RR registrants in raw data

n = 26,667 records

modeled as retail advisors



Data:



Research Methodology & Design:

• This is a quantitative study using secondary data where the

model-construct DV exhibits a censured range from 0-56.

Tobit regression is advised as the most appropriate

statistical technique. Logit (using binary DV transformations)

primary robustness check; OLS also used.




• DV’s:

• DIS (Disclosure Incidence Score) sum all adverse disclosure

• A-DIS (Advisor-DIS) sum all that are advisor related (financial fraud vs.

domestic abuse) allegations and findings

• CAD (Culpable Advisor Disclosures) sum all that are advisor

related and findings not just allegations

• B-DIS, B-ADIS, B-CAD Binary versions of each (0 if 0 1 if >0) for logit

check

• These are regressed using Tobit, Logit and hetroskedasticity

consistent OLS (latter as supplemental robustness check).



Research Methodology & Design: The DIS Models Condition

1. Does the item generally relate to non-investments-specific amoral or unethical behavior? DIS factor = 1

2. Does the item directly relate to registrant’s actions with respect to investments or theft? DIS factor = 2

3. Does the item relate to allegations against registrant without other implication of culpability? DIS factor = 1

4. Does the item relate to allegations against registrant with reasonable implication of culpability? DIS factor = 2

DIS sum of all non-zero items

A-DIS sum all including condition 2 items (2,3 or 2,4)

CAD sum only those including condition 2 and condition 4 items (2,4)



Research Methodology & Design: The DIS Models

Condition combination DIS as product of factors

1,3 1x1 1

1,4 1x2 2

2,3 2x1 2

2,4 2x2 4

DIS sum of all non-zero items

A-DIS sum all including condition 2 items (2,3 or 2,4)

CAD sum only those including condition 2 and condition 4 items (2,4)




• Form U4 requires answers to some 57 misconduct disclosure questions

• Required of all RR (and IAR) securities financial advisors

• Study focuses on non-fiduciary advisors/RR’s: brokers, banks, insurance reps, planners, etc.

• DIS (disclosure incidence score) is primary DV

• Compiled from RR record disclosures, additive total score based on each product of two metrics:

Mere allegation or indication of culpability?

Allegation = 1 Finding =2

Directly related or incidental misconduct?

Non-advisory related = 1 Advisory related = 2

Scores for each U4 question can be 0, 1, 2, or 4

CAD only uses 4’s:

Finding 2 x Advisory Related 2 = 4



Research Methodology & Design: DIS Models Focus on CAD




• Study IV’s:

• CFP

• CFA

• ChFC

• Control IV’s:

• Age

• Gender

• Years registered

• Licensed to sell life insurance products

• Independent contractor vs. W2

• BD and RIA licensed and registered - conducts suitability sales and renders fiduciary advice


Three Confounding Factors: dual Fiduciary/Suitability,

Insurance Sales & being Male


CAD and AnyDes controlled


CAD and AnyDes controlled finding


CAD and different designations controlled


CAD and different designations controlled finding


The Pure Signal: CAD, AnyDes and

different designations uncontrolled

confounding factors




confounding factors


The Pure Signal: CAD, AnyDes and different

designations uncontrolled findings


Conclusions - CAD emphasis

FL designees a 1/8th minority, tend to be male, both suitability RR’s and fiduciary IAR’s,

and licensed to see commissionable life insurance – the 3 confounding factors discovered

These 3 factors are found to sharply increase misconduct

Appear to overwhelm positive designation effects for ChFC®'s and CFP ®’s but possibly

not for CFA®’s

Misconduct max severity declines for all designees, but frequency and means increase for

CFP ® /ChFC®

The gender effect is profound and unanticipated

Controlled regressions show strong, robust effects for ChFC ®, stronger but questionable

effects for CFA, some AnyDes effect, but none for CFP® which is quite unexpected and

puzzling. Only the ChFC shows a strong and robust quality signal effect

Pure signal regressions show misconduct increases for ChFC®'s, much more for CFP®’s

and may decline substantially for CFA ®’s – a tantalizing tentative finding

This study sadly does not find a robust quality signal associated with any designation, and

in fact finds a poor quality signal for the financial planning designations likely attributable

to the confounding factors


General Conclusions & Policy Suggestions

Compensation factors seem to overwhelm training and ethical codes and should be

transformed to send a valid quality signal and foster emergence of a true profession

While not presented today (but please read the paper) the educational bars for, in

particular, the financial planning designations do not rise to the standards of true

professions like medicine, law, and public accountancy. Dedicated, academic, practitioner-

specific education should be made a requirement if professionalism is desired, perhaps

leading to a practitioner's doctorate analogous to JD or MD (WD?)

True professional regulation – by states’ governments – using the other professions’

models – is probably the only path out of the quagmire of conflicted interests, industries,

regulators, and designations’ competing flags. Moisand’s work is instructive, and

hopefully prescient.

*Moisand, D. (2008). The Financial Planning Act of 2008.

Journal of Financial Planning, 21(10), 78-90.


Suggestions for further research These findings should be validated using an alternative source of FINRA data for Florida as a data robustness check.

These findings should be validated using national data, especially with regard to the limited CFA® findings. All states are unique, and Florida’s

results should not be extrapolated without confirmation. The CFA® effect is tantalizing and should be rigorously studied for clues to policy

improvement.

Public discipline records are available for CFP®’s and CFA®’s, and these could be anonymously compared to those showing positive misconduct scores

to see if disclosed misconduct violates designator ethical codes, and if so if there is associated designator sanction, if the FINRA misconduct otherwise

impacts the designator disciplinary history record, and if there is a correlation between misconduct and designation suspensions or revocations.

Especially with regard to the poor CFP® scores and high scores of some designees, this could provide useful insight as to if enhanced BrokerCheck

surveillance of designees is warranted.

Correlation of this study’s parameters and findings with firm types: wirehouses, banks, credit unions, life insurance BD’s, independents, etc.: is there a

culture effect? Does misconduct for designees concentrate in some firm forms?

Correlation of this study’s parameters and findings with firms identified to specialize in misconduct (Egan et al., 2016); does misconduct for designees

concentrate in some firm forms?

Exploration of the confounding factors effects and most especially gender. Are these factors additive? Are they interactive?

Is the gender effect observed in other professions such as medicine and law?

Similar study and comparison to this one of dedicated non-RR IAR’s; is there a “one hat” improvement effect?

MSFS® and other masters’ degree or advanced credential effects, to the extent data can be obtained: do advance degrees suppress misconduct?

RR as Series 6 (investment company products) or Series 7 (general securities). Do designees with S 6’s show better results? Could this explain the

ChFC® vs. CFP® effect?

Does having than one designation suppresses scores?

Demographic profiling including education level and disciplines designees vs. non.

Misconduct vs. business mix, investment companies, general securities, insurance, annuities, alternatives, fee-only products and services, etc.

FINRA misconduct correlation with other regulators (SEC, Insurance commissioners, etc.) misconduct history

Panel data study: does designee misconduct increase over time? Are designations suspensions or revocations correlated width misconduct measures?

Panel data study of multiple count effect for a CCAD (Cumulative Culpable Advisory Disclosure) measure.

Do specific types of designees concentrate at specific firm types (e.g., ChFC® at life companies, CFP®’s at wirehouses) so that firm cultures may

impact misconduct measures?

Case study qualitative and mixed-method supplemental research

Is there designator selection bias? Does reported misconduct affect designations’ eligibility?

Add DIS factor reflecting non-U4 public record background check information: civil, criminal, credit, etc.

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