A decision last week by the National Association of Personal Financial Advisors to ban its members from owning even a small stake in any financial firm that charges commissions brings some agreement in the industry about the definition of a fee-only financial adviser — but does not quell the debate.
“I’m pretty sad and feel some anger about that,” said Rick Kahler, president of Kahler Financial Group. His stake in a real estate firm puts his NAPFA ties in jeopardy.
“I was accepted into membership with [NAPFA] fully being aware of my minority ownership of the family real estate firm,” he said.
NAPFA, an organization created for fee-only financial advisers, notified its approximately 2,500 members in an e-mail last Thursday that it was rescinding a provision allowing them to own up to 2% of a firm that generates transaction-based revenue.
The change resolves a difference between NAPFA’s fee-only definition and the one outlined in Certified Financial Planner Board of Standards Inc. rules. The CFP Board says financial advisers are fee-only if they only charge fees for their services and are not affiliated with a firm that charges commissions, a rule that has caused much controversy.
Mr. Kahler said the organization is sidestepping a chance to shape the compensation debate.
“This was a great opportunity for NAPFA to take the lead on defining what fee-only financial planning is,” he said. “It appears they’ve decided to accept the CFP Board’s definition of fee-only. Their definition is one I don’t feel is entirely accurate. There are lots of unintended consequences.”
The move makes sense to Michael Kitces, a partner and director of research at Pinnacle Advisory Group, because NAPFA requires its members to hold the CFP designation — but more work needs to be done to iron out what fee-only advice means.
(Here's what blogger and adviser Michael Kitces has said about the definition debate)
“The fundamental challenge remains,” Mr. Kitces said. “The [CFP Board] definition is flawed and needs to be fixed. The CFP Board continues to be in denial that there’s a problem.”
Paul Grant Truesdell, owner of TrueStar Advisors Inc., is more emphatic. He’s tired of fee-only advisers using the label to put themselves above advisers who collect other kinds of revenue.
“Everybody in this blessed universe has not sat down and thought this through. They’re both stupid,” Mr. Truesdell said of CFP Board and NAPFA. “They’ve never … defined what a fee is.”
Charging a fee for assets under management, as NAPFA members do, “is no more than a slow-bleed commission,” Mr. Truesdell said.
NAPFA’s decision may not settle the argument, but it does add important clarity to what “fee-only” is, said Kimberly J. Howard, owner of KJH Financial Services.
“It’s kind of getting everyone in the same ballpark,” Ms. Howard said. “It’s one more affirmation that [another] organization is taking a step to be exclusively fee-only.”
At various points in NAPFA’s history, the financial-firm ownership criteria has ranged from 0% to 5%. Set at 2% in 2004, it has outlived its usefulness, NAPFA chief executive Geoffrey Brown said, and doesn’t fit with the other pieces of the organization’s “membership vetting process.”
“This change in alignment is really about our members’ commitment to providing financial services in a manner that is open, clear and easily understandable for consumers,” Mr. Brown added. “The 2% exception is confusing.”
The CFP Board backed NAPFA’s decision.
“NAPFA is a leader in investor protection, and this change reflects their commitment to putting consumers first with a focus on transparency along with clear and understandable disclosure,” Ray Ferrara, CFP Board chairman, said in a statement. The CFP Board did not make anyone available for an interview.
(CFP Board chairman Ray Ferrara sets the record straight on its rules)
The CFP Board is embroiled in a lawsuit by a Florida planning firm over compensation descriptions, and a disciplinary case led to the resignation of a former CFP Board chairman more than a year ago.
Last year, the CFP Board temporarily removed the fee-only label from the profiles of 8,000 planners (out of almost 70,000 CFP professionals) on its website after it found that some wirehouse representatives and others were improperly claiming fee-only status.
Since then, Mr. Brown called for a discussion between the CFP Board and other groups over compensation definitions. He said those talks have not yet occurred.
“There’s still some confusion,” he said. “What we did was take care of a piece that was confusing that we could control. It would be great to have that larger industry dialogue that we’ve talked about, when parties that need to be at the table are ready to be at the table.”
The CFP Board is not considering modifying its compensation definitions.
“I look to the CFP Board to carry that banner, and that’s the definition that should hold,” said Paul Auslander, director of financial planning at ProVise Management Group and president of the Florida Financial Planning Association. “Considering all the moving parts, it’s the best that’s available for now.”
The removal of the 2% exception will affect about 125 NAPFA members, Mr. Brown said. Their status will be resolved when they renew their annual NAPFA membership. At that time, members will not be allowed to have any interest in a commission-charging firm, according to NAPFA.
“We’re going to look at each of these situations on a case-by-case basis,” Mr. Brown said.
NO SIGNIFICANT IMPACT
If some members depart, Mr. Brown doesn’t anticipate a significant impact on the NAPFA budget. In its last fiscal year, $1.07 million of NAPFA’s $3.2 million in revenue came from membership dues, according to its Form 990 tax document. Annual membership costs up to $625.
“I don’t think we’re going to lose anyone over this,” Mr. Brown said. “We’re going to work with individual members that may be affected by this to make sure they’re in a position to be with us for the duration.”
The fee-only label is held dear by NAPFA members, who see it as a symbol of their commitment to act in the best interests of their clients.
“Anything we can do to really, really simplify things for consumers so they can understand who is getting paid by whom for what supports the goal of helping the consumer make informed choices,” said Dave O’Brien, owner of O’Brien Financial Planning.