The CFP Board has eliminated compensation disclosures from its consumer-facing website. It may have had good reason to.
As you no doubt have learned by now, the CFP Board has decided to take down the checkboxes where the CFP mark holders, on its website, list their compensation model as “fee-only,” “fee plus commission” or “commission-only.” This has sparked some degree of outrage in the advisor community – the idea apparently being that the CFP Board has caved in to the non-fiduciary firms (including independent broker-dealers and wirehouses) and made it impossible for consumers to know whether their search is bringing up advisors who will truly act in their best interests.
How dare they!
In a recent communication with the CFP Board for more information, CEO Kevin Keller noted that the discussion about whether to retain the compensation-search criteria was discussed several times last year at the board level, and that the CFP Board is (and always has been) "compensation neutral." To compensate for the removal, the Board has posted a list of suggested questions that consumers should pose to their advisors; Number 7 (of the 10 questions) is: How will I pay for your services? and noted that advisors are paid by AUM, commissions or a combination of both, or by annual or monthly fees. (No mention of hourly fees, which is a curious omission.)
For those who are outraged at what they imagine to be the CFP Board giving aid and comfort to the sales culture, I would like you to engage in a thought experiment.
First, the proposed question makes clear that the three compensation categories on the CFP Board website have become increasingly inadequate to provide guidance on how, exactly, advisors get paid. Imagine a non-wealthy millennial who is looking for an advisor who will charge via a subscription model, to whom paying by AUM is as anathema as paying by commissions is to some Baby Boomers who are aware of the conflicts.
So the solution is to expand the search categories to include these new compensation models, right? Perhaps not. I know of many advisory firms that charge by the project (hourly), by subscriptions (for high-earner not rich yet – HENRYs) and via AUM (for wealthier Boomers). Some of those firms also charge commissions. If the outrage is focused on the conflicts of interest inherent in sales activities and commission revenue, then more categories might mean more confusion.
To address the outrage directly, let's imagine that you live in a world where many – perhaps most – brokers working for wirehouse firms have moved their revenue model from selling products to managing assets in return for AUM fees. Let’s further imagine that the brokerage attorneys have been in dialogue with the CFP Board and have argued (with some justification) that these brokers are in fact “fee-only” by the definitions most of us understand – even though we know that they’re selling their brokerage firm’s platform with separately-managed accounts that have under-the-table shelf space payments. They are asset-gatherers, in the terminology of the brokerage world, yet their compensation is purely asset management fees.
We live in this world – minus (we actually don't know) any proven evidence of this hypothetical dialogue between wirehouse attorneys and CFP Board leadership.
Now imagine that the CFP Board of Directors has a choice. They could switch the brokers’ compensation listing on the CFP Board website to “fee-only” – only for those brokers who charge via AUM, of course. Consumers who are looking for an advisor will click the box that will only show them “fee-only” advisors in their area, and the list that comes back will be populated with brokers – who will make up the majority.
Alternatively, the CFP Board could do what its leaders were thinking about anyway: take the compensation model disclosure off of its website to prevent this misunderstanding, and study the compensation models in the marketplace more thoroughly. This means that consumers will only have the option of looking for advisors in their area who specialize in their type of problems, which will bring up wirehouse brokers, dually-registered advisors who sell annuities, dually-registered advisors who might only sell term insurance on the side, and fee-only fiduciary advisors.
Consumers are then encouraged to ask question 7, and engage in some probing dialogue about compensation models. They would not be instantly misled into thinking that brokerage firm reps are “fee-only.”
Which would you choose? And remember that this summer, right around the time when the fee-only search function will come down, all CFP advisors, including brokers, will be required to adhere to a reasonably strict fiduciary standard based on the CFP Board's new Code of Ethics and Standards of Practice, at which time some of these conflict issues will go away. My understanding through the grapevine is that brokerage firms are terrified of having their reps held to a fiduciary standard that could be enforced in arbitration if their reps are listed on the CFP Board website with the fiduciary disclosures right there in front of the consumer. They may set up less conflicted asset allocations with cheap passively-managed funds for those brokers, which can be better-defended in court.
You can hate the CFP Board if you want to, and some of you will be outraged no matter what it does or says – and there are days when I understand the sentiment perfectly. But I also understand that the CFP Board’s chartered objective is to help consumers by promoting the best services from the planning profession. This decision could prevent misunderstandings that could lead to financial harm among consumers.
These are guesses, but I can see what forced their hand. I, personally, take some comfort that, by this summer, everybody who is on the Board’s website will have to act as a fiduciary for clients, so the distinction of fees versus commissions will become less meaningful in the course of time, and commissions in the CFP world will become something of a rarity. And I also believe that, at that time, the CFP Board will have had a chance to provide more meaningful compensation information on its website, based on the new compensation realities emerging in the profession.
That said, I find myself wondering how long it will be before those same (hypothetical) brokerage attorneys meet with NAPFA leadership and argue that their brokers should be allowed into the fee-only association. What would NAPFA do in that circumstance?
What do you think? Is this a more reasonable explanation than the CFP Board suddenly deciding to “cave” to wirehouse pressure? And more importantly, is there a better way for the CFP Board to clearly distinguish between true fiduciary CFP advisors and brokerage CFP advisors who have conflicts built into their recommendations, but are technically "fee-only?"
Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com
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The CFP Board has eliminated compensation disclosures from its consumer-facing website. It may have had good reason to.
