More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Last November, Alan Goldfarb, the then CFP Board chairman, was asked to resign, after the Board informed him that he was under investigation for improperly disclosing his compensation. At the time, I criticized the Board (AdvisorOne blog on Nov. 7, 2012, “Clear as Mud: The CFP Board’s Blackbox Oversight Process on Ethics”) for not being more forthcoming about the nature of Goldfarb’s alleged infraction. Now, more details about the case have come to light, revealing what can only be described as a curious ruling by the Board—with-far reaching consequences for the advisory profession.
While the Board still hasn’t broken its silence over the case, on Tuesday Goldfarb issued a four-page statement on the matter and granted interviews with reporters including yours truly, in which he said he expects the Board to “issue a public admonition letter next Monday.” His infraction: failing to accurately describe his compensation on the FPA’s website.
According to Goldfarb, these are the facts of the case:
— He was employed by his former firm Weaver Wealth Management, in Dallas as a financial advisor, and compensated in the form of a salary, which was based on AUM fees collected from his clients.
— His firm was owned by Weaver LLP, an accounting firm that also owned brokerage and insurance subsidiaries.
— As “the only person at the accounting firm with a securities principal’s license,” he served as president of brokerage firm, and was given a 1% “non-compensating” equity stake in both the brokerage and the insurance subsidiaries.
— He fully disclosed these relationships, and “any conflicts arising from them,” he told me, “on his form ADV, the client engagement letter, other disclosure documents, in oral communications with his clients and prospective clients, and on the firm’s website.”
— When filling out his profile on the FPA’s advisor search website, he was presented with four compensation boxes from which to choose: fee-only, salary, commission, and fee and commission. He chose “fee-only,” and later changed it to “salary,” as he “felt that was more descriptive. There was no place on the form for explanation or qualification, and since I wasn’t paid any commissions, and they seemed the only reasonable choices,” he said.
However, “The CFP Board felt that listing his compensation as both ‘fee-only’ and then ‘salary’ on the FPA’s website was misleading,” according to Goldfarb. He begs to differ: “At worst, it should have been dismissed with a caution. I still don't think I did anything wrong.”
Goldfarb believes that the Board reached the wrong conclusion for two reasons. First, it “totally ignored all the conflicts and compensation disclosures that all prospective clients received,” he wrote. “More importantly, the CFP Board’s [case is based on the misperception that] because the broker-dealer and the insurance company charged commissions, [my] salary paid by the accounting firm came from revenues and profits of those entities.”
As I said, it’s a curious ruling, on many levels. Given Goldfarb’s disclosure everywhere else, and the limited choices on the FPA’s website, it seems as if it was, at worst, an honest mistake; appropriately remedied by a private request that he change his FPA listing. Yet even that raises the question of whether Goldfarb violated any rules in the first place.
As the CFP Board has not to date responded to my requests for comment on the case, we only have Goldfarb’s account of the Board’s decision. By Monday, “you will have heard that I had received a public letter of admonition for violating Rules 2.1 and 2.2 of the CFP Board’s Code of Ethics,” he wrote. “They state in part that a certificant shall… …disclose to prospective clients an accurate and understandable description of the compensation arrangements being offered including information related to cost of compensation to the certificant and/or the certificant’s employer.”
Did Goldfarb in fact violate those rules? Or more specifically, how accurate is the Board’s contention that a salary paid by a parent of a commission-charging subsidiary can only be described as “fee and commission” compensation? To get a better understanding of the legalities involved in situations such as these, I called Dan Bernstein, a compliance attorney at MarketCounsel, in Englewood, NJ. Dan is very familiar with the structure of accounting firms owning commission-paying brokerage or insurance subsidiaries.
According to Bernstein, “Legally, only securities licensed individuals can receive any portion of a commission on the sale of a security. Consequently, brokerage or insurance subs cannot pass along the commissions they receive nor any portion of them to a parent accounting firm. The only way an accounting firm can benefit from owning a brokerage subsidiary is to charge it directly for services offered or as reimbursement for direct expenses such as overhead.”
So much for the Board’s pass-through-commission theory. What’s more, it seems that if anyone would have a clear picture of what’s fee and what’s commission comp it would be NAPFA, which limits its membership exclusively to fee-only advisors. Here’s what NAPFA’s membership standards say about “ownership interests and employment relationships:” “Neither a member nor an affiliate may own more than a 2% interest in, or be employed by, a financial services industry firm that receives transaction based [commissions].”
While at the time of this writing, I haven’t received a call back from anyone at NAPFA either (I’m starting to get a complex), it seems to me that with his 1% stake and no compensation from the brokerage subsidiary, Alan Goldfarb would have qualified for NAPFA membership. Does the CFP Board really have higher “fee-only” standards than NAPFA, or did the Board simply fail to understand the reality of his compensation, as Goldfarb contends?
With an increasing number of advisors claiming fee-only status these days, it seems incumbent upon the CFP Board to truly understand the nuances of fee compensation before it starts playing the role of “fee-only” police. Goldfarb put it this way: “The ramifications of [the Board’s] position are dramatic, since employees at any financial services firm that has an interest in another firm that accepts commissions can never describe themselves as salaried or fee-only.”