Which is more important to your advisory practice – your CFP designation or your fee-only status? Before you answer, consider this: Your CFP mark says very little about whether you adhere to a fiduciary standard, and less about your mode of compensation.
Those issues are at the forefront of an ongoing controversy pitting the CFP Board against a prominent advisor, and there is little sign that its outcome will resolve the ongoing debate about how to define a fee-only professional engagement. If anything, it raises more questions than answers.
One afternoon in August of last year, Rick Kahler, of the Kahler Financial Group in Rapid City, SD, was reading the latest industry news on his Stairmaster when he came across a disturbing assertion in one of the articles.
“The article said that 125 members of NAPFA couldn’t qualify as fee-only advisors under the CFP Board’s rules,” Kahler says. “Why? Because the NAPFA rules say you cannot own more than 2% of a financial services company that accepts commissions. That in itself was news to me,” he adds.
“But then, under the CFP Board regulations, according to the article, it said that I couldn’t call myself fee-only if I owned any part of an affiliated entity that accepts commissions.”
Are you willing to accept an unfair advantage as you build your business?
Bob Veres's Inside Information service takes you right to the cutting edge of new ideas, business-building insights, investment paradigms and marketing strategies as they arise from leading thinkers around the profession.
The service has been described as an "unfair advantage" by subscribers who are now among the most successful advisors in the business.
Knowledge is power. Try a year of Inside Information, with a money-back guarantee: www.bobveres.com, and give yourself the unfair advantage that you deserve in your professional career.
Best,
Bob Veres
Inside Information
It’s possible that this assertion was not correct.
When you look through the CFP Board’s 29-page Code of Ethics and Professional Responsibility, the term “fee-only” appears only twice, both times in the same paragraph, under “Definitions:”
“Fee-only.” A certificant may describe his or her practice 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.
By that very clear standard, Kahler was a fee-only planner. “I don’t receive real estate commissions,” he says. However, he does have outside activities which are not discussed in the Code; he owns 50% of a real estate company which receives commissions from the purchase and sale of homes and commercial property, and he did earn real estate commissions earlier in his career.
“I was originally in real estate, when I discovered financial planning,” he says. Kahler earned his CFP designation in 1983, and gradually reduced his real estate activities as his financial planning revenues grew.
But he never mixed the two businesses. “From the beginning, I wanted a fee-only planning firm,” says Kahler. “So when I started my financial planning firm, I would not allow financial planning clients to be real estate clients or buy real estate from me, because that’s a conflict. Then,” he adds, “about 10 years ago, I stopped selling real estate altogether.”
What was left was a somewhat oblique referral process. “When I am asked: Rick, who would you recommend for a realtor? I’ll give them three good companies, and one of them is the one my brother operates,” says Kahler. “But as a general rule, I tend to steer people away from our company. I don’t ever want a client to think they’re obligated or that I have an underlying agenda. That spirit may be hard for any regulator to see,” he adds, “but I’m relieved if a client doesn’t do business with our real estate company, because then, if it goes poorly, I am not implicated in any way.”
Does he get paid by the real estate firm for these referrals? No.
“I did receive a $150 monthly salary until several months ago, which was really compensation for interest on a loan,” says Kahler. “It was a way to get me the money to pay the interest. I never had a dividend except once, right prior to Obamacare kicking in, when they dumped out some cash so we wouldn’t be faced with the higher taxation.”
Like commissions related to the sales of automobiles, dinette sets or Amway products, the transactions involving homes and offices didn’t fall under the SEC’s definition of securities sales. But the article Kahler was reading on his Stairmaster made it sound like any commissionable entity counted in the CFP Board’s compensation calculus.
“I looked at that article and thought to myself, according to the CFP rules, the way they’re framing this, I’m out of compliance if I say I’m fee-only,” says Kahler. So he decided, on his own initiative, to contact the CFP Board and get clarification on his status.
