After a sudden resignation last fall, Alan Goldfarb, the former chairman of the board of directors of the CFP Board, had been found to have violated the CFP Board's Rules of Conduct.
The first part of our post explained the (extremely interesting) details of the case. We'll now turn to a discussion of what needs to happen from here.
The last troubling issue from the CFP Board's ruling is the declaration that Goldfarb could not characterize his income as a salary because the client paid the firm with some combination of fees and/or commissions, and that accordingly Goldfarb should have characterized his compensation as fee-only, commission-only, or a blend, but not salary. Yet isn't this true for all planners? Salaries are paid by firms, not clients; is there ever such a thing as an advisor being paid a salary directly from a client, and not from an employing firm? How is that even possible?
Perhaps an employee of a firm that has no responsibilities for engaging with clients—i.e., in a purely administrative capacity—might be salaried (but then that person isn't working with clients!), or a full-time employee in a family office with a single client who really does engage the planner on a salary basis. Yet people in those positions won't be found on a "Find a Planner" website like FPA's PlannerSearch or the CFP Board's "Find A CFP Professional" because they are in a limited salary capacity and therefore wouldn't be soliciting clients in the first place!
So it would seem that by basing the compensation methodology off of what the client pays, the only three categories in the context of planners making themselves available to the public should ever be fee-only, commission-only, or a commission-and-fee blend? Yet if that's the case, why has the CFP Board even put forth a potential category of "salary" in its compensation disclosure rules and on its own Find A CFP Professional website, if it's not actually possible for a client to hire an advisor on that basis without at some point paying a fee, or a commission, or a combination of the two?
What We Need From Here
Ultimately, what Goldfarb's case illustrates is that if as an emerging profession we're going to go further down the road of compensation disclosure—which I'd certainly argue is a plus for consumers in the long run—that we need to craft some clearer lines and tests for what really constitutes non-trivial materiality in determining types of compensation for which disclosure (and consequences for failure to disclose) are necessary. Otherwise, not only is there ongoing risk of more advisors unwittingly finding themselves in error and subject to CFP Board sanctions, but beyond that it would appear that huge numbers of planners are already in non-compliance with the current rules.
Just run a search for CFP Professionals in your local city and then narrow the search to see how many advisors claim they're compensated by salaries when they clearly work at firms where clients pay fees (or commissions or both), or how many claim to be fee-only when they clearly work for an employer that is (or has a related) broker-dealer. Is the CFP Board really intending to sanction thousands of its own advisors across the country for running afoul of the rulings set forth in Goldfarb's case?
If not, how does the CFP Board intend to distinguish between why Goldfarb was sanctioned, but the dozen/hundreds/thousands of advisors labeled as "Fee-Only" yet outright employed by a broker-dealer are within the rules? Or is the reality simply that thousands of CFP certificants really are out of compliance with the CFP Board rules and need to change their compensation disclosures as soon as possible, to no longer be characterized as "salary" or "fee only" at all? (Note: The point here is not to say that advisors who have a non-fee-only employer can't operate their personal business as fee-only; instead, the point is to say that if advisors truly conduct their own client business on a fee-only basis, and hold themselves out as such, why isn't that acceptable?)
Similarly, where exactly is the line for materiality in outside ownership interests in non-fee entities? If Goldfarb's 1% non-compensating equity interest is still a conflict, even if none of his clients ever actually did any business with the entity, and his compensation for a particular client transaction might truly amount to no more than a dollar or two, then does that mean any/every advisor who owns any interest in a broker-dealer—even if it's just a stock that's part of the S&P 500—is running afoul of the rules? And how many other fee-only firms and RIAs would fail this test when rules regarding small overlapping equity interests, or parent companies that also hold commission-based subsidiaries, can be deemed "related parties?"
Does the Advice Consumer Benefit?
Moreover, is that really a positive for consumers to take these definitions to a degree of potential irrationality that even NAPFA doesn't believe is necessary? At some point, we're no longer simplifying the complexity with disclosure, but making relatively simple situations into complex ones, due to the lack of a clear line about what constitutes a "non-trivial economic benefit" associated with a potential commission.
In addition, while I absolutely applaud the principle that fee-only should really mean fees only, to lump every other advisor into the broad category of "fee and commission" seems to limit the effectiveness and relevance of compensation disclosures.
After all, in a world where someone can't be fee-only because of $1 of commissions, and cannot be commission-only because of $1 of fees (any AUM or financial planning fee?), then the overwhelming majority of CFP certificants will all fall into the same broad classification of fees and commissions.
Yet is it really helpful when an insurance agent who once offered an hour of advice for a fee falls into the same category as, well, Alan Goldfarb and his RIA firm that only ever charged clients fees but had a 1% ownership interest in a separate small broker-dealer? Are we really helping consumers understand the compensation of their advisors to put every advisor into the same giant bucket, regardless of whether their compensation is 99.9% fee, 99.9% commission, or anything in between?
A Proposal on Finer Gradations of Compensation
