At the same time, Merrill Lynch and Morgan Stanley notified their advisors who hold CFP designations and declared themselves to be fee-only to change their marketing to “fee and commission.” Hundreds of wirehouse CFP licensees, along with many others, changed their compensation method and didn’t receive any letter of admonition the way Goldfarb did. The move raised age-old concerns about the CFP Board engaging in selective enforcement while trying to curry favor with big deep-pocketed institutions by toadying up to them even as they come down hard on small practitioners with limited resources.
This pattern of favoritism reminds many advisors of the manner in which Finra distributes punishment. Coincidentally, Finra is the agency that formerly employed a growing number of CFP Board personnel. Given their bent to regulating transactions and their unfamiliarity with the financial planning process, many advisors believe they are ill-suited for their jobs.
For his part, Goldfarb believes he is not guilty of any infractions. “I don’t want to be the poster boy for the fee-only controversy, but there has to be a clear definition,” he says. “They want you to select one of three options, and there is no room for clarification.”
Goldfarb maintains that the fee-only designation should be based on what an advisor is paid by clients, not what the firm could be paid by someone else. “I think the CFP Board staff overreached in applying the definition. The action was inappropriate and the definition should be changed.”
Other CFP licensees have been caught in the crossfire as well. Tina Florence, of Lane Florence Financial Advisors in Folsom, Calif., was forced to resign from the disciplinary panel of the CFP Board after being charged with violating the board’s rules.
The charge against her stemmed from a sentence on her firm’s Web site that said consumers could get financial planning advice without worrying about a conflict of interest with commissions. “This is a true statement since we offer financial planning on an hourly fee basis through our RIA separate from any commissioned products. I have always identified myself on public profiles as compensated by fees and commissions,” Florence says.
CFP practitioners are being subject “to discipline in an arbitrary and capricious manner, causing real harm to those of us caught up in it,” she says. “[It] needs to rescind the discipline rulings for those of us caught up in this mess and pay all costs for defending ourselves. The credibility of the CFP mark is at stake.”
In addition to any legal fees that are involved if the board’s ruling is challenged, an initial fee of $1,500 is charged for a hearing on the charge. But more than that, advisors say disciplinary proceedings hurt their reputations and cost them business.
Some advisors feel the entire controversy and the ensuing series of disciplinary actions are part of the board’s reaction to a Florida couple who balked at its disciplinary stance and filed suit in protest against it. Jeffrey and Kim Camarda objected to discipline proposed by the CFP Board for listing their advisory practice as fee-only. The couple own Camarda Wealth Advisory Group in Fleming Island, Fla., which charges fees. They also own Camarda Consultants, a separate company that offers non-RIA services, including insurance products on a commission basis, and that sometimes receives referrals from the advisory firm.
The board objected to the couple’s advertising their advisory firm as fee-only because of the insurance company ownership. In a case involving a jointly owned insurance business, many advisors think the CFP Board had a valid point. However, the Camardas themselves say they changed their advertising to say “fee-based.” They say they offered several solutions they thought were fair, but were turned down by the board, so they filed suit for damages.
“The CFP Board should be a force for good in the profession,” Jeffrey Camarda says, “but this controversy creates confusion for the public and for advisors. There is no clear definition for fee-only in these complex situations. This ongoing conflict is especially bad for the entire profession in the public’s eyes.”
Is Fee-Only Better?
The controversy has erupted in part because many people feel fee-only advisors are subject to fewer perceived conflicts of interest than those who earn a commission from selling specific products, although the CFP Board says it is neutral on the compensation question. The purpose of the definition, according to CFP Board CEO Kevin Keller, is to give the public information about how advisors are paid so they can make an informed decision in selecting an advisor.
“You can ethically serve clients through any fee arrangement,” Keller says. “Conflicts exist in all forms of compensation, but some of the advisors have been struggling to try to describe themselves as fee-only.”
This confusion has been compounded by mergers and acquisitions in financial services. Many RIA firms are now owned by accounting firms, brokerages and banks that operate other commission-based entities. In the post-Glass-Steagall world, it’s perfectly normal for a bank to own a trust company that calls itself a fee-only fiduciary and a brokerage business that collects commissions.
Within the advisory business, the problem has arisen because the CFP Board definition of fee-only includes money paid to the advisor and “related parties” and money the advisor is paid or is “entitled to be paid.” A financial advisor can be “entitled to be paid” compensation through commissions even though he or she only receives fees.