In retrospect, this might not have been the best possible business decision for Kahler, but that wasn’t uppermost in his mind at the time. “Some of my peers said: Rick, just lay low,” he says. “Come up with a blind trust, or give the interest in the company to your wife, or do things that you know to do and circumvent their rules. But I said we’re fiduciaries. We’re supposed to demonstrate integrity. That doesn’t feel like integrity to me.
“So,” Kahler continues, “I went to the CFP Board and I asked them: How can we fix this? I think I might be out of compliance: tell me what to do. If the 50% ownership stands in the way of fee-only: tell me, here is what would work. If your wife owns it, or if you have no control, here is what we will accept.”
That started 10 months of back and forth with the CFP Board, which resulted, not with guidance on how Kahler could bring himself back into compliance with however the CFP Board defines “fee-only,” but with a letter of admonition that he cease and desist calling himself a fee-only advisor.
Trivial or non-trivial?
The dialogue between Kahler and the CFP Board is instructive to advisors who are wondering where, exactly, the ownership policy came from, and where the Board’s enforcement priorities are currently. “As part of this dialogue, I talked with [CFP Board Managing Director, Professional Standards & Legal] Michael Shaw at the 2014 FPA Retreat in Miami,” says Kahler, referring to a conversation during a public under-the-trees session attended by a small group of CFP Retreat attendees, plus Kevin Keller and CFP Board chair-elect Rich Rojeck.
“At one point, Michael said: it’s all about the income,” says Kahler. “And I am reading their definition of a related party, under the compensation definition, and then it says, ‘compensation is any nontrivial economic benefit.’ My compliance attorney tells me that anything under 10% of my income is trivial, according to the SEC, anyway, and anything under 10% of my time is nonmaterial,” he continues. “So I was wondering if $150 a month is considered nontrivial. I’ve received one dividend in 20 or so years from this company. Is that nontrivial? Please define what’s trivial for me.”
Kahler says that Shaw responded that even if the compensation could be classified as trivial, the ownership is still there. “I said, what if I owned 2% of Bank of America?” says Kahler. “He told me that if the company is publicly-held, then it doesn’t count. I had,” Kahler adds, “the sense that they were making these distinctions up as they went along. They don’t know themselves what the rules are.”
I confirmed this part of the conversation with two other participants in the under-the-trees conversation. Shaw says that he vaguely remembers this issue coming up, but says it is not reflected in the notes he took on the discussion. “Our position,” he told me, “is that if you own a company and it is part of your business model, whether it is publicly-traded or private, if that company generates commissions, you need to disclose those commissions to your client.”
Fee-only or CFP?
On July 22 of this year, the CFP Board sent Kahler a letter by certified mail, signed by Shaw, which read, in part:
This letter follows several conversations that my staff and I have had with you during the last few weeks. These conversations were precipitated by your request for guidance on CFP Board’s disclosure rules and compensation definitions... My staff and I have informed you that because your business model includes a commission-generating business, you may not describe your compensation as “fee-only.” An accurate description of your compensation arrangement would be “commission and fee”... With regard to your business model, there are two reasons that “commission and fee” is an accurate description of your compensation arrangement. The first is your ownership of the real estate company, which is a commission-generating business. The second is the referral of clients that sometimes occurs between the RIA and the real estate company... Please consider this letter a caution that if you continue to refer to your practice as “fee-only,” the CFP Board may, in accordance with the Disciplinary Rules and Procedures, initiate an investigation.
This left Kahler with several options. He had requested from the CFP Board some guidance as to how to re-arrange his business so that he could continue, under their interpretation of their rules, to describe himself as “fee-only,” which he still feels is an accurate description of an advisor who refuses to take commissions and who discourages his clients from working with his family-owned real estate firm. Should he cease giving out the name of the real estate firm and refer clients to competing firms? Should he give up ownership in the firm, perhaps transferring it to his wife or putting it into a blind trust?
The response was not guidance, but a cease and desist letter.
