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- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
You’d think that after all these years, I’d be smarter than to base my judgment on “facts” as they are laid out in a lawsuit complaint. After all, they are written by lawyers serving as advocates for their clients. I guess I’ve just gotten used to the filings being the only thing to go on, as parties to a legal action are usually constrained from giving interviews. Also, the case laid out in the complaint usually does put the plaintiffs in the best light possible—or even imaginable.
I’m referring here to the case of Jeffrey and Kim Camarda, the CFPs who have recently made news by filing a lawsuit against the CFP Board for unfairly sanctioning them over their use of “fee-only” in reference to their firm, Camarda Wealth Advisory (see my Oct. 2 ThinkAdvisor blog).
Jeff and Kim Camarda were kind enough to talk with me about their situation and the details leading up to their taking legal action (with permission of their attorney, Tom Giachetti). The couple was just as open and smart and personable as I’ve found most independent advisors to be. They gave me a new perspective on their case—and new questions about the CFP Board’s handling of the entire affair.
My initial curiosity was about the Camardas’ two firms—an RIA and an insurance agency—and the relationship between them. To my mind, this would get at the heart of whether they were “related parties,” potentially disqualifying the couple from describing themselves as “fee only.”
Here’s the deal.
The Camardas do, in fact, own an RIA and a commission-charging insurance agency. However, it’s not as if they are two sides to the same business. Camarda Wealth Advisors (the RIA) was founded in 1993, and has been fee-only since 2002. The agency—Camarda Consultants—was launched in 2009, with the goal of marketing group benefits and 401(k)s to local businesses. But Camarda Consultants hasn’t gotten off the ground: generating “around $5,000 or so in commssion revenues a year and hasn’t yet turned a profit,” Jeff Camarda explained. “Of the 800 or so clients in the RIA, maybe 3 get insurance through Camarda Consultants: at their request and with full written disclosure that they will not be covered by the same fiduciary standard as they are with the RIA.”
In addition, the Camardas were NAFPA members until they opened their insurance agency. “We knew it might be an issue,” said Jeff. “So, we had a conversation with Ellen Turf [then, CEO of NAPFA] about their standards, and decided we should resign from the organization, which we did. The CFP Board’s standards for ‘fee-only,’ however, were different than NAPFA’s, and the way we and our attorney read them, and still do, we still fell under their definition.”
The definition that Jeff is referring to is a bit confusing (at least to my old brain), in that it was changed in June 2008, when the Board issued a “Side by Side Comparison of Previous and Current Standards of Professional Conduct.” In the “Terminology” section, the “previous” definition reads like this:
“’Fee-only’ denotes a method of compensation in which compensation is received solely from a client with neither the personal financial planning practitioner nor any related party receiving compensation which is contingent upon the purchase or sale of any financial product…”
While the current definition was changed to: “A certificant may describe his or her practice as ‘fee-only’ if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.”
In the case of the Camardas, neither of them worked in the insurance agency, and therefore, neither had any commission compensation from their “client work.” With the reference to “related parties” removed from the definition, it looks as if Jeff Camarda may well be right.
What’s more, the same Terminology section of the Board’s comparison shows the new definition of “Compensation” to be: “any non-trivial economic benefit, whether monetary or non-monetary, that a certificant or related party receives or is entitled to receive for providing professional activities.” The $5,000 or so from the insurance agency compared to the $4 million or so in annual RIA revenues seems pretty trivial to me.
As the Camarda suit documents state, after they initially talked with representatives from the CFP Board about the “fee-only” investigation, the Camardas voluntarily changed their website and marketing materials to refer to Camarda Wealth Advisors as “fee-based.” However, when the Board announced its intention to go forward with a public sanction, the Camardas filed suit.
“Our only intent has been to comply with the CFP Board’s rules,” said Jeff Camarda. “We had legal advice telling us we were in compliance, and when the Board said we weren’t, we changed our description. The only reason we brought up Alan Goldfarb and the other Board members was to point out that their own officers didn’t understand their definition of ‘fee-only.’ Just help us understand the rules, and we’ll comply. Now the Board’s offering amnesty to brokers who didn’t comply, but they still want to publicly sanction us? It doesn’t make sense.”
No, Jeff and Kim, it really doesn’t.
Don’t get me wrong: I still agree with the spirit of the CFP Board’s standard on fee-only. That is, I agree with the old standard, which barred ownership in related commission-taking parties. I agree that it’s in the best interest of clients that the use of the term “fee-only” be monitored and enforced.
With that said, the way to handle CFPs who are trying to comply with what are clearly complex—and changing—rules is not to jump right to the nuclear option of public sanction. And if they are now in compliance, as the Camardas seem to be, who’s being served by pressing ahead with any action?