Even though some advisors find that definition confusing and complain that it includes criteria that are not relevant for advisors who actually only receive fee payments from clients, the CFP Board is not backing down. “The CFP Board definition is an accurate and understandable description of the compensation methods,” says Keller. “The board continually makes sure the rules and standards are understandable.” The board is in ongoing discussions about the dispute and has asked CFP professionals to weigh in on the subject, but there are no plans now to change the definition.
Trail fees, 12b-1 fees, surrender charges, referral fees and contingent deferred sales charges are all commissions and have to be reported as such, Phil Fazio, adjunct professor at Florida Atlantic University and Nova Southeastern University, said during a webinar the board conducted late this summer to walk advisors through the CFP Board’s definition. A CFP professional must disclose to clients any compensation that is received by him or his employer, even if it is a small portion of the overall earnings, Michael Shaw, managing director of professional standards and legal counsel for the CFP Board, said during the webinar.
The concept of “related party” is particularly important, according to the webinar panel. “If an advisor works for a company that owns a broker-dealer, the broker-dealer is a related party and the advisor must be considered a fee and commission advisor,” Shaw said.
However, simply owning stock in a publicly traded broker-dealer does not mean the advisor has to list himself as fee and commission if he has no management duties and no referral relationship with the broker-dealer, Fazio said.
Whose Responsibility Is It?
A bigger question some advisors are asking is, where is the SEC on the definition of fee-only? “If an administrative fee was such a concern in 1999, I would think an outright commission would be a concern today,” Adkins says. “Someone should be concerned.” Adkins acknowledges that for all he knows the SEC is addressing the issue at present, either through future disciplinary actions or via an upcoming notice to advisors and brokers.
Adkins himself is appalled by what he has seen some advisors who claim to be fee-only reveal about their business activities in online advisor forums. “They had better be disclosing this stuff on their ADV, because it is now public and the SEC can see it,” he says. “As Warren Buffett says, when the tide goes out we’ll find out who is swimming naked.”
The CFP Board says it only investigates advisors after a complaint is received; otherwise, CFP professionals are allowed to use any of the three designations on the CFP Web site or in marketing materials.
The growing pains of a relatively new profession explain the confusion, says incoming FPA president Jane Stanzak. “The financial field was a sales profession at first. People come into it from all different backgrounds. Now it is a profession of advice, and we find that we need more clarity for the consumers. The compensation definitions are part of that,” she adds.
“A big public discourse like this has the potential to chip away at the foundation that has been built for CFP professionals,” adds Michael Branham, current FPA president. “The term fee-only has to be clarified and a decision has to be made whether it should be kept or not.”
As the association that historically has set the agenda on compensation issues, Napfa has also found itself wrestling with these issues. “Fee-only advisors are free to put the consumer first with no conflicts for selling specific products,” says Geoffrey Brown, the CEO of Napfa. However, the organization realizes the complex nature of the industry and allows a small exception to acknowledge how advisors actually work.
“The Napfa and CFP Board intentions and spirit are the same,” Brown says. Under the Napfa rules, members or their affiliates are allowed to own up to a 2% interest in a firm that receives commissions. The stricter CFP Board definition would eliminate about 5% of Napfa members. Napfa reviews advisors’ ADV forms when they apply for membership to make sure they meet the fee-only requirements and then reviews the information every two years when the person reapplies, says Brown.
Members of Napfa were stunned in recent years when two of their past presidents, James Putman and Mark Spangler, were charged with establishing limited partnerships that defrauded clients out of their life savings. Spangler was recently convicted of 32 counts of wire fraud, money laundering and investment advisor fraud that cost clients, including family members, an estimated $50 million in life savings. He awaits sentencing in February.
Putman was banned from the business for life for investing client funds in viatical settlements that proved worthless while receiving payments from the sponsor. He is now selling motorcycles, according to a victim. Both men were CFP licensees.
The CFP designation usually is held up as the gold standard for ethics and education for financial professionals. But why is the CFP Board involved in the discussion of compensation in the first place, asks Gregory D. Sullivan, a CPA and CFP licensee and managing director of Harris SBSB in McLean, Va. Harris SBSB is a service of Harris Private Bank that provides financial planning and wealth advisory services to affluent clients. Harris, in turn, is owned by Bank of Montreal, which owns and operates a brokerage.