“I don’t feel like I can try to read their minds and create a new arrangement,” says Kahler. The risk, he says, is that the CFP Board would then reject the solution and launch an investigation, which would linger on-line, visible to search engines, and tarnish his business reputation. “I don’t know what being in compliance is. I really don’t,” he says. “I know if I sell the real estate firm, then I am back in compliance. And I am in discussions. But,” he adds, “I have been trying to sell it for three years.”
Otherwise, the choice is between giving up his CFP designation (the proper term is “voluntary relinquishment”) or giving up describing himself as fee-only.
This raised a very interesting question: which is more the more valuable distinction in the marketplace? “I asked my staff,” says Kahler, “and they said, unanimously, that ‘fee-only’ is our niche and our brand. And they pointed out,” he adds, “that nobody ever asks if you are a CFP. But they do ask if you’re fee-only.”
If he does voluntarily relinquish the designation, Kahler hopes to maintain his membership in NAPFA. The fee-only organization requires all of its members to be CFP certificants, but has grandfathered individuals who were members before the requirement was passed.
Kahler’s initial dialogue with NAPFA was very different from his CFP Board experience. “Back when I first applied, I think it was in 2009, we sat down and had a conversation about my real estate connection,” says Kahler. “They said: Rick, are you active in the real estate business? I said no. They said: are you actively selling? I said no; I haven’t been active in the real estate business for five years – which was true at the time; now it’s more than 10. They said, would you put a statement on your ADV that says you are not currently active in the real estate business, and that you don’t accept commissions? I said yes; I think it’s implied in my ADV now, but I’ll make it explicit.”
Kahler thinks that this was a clear application of NAPFA’s rules. The CFP Board has suggested that it’s an “accommodation.”
Fiduciary or fee-only?
As a result of the experience, Kahler believes that the CFP Board is in danger of losing some of its long-time friends. “For almost 30 years, I have been one of the CFP mark’s most ardent supporters,” he says. “I teach at a graduate level, I require all my people to be CFPs, and somehow, when I asked for a simple clarification, they managed to make an adversary out of me. This is like friendly fire. We’re shooting at ourselves.”
But bigger picture, Kahler wonders whether the CFP Board’s enforcement priorities are in the right place. “I asked Michael: why are you focusing on the trivia, the hair-splitting of my situation, when there are a lot more ominous targets that you should be turning your attention to.”
Such as? “Over and over again, I see the CFP Board is not enforcing fiduciary behavior on thousands of its members,” says Kahler. “I see stuff coming in my door all the time, these crappy high-commission annuities sold by CFPs. You have all these insurance agents out there thumbing their noses at fiduciary, and holding themselves out to the public: hey, I’m a CFP, and CFPs look out for you. We put your interests above ours. Their ads that say that, but is the CFP Board paying attention?”
This, at least, is clearly spelled out in the Rules of Conduct, under the definition of the relationship with the prospective client or client:
1.4 A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.
In fact, under the trees at Retreat, Kahler says he posed this fiduciary enforcement question to Shaw, who happens to be a former Northwestern Mutual life agent and NASD (now FINRA) staff attorney in an organization whose primary mission was (and is) to regulate sales activities. “His answer,” says Kahler, “was: Rick, if I enforced the fiduciary standard on life insurance agents, I would put insurance companies out of business. I found myself wondering: who are they supposed to be protecting, the insurance companies or the public? Later he told me: I just can’t get into hair-splitting on what fiduciary is or isn’t. In some cases, those high-fee commission products may have been appropriate. My basic concern is that they disclose compensation. If they have disclosed compensation, they have fulfilled their fiduciary obligation.” (Another participant in this under-the-trees conversation confirmed to me the accuracy of Kahler’s portrayal of it. Shaw categorically denies that he said this, though he does say that the general subject of ”fiduciary” was raised.)
