Question: I am a newly minted CFP professional. Last year I launched a solo practice offering modular as well as comprehensive financial planning on a fee-only basis. I charge clients a subscription fee as well as hourly fees for services not included in the subscription. The business is not where I want it to be yet, but it is growing.
A friend I worked with in the past approached me with an interesting proposal. He has trouble following up on all of the leads he generates. Preparing financial plans takes a lot of his time and he really doesn't enjoy this part of the process. He'd much rather focus on two things: marketing to create a strong pipeline of new prospective clients and converting prospects into clients by establishing investment accounts and implementing appropriate financial solutions that benefit them. He operates on an assets-under-management basis and also earns commissions on some financial products.
He wants to outsource the plan production steps to me. I would conduct the initial data-gathering meetings and prepare the analysis. He would then meet with the clients to present the plan and the recommendations. He's offered me a flat rate to provide this service. He'll introduce me to his clients as an "associate" but I would not be an employee. I would be an independent contractor. He anticipates this as something I could do on a part-time basis. He would also allow me to work hourly through my own firm on any leads that fail to meet his minimum assets requirements.
Is it OK for me to take on this role and still claim to be fee-only?
Answer: Your friend's creative offer would certainly be less problematic if you were not also holding yourself out as a fee-only advisor. The CFP Board's rules are very clear that you cannot describe yourself as "fee-only" if you or your employer receive sales-related compensation. As an independent contractor being paid a flat fee, you might think that you would be OK, but it is not. Your friend receives sales-related compensation and the CFP Board would treat him as your employer. You could not call yourself fee-only without violating the CFP Board's Standards of Professional Conduct. If you are also a NAPFA member, these services may disqualify you from membership in that organization as well. The inability to describe your practice as fee-only could be a heavy price to pay for part-time compensation.
You and your friend would both need to disclose the arrangement in your respective ADV brochures. He would need to inform prospective clients that he hires an outside firm to perform some financial planning functions. You would need to disclose in your ADV that you earn compensation from a non-affiliated firm for providing some of the same services that you offer on a subscription and fee basis within your own firm. The referral arrangement he offered would need to be disclosed in your ADV as well. You would also need to consider the conflicts of interest that could complicate your working relationship. The compensation method outlined would reward you for spending as little time as possible on each case. Your friend would want you to spend enough time to identify opportunities for significant implementation revenue — but you would not share in the revenue directly.
A cleaner approach would be to merge the firms. Your interests and your friend's interests will be aligned. You both benefit from his marketing and sales skills and your planning and analysis expertise. Prospective clients would benefit from your combined talents and would not be confused by an obtuse business relationship. Clients are more likely to understand and accept that individuals in the firm perform different roles than they are to understand the strange bedfellows arrangement in your friend's initial proposal. There would be an enhanced service offering for existing clients when it is time to make adjustments to their plan and rebalance their portfolios.
A merger would mean that you could no longer refer to yourself as fee-only. Although you may be tempted to use the term "fee-based" or a similar term, you should know that the use of these terms to diminish or obfuscate the receipt of sales-related compensation would be a potential violation of CFP Board rules.
If your friend is unwilling to merge your practices, he can benefit by hiring a paraplanner to perform some duties and allow him to focus on what he does best.
Dan Candura is founder of the education and consulting firm Candura Group. Write to him to submit a question. All submissions will be treated confidentially.