More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
As a follow up to my June 12 blog (“The Curious Case of Alan Goldfarb and Why All Advisors Should Care”), on June 18 the CFP Board issued a newsrelease announcing its recent censures of “Improper CFP Professional Conduct” including its actions against former CFP Board Chairman Alan Goldfarb. I have to admit to now finding myself torn on the Goldfarb case: While I am in agreement with Ron Rhoades (who posted an excellent, well-reasoned comment to last week’s blog) that Alan Goldfarb has been unduly reprimanded, I’m also encouraged by the Board’s approach to the use of the term “fee-only.”
Let me state right up front that I’m more than impressed with the Board’s explanations of its actions in this release. I guess it’s been a while since I looked at its disciplinary activity, but the detail of the circumstances and the reasoning behind each ruling does indeed provide practical guidelines for all CFPs—and valuable additions to the Board’s ethical standards themselves.
As you might expect, the best example in this release is the explanation of the Board’s thinking in the Goldfarb case. As an employee and a part owner of an RIA, and an employee and part owner of an affiliated broker-dealer, Goldfarb had listed his compensation as “fee-only” and “salary,” on the FPA advisor-search website. However, the Board’s Ad Hoc Disciplinary and Ethics Commission “issued a Letter of Admonition to Mr. Goldfarb” after determining that he “misrepresented his compensation, first as ‘fee-only’ and later as ‘salary,’ on an online financial planner database.”
To reach its ruling, the Board combined two definitions from the Terminology Section of its Standards of Professional Conduct. First, there’s the question of what is a “fee only” advisor: “A CFP® professional may describe ‘his or her practice as ‘fee-only’ if, and only if, all of the CFP® professional’s compensation from all of his or her client work comes exclusively [emphasis added] from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.”
This definition is fine as far as it goes, but it leaves unanswered the question of what, exactly, constitutes “compensation.” Here’s what the Standards say: “…compensation is ‘any non-trivial economic benefit’ that a “[CFP® professional] or related-party receives or is entitled to receive for providing professional activities.”
Armed with these two definitions, the Release then concluded that the “CFP Board’s definitions of ‘compensation’ and ‘fee- only’ prohibit a CFP® professional from referring to his or her practice as “fee-only” if any of the compensation received by the CFP® professional and any related-party, such as the CFP® professional’s employer, is comprised of compensation other than the types of fees identified in CFP Board’s definition of ‘fee-only.’” In the Goldfarb case, because the RIA he worked for and its affiliated BD “were entitled to receive compensation such as commissions and 12b-1 fees… …the Ad Hoc Commission determined that Mr. Goldfarb misrepresented his compensation model as ‘fee-only’.”
As I said, it’s an impressively well-reasoned and well-supported ruling. On its face, it appears that Goldfarb was in fact in violation of the Board's definition of "fee-only.” Yet, the case against Goldfarb essentially rests upon the ability of a “related party” to charge commissions. This is a very expansive definition of “fee-only.” In fact, it’s beyond even NAPFA’s definition, which limits ownership “interest in a financial services industry firm that receives transaction based [commissions]” to not more than 2%.
In the bigger picture, I'm very encouraged by the Board's narrow interpretation of "fee-only." I have for a long time believed that "fee-only" advisors and their firms should have to be completely independent of commission-charging and/or product-generating affiliates, in order to truly “mitigate” all the potential conflicts of interest involved. At the same time, it still seems to me that the Goldfarb case was a bit of an over reaction by the Board. He described his compensation as "fee-only" in one instance, where the online form’s options were limited to one of: fee-only, salary, commission, or fee and commission. He chose what he felt was the most accurate, and then changed it to “salary” after refection (which the Board also ruled as not accurate because the clients “paid commissions and/or fees”). And he provided full disclosure of his firm's circumstances to all clients and prospective clients. Public resignation and admonition were probably overkill.
Again, I applaud the Board's overall interpretation, but in this case, due to circumstances and limited scope of the infraction, the novelty of the Board’s definition of “fee-only,” and Mr. Goldfarb’s clear intention of trying to do the right thing, one can’t help but feel that perhaps more leniency was warranted.