In addition to an estimated 4,000 life insurance agents who hold the CFP designation, and many CFP wirehouse brokers who are contractually obligated to put the interests of their firms ahead of the interests of the customer, Kahler points to the two-hat arrangement where registered reps behave as a fiduciary when they create a plan, and then switch to sales mode when it comes time to implement it. “When somebody sells crappy annuities, whose interests are being put first?” he asks.
Shaw says that the CFP Board applies the fiduciary standard to any business model. When asked whether the CFP Board would investigate a situation where an advisor came across a situation where a CFP certificant had sold inappropriate annuities or non-traded REITs – a sales agenda applied to a financial planning engagement – his response was straightforward. “Absolutely we would,” he says, adding that the Board would prefer to respond to written rather than verbal complaints.
But Shaw doesn’t agree with Kahler that the existence of a product sale, per se, violates the fiduciary standard. “The approach we prefer to take is: let’s take a look at the facts and circumstances of the situation. Let’s look at the product that was recommended, let’s look at the client’s risk tolerance, the client’s age, the client’s goals and needs and objectives, and let’s make an assessment from there as to whether it was an appropriate recommendation.”
The CFP Board has issued guidelines around the use and misuse of “fee-only.” Would it make sense to also offer guidance to the CFP community on whether, or how, sales activities might conflict with a fiduciary standard? “I like that idea,” says Shaw. “Maybe we could do something along those lines.”
CFP Board priorities
There is no question that the definition of “fee-only” can be subject to gamesmanship, and the CFP Board has taken it upon itself to make fine distinctions – without much guidance from the actual wording of the Rules of Conduct – as to who is and is not trying to get away with selling stuff under the fee-only moniker.
The reader will have to decide for yourself whether Kahler was (as the CFP Board has ruled) trying to get away with posing as a fee-only advisor while engaging in conflicted client relationships.
Behind that judgment, there is another one. Is Kahler’s transgression more worthy of a specific letter of admonition than the thousands of wirehouse brokers who were checking the box to identify themselves as fee-only advisors on the CFP Board’s website?
Kahler voluntarily brought his case to the CFP Board and asked for guidance. Did he receive what he requested? Should he have received a more stern response than the brokers who slipped under the CFP Board’s radar and collected clients for years, and never self-identified even after the Board removed their misleading compensation disclosure from its website?
As an update: After the letter of admonition was sent, as this article was being written, Kahler and the CFP Board entered into further discussions, and the CFP Board has agreed not to move forward with enforcement until those discussions are concluded. It is possible that Kahler is receiving the guidance he originally asked for (neither he nor the CFP Board will discuss what, exactly, they are now talking about), but the conversation is taking place under the shadow of an already-issued cease and desist order.
This leads to another question: Do you think the CFP Board is expending its regulatory and enforcement efforts where the greatest conflicts exist, where the public is most harmed? Or, as Kahler suggests, are there more damaging, consumer-harming conflicts in the CFP community than his, which are being ignored as the Board puts so much time and energy into the fee-only distinctions?
Or, given Shaw’s response, is the lack of fiduciary enforcement due to the fact that CFP professionals simply haven’t been diligent about alerting the Board to sales activities under the guise of ”fiduciary” by salespeople holding the CFP mark?
And finally, this story raises one transcendent question. What is the value of the CFP mark to an experienced advisor in today’s marketplace? Is it more, or less, valuable than the fee-only distinction? Is it, perhaps, cheapened by the fact that salespeople and brokers who hold the mark are able to conduct, with impunity, sales activity business as usual?
More basically, are advisors giving more to the CFP Board by maintaining the mark and jumping through the CFP Board’s hoops than the benefits they’re receiving from the mark itself?
Kahler’s story raises a lot of important questions. I’d like to hear your thoughts on any of them.
Bob Veres’s Inside Information service is the best practice management, marketing and client resource for investment advisors and financial planners. To get a free sample issue of Inside Information, send your request to [email protected], or order online at http://www.bobveres.com.
Read more articles by Bob Veres
