The National Association of Personal Financial Advisors has revised its membership guidelines to allow advisors with tiny trailing commissions to join its ranks, a move that has predictably provoked a backlash by advisors, including former NAPFA leaders, who say the move waters down the association’s fee-only philosophy.
A few longtime NAPFA members, including one former chairperson, said the move is largely innocuous and applies only to a dozen or so advisors dogged by very old trailing commissions. The advocates for the plan say that it helps those advisors burdened with old insurance contracts, people making a few dollars here and there from commissions they can’t shed, but whose hearts are otherwise in the right place.
Critics, however, called the move “seismic” and insist that NAPFA as a beacon of integrity will be compromised for its 4,600 members. For decades, the association held itself out as an advocate of conflict-free advice and some of its members voiced scathing critiques of the commission-driven sales cultures of the stock brokerage and insurance industries.
Moreover, trail commissions, including 12b-1 fees, have been the target of hefty, multi-million dollar regulatory fines of numerous broker-dealers. Some regulators have raised the option of eliminating them and critics have complained these commissions serve as an incentive to brokers to keep clients in expensive mutual funds that underperform competing investments.
“Once standards and requirements are lowered, it’s hard to raise them,” said former NAPFA chair Gary Schatsky, who is also an advisor with IFC Personal Money Managers. “There is only one entity that has never lowered standards when it came to protecting the public and that was NAPFA.”
The new membership rules, which were announced by NAPFA in a Monday press release, say that advisors with a “de minimis” amount of trailing commission can qualify for membership. That means they cannot receive any other sales-related compensation, and what they do get from older commissions can’t be more than $2,500 per year.
After that, the advisors must use a three-tiered process to get rid of the commission business: They can ask for a transfer or assignment of the assets to a person or entity that’s not related. They can also contact the company paying the commission and ask for it to be discontinued. If neither of these gambits work, the advisor can donate any trailing commission to a 501(c)(3) charity, submitting documentation and attesting every year that the commission has been donated.
The association said in the press release that it “did not want to punish advisors committed to fee-only advising who began their careers in commission-based model firms yet have been unable to transfer their lingering commissions due to frustrating clerical challenges.”
Jeff Jones, NAPFA’s current board of directors chair, said in an interview that the association decided to do this now to get its members aligned with a similar initiative and language at the Certified Financial Planner Board of Standards, though he says NAPFA’s language is more specific and defines “de minimis” with the $2,500 commission limit, which the CFP Board doesn’t do. He stressed that it’s not about boosting membership and that it only affects a few advisors who bemoaned the fact they couldn’t join even though they’d seen the fiduciary light.
“We’ve had members who have been here for 20-plus years and came in under the exact same policy and at some point that policy was rescinded,” Jones said. “Quite frankly, I believe it was hypocritical of those who had entered into the NAPFA community to then turn around and say we’re not going to welcome people like us. We have a number of members who came to us out of the insurance industry, where they sold products [and] decided to make the transition to fee-only and fiduciary.” Jones said the rules keeping out those with very tiny commissions is throwing up an unnecessary wall to those who want to convert to the fiduciary model.
Susan John, who served as NAPFA’s national chair in 2012 and is the managing director with F.L. Putnam Investment Management, said that insurance company bureaucracy makes these commissions too hard for some advisors to completely shake off.
“I had clients who were insurance agents before they retired and they still get dribs and drabs, sometimes $8 a month … from policies they sold 40 years ago," she said.
Ron Rhoades, director of financial planning and an assistant professor at Western Kentucky University and onetime chair-elect of NAPFA (he ended up not taking the position), said, “I think it’s just and fair to allow these few individuals in.” However, he added, “I worry that [the way] this was rolled out to the members was perhaps not the best way it could have been done. I worry that some NAPFA members may feel that [its] values have been adversely affected.”
He also acknowledged that the issue has been contentious and that there’s been pushback among some members on an internal NAPFA message board.
“I fully expect the national board of directors who are fully committed to NAPFA will re-evaluate this rule that came out and take appropriate action,” he said.
George Kinder, an industry thought leader, fiduciary advocate and early NAPFA member, said that given the crucial role fiduciaries are going to play in the future, NAPFA’s role shouldn’t be diminished, even for something as small as a few trailing commissions. He said that the CFP Board comparisons don’t hold up because NAPFA has been a visionary organization on the fiduciary issues in a way the CFP Board hasn’t. NAPFA should instead try to change insurance companies’ behavior if they won’t drop commission contracts, he said.
“NAPFA has been in a leadership place around what ‘fiduciary’ means,” Kinder said. “To diminish that in any way by kind of apologizing for insurance companies’ bad behavior of not being able to end trailing commissions, that stinks.”
Kinder said he talks to consumer investors quite a bit and their confusion over this issue requires NAPFA to adhere to a higher calling. “You say, ‘Hey, you want the gold standard of fiduciary care, you get a CFP, you get a fee-only person and you get a registered life planner. You put them all together and you’ve got an incredible package.’”