There is continuing controversy around the CFP Board’s decision to drop the compensation-search function from its website, making it less easy for consumers to find “fee-only” CFP advisors. The most recent development was a letter from the Committee for the Fiduciary Standard, sent to all media outlets, urging the CFP Board to reverse the decision, credibly arguing that the method of compensation search function was a helpful consumer tool, especially in light of the financial media’s oft-repeated admonition that consumers are better off working with an advisor who charges fees rather than commissions.
My take, published last week, is that not all service providers who charge fees sit on the same side of the table with their clients. As most of you know, the wirehouses are rapidly converting their brokers away from one-time sales of individual products to gathering client assets onto their asset management platforms – which is, in the long term, much more lucrative. (The independent broker-dealers are encouraging their reps to move away from sales to asset management as well.)
As a result, we have entered an entirely new phase in the constant battle between sales agents and fiduciaries, and this has somehow gotten lost in the discussion. It is now very hard to find a functional difference, compensation-wise, between a broker who is paid to gather assets for a wirehouse firm’s asset-management platform, and a fee-only planner who is gathering assets for his or her AUM platform and offering (or not) planning services.
Both are paid exclusively via AUM, and therefore both fall under the technical definition of fee-only. I said in the earlier article that the CFP Board and NAPFA would have some difficulty answering brokerage firm attorneys who will question why their AUM-compensated brokers are somehow regarded as different from advisors who are gathering assets for their own asset-management services.
Let’s reflect on the larger issues before we talk about solutions. The fiduciary members of the financial services profession have, over the years, tried to create a number of ways for consumers to distinguish them from sales agents.
Once upon a time, advisors offered financial planning services, while brokers did not. Eventually, brokers did, and the distinction became meaningless.
Then there was the use of the “fee-only” term, which was countered by the “fee-based” terminology. That distinction has been erased.
The “fiduciary” distinction is now under direct attack. The SEC’s new Reg BI, set to go into effect on June 30, calls for brokers to live up to a suitability standard, but reframes it as a “best interest” standard, borrowing the term that most consumers associate with “fiduciary.” Before long, brokers will be able to tell their customers that the regulators require them look out for their best interests, and will have a document to show them, approved by the SEC, which makes the case.
The CFP Board’s new Code of Ethics and Standards of Conduct, which will also be enforced as of June 30, is a real fiduciary standard – but the problem there is: How do you enforce it? There is no evidence that the FINRA arbitration system, in deciding whether a broker defrauded or misled a customer, will take into account the fact that the offending broker has the CFP designation and is listed on the CFP Board’s website as having signed off on these tougher fiduciary standards. The most the CFP Board can do is take away the CFP designation, and if the broker is not sanctioned, even that action might be off the table. How many customers would be willing to file a separate complaint with the CFP Board?
The urgent question in front of the profession is not whether the CFP Board should be listing, on its website, increasingly misleading compensation categories in a world where the brokerage industry no longer relies on commissions.
The much larger meta-question for real fiduciary advisors becomes: How will the real professionals, going forward, distinguish themselves from the sales agents who are once again comfortably fitting themselves into sheep’s clothing?
I have some ideas. The CFP Board could reinstate its fee-only question (and add increasingly-important distinctions like AUM, flat retainer, hourly or subscription), but only allow advisors/reps who have individually registered with the SEC to call themselves “fee-only.” If the brokerage firms don’t see the need to register their reps individually with the SEC, those reps wouldn’t qualify under the increasingly popular search term.
Alternatively (thanks for the suggestion, David Hultstrom) only CFP practitioners who have given up all their sales licenses, and are no longer regulated by FINRA, could qualify to be listed as (a new term I just made up) "commission-free."
But those are not long-term or global solutions. I’m going to propose another one, which is going to be controversial to the profession. Instead of charging via AUM – which I consider to be “commissions in drag,” and which encourages asset-gathering and misleads consumers about the real (planning and advice) value that advisors provide –advisory firms should consider changing their fee model to one of the other options. Flat-fee quarterly retainers would probably be the most popular revenue model for wealthier clients, and subscription fees would predominate among advisors serving younger, less-wealthy clients.
Brokerage firms can afford to pay their reps via AUM fees because that compensation model directly incents the sales agents to gather ever-more assets to the firm’s separately-managed account asset platform. I doubt those large Wall Street firms would switch to collecting flat retainer fees for customer relationships – it would completely take away the sales incentive. They would be similarly reluctant to switch to hourly or subscription fees.
This would be a complicated switch for many planning and advisory firms, but most of us realize that this shift will come to the profession eventually. In fact, I suspect the current market downturn, if it persists, will show many advisory firms how hard it is to manage an AUM-supported practice when revenues are dropping and more clients are calling and asking for hand-holding.
Bigger picture, what other profession, ever in history, has ever been asked how much they charge for their services, and replied: I’m not sure. How much have you got?
Would this be the switch that finally makes a permanent distinction between asset gathers/sales agents versus real professionals who sit on the same side of the table as their clients? I have no idea. Some of us thought that offering financial planning advice would be a lasting distinction, and I had hopes for both fee-only and fiduciary. It’s hard to see how the wirehouses could blur this newer line, but we should never underestimate their creativity.
What I do know is that this shift in revenue models will give organizations like the CFP Board and NAPFA a point of distinction that started slipping away as the wirehouses switched from commissions to AUM compensation for their reps – and it has the advantage of ushering in a future that most of us believe is coming anyway.
We can enjoy the controversy with the CFP Board, and throw rocks in all directions if we want. But I’m hoping that when the rocks finally settle to the ground, the profession will consider the much more important, much bigger picture that this controversy has unearthed, and move forward toward creating the next bright line between real professionals and the sales agents who try to mimic them.
What do you think? Would it be advantageous for professionals to shift from an AUM model to one of the other compensation methods, in order to create a brighter distinction between us and our competitors in the wirehouse world?
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
Read more articles by Bob Veres