CFP Board to set guidance on compensation disclosure

The board will have the last word on the meaning of "fee-only"

Sep 12, 2013 @ 5:08 pm

By Mark Schoeff Jr.

Differing definitions of “fee-only” were hashed out by the Certified Financial Planner Board of Standards Inc., NAPFA and the Financial Planning Association earlier this week and while no conclusion was reached, the CFP Board will have the last word.

"It was a very healthy discussion,” said Geoffrey Brown, chief executive of the National Association of Personal Financial Advisors, referring to a meeting of the Financial Planning Coalition in Chicago on Tuesday. “Everyone came away from it with an understanding that we would be working toward coming up with a common set of definitions for all compensation, 'fee-only' being one of them.”

It's not exactly a negotiation. The groups agree that their aim is to strengthen consumer protection by defining clearly how an investment adviser is paid. The CFP Board, however, is the body that determines the requirements for financial planning certification.

“This is not about us changing,” CFP Board chief executive Kevin Keller said in an interview. “FPA and NAPFA fully support the CFP Board as the standard-setting body, and we're working to facilitate their compliance with our standards.”

Within the next couple weeks, the CFP Board will send to its certificants a document designed to help them understand how to describe their compensation.

The CFP Board is compiling a set of frequently asked questions that have cropped up since an early August webinar and a follow-up notice distributed at that time to the nearly 69,000 CFPs. The FAQs also will be posted on the CFP website.

The organization has renewed its focus on compensation disclosure in the wake of recent enforcement cases, including one against former CFP Board chairman Alan Goldfarb, that centered on advisers' misrepresenting their compensation as fee-only under the CFP Board definition of the term.

“The FAQs are designed to provide guidance within the limitations of facts and circumstances,” Mr. Keller said. “Our effort is not to capture people doing things wrong. Our efforts are toward helping people comply, so that when the public sees CFP after [an adviser's] name, they know that person is meeting high ethical standards and that they've met competency standards.”

The CFP Board defines fee-only as meaning that an adviser derives compensation only from charging fees to a client. If the adviser is affiliated with a broker or insurer that charges commissions — even if the adviser doesn't charge clients a commission — the adviser's compensation is deemed to be “commission and fee.”

The CFP Board's definition differs from that used by NAPFA. The organization allows its members to own up to a 2% stake in a financial services company, which means they can be affiliated with a firm that charges commissions and still use the fee-only designation.

Mr. Brown said that fewer than 100 of NAPFA's approximately 2,400 members might find themselves out of compliance with the CFP Board's definition of fee-only.

“We've aligned ourselves with the CFP designation, and we will work with our partners to resolve the situation,” Mr. Brown said. NAPFA last year implemented a requirement that new members hold the CFP mark.

Mr. Keller said that the relationship between the organizations is strong, despite the compensation differences.

The three compensation designations that the CFP Board uses are “fee-only,” “commission and fee,” and “commission only.” The organization recently dropped “salary” as a term an adviser can use to describe compensation on the CFP website. The FPA also has eliminated “salary” as a compensation option.

“There are many different, complex ways folks can be compensated,” Mr. Keller said. “We just think words have meaning. If you're fee-only, you and the firms you're affiliated with are fee-only.”

The recent compensation matters that have come before the CFP Board's Disciplinary and Ethics Commission don't necessarily signal a trend in compensation enforcement. The organization will look into alleged compensation misrepresentation that's brought before it but won't go looking for cases, Mr. Keller said.

“It is not our policy now — nor do I see it going forward — to conduct audits or investigations,” he said. “We focus our resources on helping people comply with our standards.”

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