Getting real on a ‘fee-only’ definition

The Certified Financial Planner Board of Standards Inc. has never shied away from controversy, but boy, did it stir up a hornet’s nest last month when it temporarily removed the fee-only description from its online profiles of about 8,000 of its nearly 69,000 certificants.

Indeed, the controversy over compensation designations has rocked the CFP Board and has polarized the adviser community. For proof of this schism, one need only read through the comments from InvestmentNews’ online readers that accompany our coverage of this fiasco.

Under the CFP Board’s rules, a “certificant may describe his or her services as “fee-only’ if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.”

CFPs who work for — or are affiliated with — firms that earn commissions are also prohibited from calling their services fee-only, even if those CFPs do not charge commissions to their clients, according to the CFP Board’s standards of professional conduct.

We applaud the CFP Board for taking a strong stand against advisers who hold themselves out as fee-only when, in fact, they receive direct commissions for recommending certain products or services.

But we fear that such a convoluted and rigid definition of “fee only” runs the risk of leaving consumers even more confused than they already are about how advisers get paid and about the significance of the different pay models.

Consider, for example, a case in which an adviser gets paid only in fees but is affiliated with a firm that charges commissions. Reluctant to give up the perceived competitive advantage of calling himself “fee only,” that adviser may be tempted to hedge — or overqualify — when discussing compensation with a client.

Imagine a conversation that goes something like this:

Client: Are you a fee-only adviser?

Adviser: More or less.

Client: Come again?

Adviser: I only charge fees, but the broker-dealer I work for charges commissions, so I am required to call myself a “fee-and-commission adviser.”

Client: So I am paying a fee AND a commission?

Adviser: No. You’re paying a fee — at least to me.

Client: Where does the commission come in?

Adviser: If I recommend a product that you buy through my broker-dealer, you may pay a commission.

Client: To you?

Adviser: No, I don’t accept commissions. I am fee-only.

Client: More or less?

Adviser: More or less.

Our advice to the CFP Board is to focus on the conduct of its certificants, and not the firms they work for. Only certificants that earn 100% of their income from fees should have the right to call themselves fee-only. All others must characterize themselves as commission-only or fee-and-commission, whichever is most appropriate.

The CFP Board is right to insist that its members properly disclose their compensation. And to be sure, the CFP Board is doing its best to ensure that any conflicts of interest that may arise in the compensation structures that are common in the advice industry are properly disclosed to consumers. But those conflicts are too vast and too varied to be summed up by a two- or three-word characterization of how an adviser gets paid.

The truth of the matter is this: There is no such thing as a conflict-free compensation model.

Advisers who charge asset-based fees have an incentive to keep as many assets under their care as possible. Meanwhile, those who charge by the hour have an incentive to over-plan and those who charge a flat annual fee have an incentive to underplan.

The important thing is to make sure advisers are paid in the manner they represent to clients, or potential clients, and that any and all conflicts of interest are disclosed.

Scrupulous advisers do what is best for their clients — regardless of how they are paid.