NAPFA OKs membership for advisors with trailing commissions

If advisors receive $2,500 or less in commissions and donate the proceeds to charity, they can join the fee-only organization.

An organization that promotes fee-only financial advice is granting membership to advisors who take trailing insurance commissions — as long as they donate them to charity.

The National Association of Personal Financial Advisors touts fee-only as the compensation method that is “the most transparent and objective method available,” in a statement on its website. Until earlier this month, NAPFA did not permit financial advisors who receive commissions to be members.

Recently, the group permitted a little more wiggle room on commissions. The NAPFA board voted in May to allow advisors with “a negligible amount of trailing commission compensation a pathway to becoming a NAPFA member,” NAPFA CEO Kathryn Dattomo said in a policy statement.

Advisors who receive $2,500 or less in trailing commissions and do not receive any other sales-related compensation have three ways to join NAPFA. They can transfer the commissions to a non-related third party or, if that’s not possible, ask the firm providing the commission to stop paying it to them.

If neither of those options is viable, advisors can donate their commissions to a charitable organization and submit proof to NAPFA. They must attest annually that they’re donating their trailing commissions to remain a NAPFA member.

“We are excited that this adjustment to NAPFA’s membership standards will offer inclusion for advisors practicing comprehensive, fee-only financial planning but otherwise have no way to drop their trailing commissions compensation,” Dattomo and NAPFA Chair Jeff Jones wrote in a June 16 email to members.

The organization said it revised its membership criteria on trailing commissions to align with the Certified Financial Planner Board of Standards Inc.’s code of ethics and standards of conduct. The CFP Board updated its code this month to clarify when the board will not consider a trailing commission to be sales-related compensation.

The board’s code of conduct outlines the same three-step process for an advisor to relinquish trailing commissions that NAPFA adopted for its membership.

“In that circumstance, CFP Board would find that a CFP professional who refers to his or her or the CFP professional’s firm’s compensation method as fee-only is not making a false or misleading representation about compensation method,” the CFP Board code states.

The more permissive commission policy enables NAPFA to welcome advisors who may have begun their careers at firms that use the commission compensation model and have been unable to shake the commissions due to “frustrating clerical challenges,” Dattomo said in the policy statement.

The reform makes NAPFA more inclusive, she said.

“This policy change allows NAPFA to support more eligible fee-only financial advisors and their clients, who value the transparency and objectivity that come with a fee-only compensation structure,” Dattomo said, adding that the revision permits “NAPFA to continue the advancement of fee-only financial planning by working with other like-minded financial planning organizations to define the fee-only model while ensuring consumers are informed and protected with the highest professional and ethical standards.”

The organization has 4,605 members.