November 13, 2013

A Commission-Only Crackdown? Really?

Long-time financial services editor and reporter Dan Jamieson recently offered an interesting take on the current fee-only issue (see “Commission-only planners could be the next group of of pay compliance”). Following on the heels of Ann Marsh of Financial Planning who reported that 486 wirehouse brokers described themselves as fee-only on the CFP Board website, Dan’s piece reported that “About 900 CFP holders are listed as commission-only on the CFP Board’s database… …[who are] registered representatives at wirehouses, regionals and a number of independent BDs.” Dan went on to observe that while these CFPs may well only charge their clients commissions, their firms all have advisory businesses that collect fees, and therefore, under the CFP Board definitions, “should describe themselves as receiving both commissions and fees.”

I know, on its face, this sounds ridiculous. At first, I thought Dan’s story was tongue-in-cheek. But after reading the whole article, I realized that he was serious—and that he raises two important points. The first, which I’ve raised in these virtual pages myself, is that the CFP Board is focusing on the wrong thing here (as is virtually every other organization that addresses this issue). Advisor “compensation” isn’t the issue: the issue is the conflicts of interest inherent in the different ways clients pay for the services they receive from advisors or brokers, and, according to the CFP Board, how clients pay any “affiliated firms.”

This change in focus would eliminate much of the current confusion regarding the disclosure of advisor “compensation.” Clients either pay commissions on their purchases, or fees (flat, hourly, or as a percent of AUM) for advice.

The second important issue (and probably the more important of the two) is the one that makes most us feel that disciplining an advisor for claiming to be “commission-only” when in fact, they are “fee and commission” is a miscarriage of justice. The reason we feel this way is that, while it may not be a fully accurate description, there’s no harm done to the investor. (The broker may suffer some harm, though, in the form of losing prospective clients who are looking for a fee-compensated relationship. But that’s his/her problem.)

Let me say right up front, that there’s nothing wrong with charging commissions. As they say, some of my best friends are commission-charging sales people. Much of American business exists thanks to commission-charging sales people. Heck, this website is a business because of commission-charging sales people, bless their hearts. In financial services, many investors simply want to buy a stock or a bond, and are happy to pay a commission to the broker who sells them the securities in question. Why would the investor care if this broker were also an advisor to other clients? As the lawyers say, it’s immaterial.

But does it work the other way? Would it be equally immaterial to a client if his/her “advisor” was a broker to other clients? Of course not. And that’s the point.

 Even if the advisor/broker were compensated solely by client fees, their brokerage firm is not: They also get paid to underwrite stocks and bonds, to “market” mutual funds and annuities, and they mark up the cost of stocks and bonds purchased on the market (principal trading). Because all of these revenue sources involve securities that may wind up in a client’s portfolio, they are major conflicts of interest.

That why the CFP Board restricts affiliation of fee-only advisors with brokerage firms—and why SIFMA is fighting the Dodd-Frank mandated application of an RIA-like fiduciary standard to brokers.

The point is that commission-charging advisors and their firms have more conflicts of interest, which are more material to their clients, and are more hidden from their clients, than do fee-charging advisors. Consequently, the CFP Board is right to restrict the affiliation of fee-only advisors with BDs, right to require brokers to describe themselves as “fee and commission” and right not to worry too much about whatever else self-described “commission-only” brokers do.

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