“They [the CFP Board] say they are agnostic about compensation methods, so why are they in this discussion at all?” Sullivan asks. “I am a CPA and they do not ask how I get paid. They want to know that I act ethically.”
When the complaints came to light, Sullivan feels the CFP Board “took out a bazooka to deal with a manageable problem. They should have done what the SEC does and sat down with the people to tell them something in their marketing might not be clear and that they should change it. They should not have publicly reprimanded CFP professionals.”
Michael Kitces, a partner and director of research for Pinnacle Advisory Group Inc. in Maryland and Florida, also objects to the CFP Board position on the grounds that the designation is meaningless anyway. Given the board’s definition that no one can be considered fee-only if they could at some point receive commissions, then all commission-only advisors are in violation of the definition because any commission-only advisor could, at some point, receive fees. Little wonder some firms have opted to call themselves “commission-free.”
“That makes everyone fee and commission by definition, and putting everyone in one bucket makes a compensation designation meaningless,” says Kitces. “Surely, at some point the fact that no client has ever actually paid a commission to the advisor or any related party should be a valid defense and safe harbor to claiming an advisor is fee-only, right?”
Harold Evensky, president of Evensky & Katz Wealth Management and another former CFP Board chair, disagrees. “I do not have any issues with the basic concept that the board has established for what is fee-only. The fact that someone need not be getting a commission, but could get a commission, means they are not fee-only,” Evensky says. “However, there is nothing wrong with commissions. I started out getting commissions and I was ethical then and I am ethical now. I think education of advisors is the answer.”
Evensky, who has testified as an expert witness for the SEC, has a major problem with the numerous advisors like Spangler and Putman who call themselves fee-only and form limited partnerships, invest clients’ funds in these vehicles and then make themselves the general partner. Simply establishing such a structure is a huge conflict of interest in his view.
“I don’t get it [advisors making themselves general partners],” Evensky says. He is not surprised that more than a few fee-only advisors who have followed this path have wound up in trouble.
The way an advisor is paid is important, according to Dan Candura, who helped write the CFP rules for compensation disclosure. Candura is president of PennyTree Advisers LLC in Braintree, Mass., and founded an education and consulting firm for financial advisors.
“It is difficult to understand the value of a service if you do not know how a person is paid,” Candura says. “It is similar to the disclosures that are now required for how much is being paid in fees for 401(k) plans. The consumer needs to have transparency. CFP professionals voluntarily agree to higher standards of disclosure.” At the same time, Candura says he does not feel all of the advisors who incorrectly listed themselves as fee-only did it on purpose.
Both Sullivan and Adkins agree that the controversy really calls for clarity from the SEC. “They are the body that really matters,” Adkins says. “The fact is this is a murky area because we don’t have any clear guidance [from the SEC].”
This is not the first time the CFP Board has clashed with its certificants and other members of the profession and it almost certainly won’t be the last. Early this fall, it made noises about entering the continuing education business and was greeted with howls of outrage from the academic community, the FPA and many others.
The CFP Board, already embroiled in the fee-only fiasco, backed off temporarily, saying it had no plans to enter the continuing education business “at this time,” but would seek to upgrade the quality of continuing education. The phrase “at this time” left the door open for the organization to change its stance. Many of those criticizing the possibility of the board getting into the continuing education business, like the FPA, are already in that market, as is Financial Advisor magazine.
But the bigger question is what is the appropriate role for the CFP Board to play within the profession? Like any bureaucracy, it possesses inherent expansionist desires.
Many times in recent years, the brokerage industry has floated the trial balloon that responsibility for RIA regulation be transferred from the resource-strapped SEC to cash-rich Finra. The mere thought of Finra regulation has repelled many in the financial planning community—who note that Finra has done a poor job of regulating the brokerage business—and the CFP Board looks like an attractive default option to many.
But the larger question is why should the CFP Board be a regulator and what should it regulate? Organizations like the CFA Institute and the AICPA administer their designations, set accreditation standards and oversee continuing education. But they are not regulators.
Advisors who have come in contact with CFP Board examiners, many of whom are Finra alumni, complain that they have a narrow transactional focus and little or no understanding of financial planning. “If they understood what we do, they’d be looking at what rate of return assumptions are we using for college funding and retirement planning,” says one advisor. “But they don’t.”
And so the board is likely to remain the proverbial elephant in the living room, walking around looking for a chair to sit in but finding out that no chair fits them.