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The CFP board is struggling with how it wants to define “Fee Only” financial planning. It's a bit of a quandary–and that is how do we define this term? What is fee only? Who has the right to use that label to describe themselves?
Over the last couple of years this debate has been heating up, however, it only seems to have to muddied the waters that much further. Some people have been sanctioned by the CFP board for doing things that others have not been sanctioned for. In short, there seems to be a fair amount of inconsistency among the CFP board and its dealing with its members.
The only consistency is that the CFP board's actions have been inconsistent.
On its surface, this doesn't seem like the sort of discussion/debate that would be particularly nuanced…right? If you are paid a fee for constructing a financial plan and/or giving financial advice, then you are a fee-only planner.
But there is a deeper question that arises…
What is a fee? Is it simply that a client writes a check for pre-determined amount to have a financial planner put together a written financial plan? Or could it be that an advisor charges an asset management fee of say 1.5% for all investable assets in exchange for ongoing investment management and financial advice?
Or could it be a combination of those types of services with a sprinkling of some life insurance or annuity sales? Where the only compensation available is for the advisor/financial planner to receive a commission.
The CFP board has decided that anybody that is associated with a business that receives a commission as compensation for the sale of a product will not be allowed to refer to themselves as “fee-only” planners.
What's more interesting?
This restriction of not receiving commissions extends to all business interests a person may have, not just to products offered within the realm of the financial services industry (stocks, mutual funds, etfs, annuities, life insurance etc.) but extends to any other business a fee-only planner may be involved. For example, you would not be allowed to call yourself “fee-only” if you owned an interest in a real estate brokerage company.
Why?
Because revenue that is earned by the real estate brokerage is derived in part from commissions on the sale of real estate. The CFP board says business interest like this will be prohibited for fee-only financial planners.
What are they saying?
Are they trying to imply that you are somehow morally bankrupt if you cannot consider yourself to be fee-only? They (the CFP board) seems to place an undue emphasis on implying that those who work for a commission are somehow more likely to act in their own self-interest as opposed to acting in the best interest of the clients they serve.
We disagree with this sentiment wholeheartedly.
Here's why…
In most cases, for someone to have a true incentive to master a skill there must be some motivation to do so and we think that simply working for a fee does not a true incentive make.
From a practical point of view to illustrate the point–if we (Brandon and Brantley) are not actively engaged with insurance companies as agents/brokers, then we will never be able to obtain complete information from them.
In theory, if you are a disinterested party who stands to gain nothing by offering a particular product, then you are always able to take the high road and make unbiased recommendations that best suit your client. Sounds good…right?
However, in practice it just means you don't know what you are talking about.
It is truly a wonderful academic argument, however, it has very real problems when it comes to application in the real world.
Furthermore, this theory that fee-only financial planning is somehow superior undermines a fundamental tenant of market economics which is simply…the profit motive.
People build good products and provide top notch service to their clients/customers because they are motivated by the profit that they will earn as a result of providing a great product or service.
What really confuses me?
The CFP board implies that those us who earn a commission for the work we do are somehow ethically flawed. We are inherently dishonest. And I just can't connect those dots in my head.
Could it be that this just a marketing angle that has been taken by the CFP board to make it seem that their members are a beacon of truth in an otherwise dishonest world? Maybe so.
Brantley,
The CFP Board’s positioning around commissions is not that they are “flawed” or that commission-based advisors are inethical. That IS a view espouse by NAPFA, but NOT by the CFP Board. In point of fact, the CFP Board requires ALL CFP certificants who provide financial planning or material elements of financial planning to act as fiduciaries, REGARDLESS OF COMPENSATION MODEL.
The issue here is simply that all CFP certificants have to disclose their compensation, and the CFP Board has taken the odd view that advisors must disclose certain types of commission compensation that COULD exist even if it doesn’t ACTUALLY exist, just because the advisor has some relationship to a firm that has no relationship to their actual clients.
That is a significant concern, as I’ve written several times (most recently at http://www.kitces.com/blog/cfp-boards-flawed-fee-only-compensation-definition-creates-another-three-bucket-mess/ ), but the CFP Board’s rules have NOTHING to do with which compensation mode is “better” (that is NAPFA’s fight, not the CFP Board). The CFP Board requirement is only that compensation be DISCLOSED. The question is WHAT to disclose, and whether it should be necessary to disclose compensation that doesn’t actually exist but “could”.
Respectfully,
– Michael
Michael,
Thanks for your insight on the subject! The lines of distinction are interesting and I look forward to more commentary on the topic from you.