Practice Management

CFP Board doubles down on ‘fee-only’ definition

Room for wiggle appears to be shrinking as board sticks to its guns.

In the debate over how to describe the ways that investment advisers are paid, the Certified Financial Planner Board of Standards Inc. is standing by its definition of fee-only — while other groups hope for some wiggle room.
In an Oct. 15 letter e-mailed to the nearly 69,000 CFPs in the United States, CFP Board chief executive Kevin Keller said that straightforward compensation disclosure by financial planners is central to building investor trust.
“We believe that our definition of ‘fee-only’ is a clear, common sense and plain-English explanation of this compensation method,” Mr. Keller wrote.
But the CFP Board’s definition has provoked controversy over the last several months. Under CFP rules, advisers can describe their practice as fee-only if they derive compensation only from fees they charge clients and if they are not affiliated with a financial services company that charges commissions.
The National Association of Personal Financial Advisors has a different definition. The membership guidelines for the approximately 2,500-adviser organization say that a fee-only adviser can own up to 2% in a financial firm that charges commissions.
At the NAPFA fall meeting in Philadelphia last week, its leaders expressed optimism that the CFP Board would negotiate a new fee-only definition.
In his letter, Mr. Keller said the CFP Board welcomes “an honest and constructive dialogue” on its standards but did not indicate that it was poised to modify the fee-only definition.
The organization is hamstrung in what it can do to change the fee-only parameters because of a legal matter, according to Michael Kitces, director of research at Pinnacle Advisory Group Inc. and publisher of the blog Nerd’s Eye View.
“They continue to dig in their heels on a seriously problematic definition,” he said. “The reality of the situation is that the CFP Board feels limited in its ability to adjust its position in the middle of a lawsuit over these definitions.”
The CFP Board declined to comment beyond Mr. Keller’s letter.
The CFP Board’s fee-only definition is unfair, Mr. Kitces said, because it penalizes fee-only advisers if they could possibly receive revenue from a company that charges commissions, even if they themselves don’t charge commissions to their clients.
“The fact that being able to prove that 100% of the time you’re only paid a fee is not a legitimate defense to say you’re fee-only is an uneven standard,” he said.
The CFP Board’s insistence on sticking with the definition is exacerbating the situation, he said.
“I truly don’t think there’s anything nefarious going on at the CFP Board,” Mr. Kitces said. “They’re sticking with integrity to a fundamentally flawed definition, which just keeps making the problem snowball.”