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I recently had an email exchange about the current “fee-only” debate with an advisor who made this observation:
“When I read the issues behind fee-only or fee and commissions, I wonder why folks who clearly get some degree of compensation from commission-based businesses cling to the ‘fee only’ label. Could it be that they see it as a marketing tool?”
It occurred to me that his question—and the implied criticism it contains—raises an important point about financial advisor compensation and its parallels to today’s larger discussion about fiduciary standards.
The use of the term “fee-only” is currently in the news due to the CFP Board, which seems to be focusing much of its efforts over the past couple of years on taking, or threatening, disciplinary action against CFPs who describe themselves as “fee-only” while failing to meet the Board’s definition (see, for example,CFP Board to Investigate CFPs for Inaccurate Comp Disclosure).
That’s forced the resignations of some its own board members (And Now, the Rest of the Alan Goldfarb Story), threatened the Camardas (and others) with public reprimands in a high-profile case (see Jeff and Kim Camarda Talk About Their Suit Against the CFP Board), pressured NAFPA to change its definition of fee-only (see The 2% Solution: NAPFA Changes Its Membership Standard) and so on.
Some skeptical observers have suggested that the Board’s recent focus on fee-only is but an attempt (seemingly successful) to divert attention away from its failure to weigh in on the SEC’s efforts to create a fiduciary standard for brokers (which is supported by the Board’s failure to take any action against the hundreds of brokers who had listed themselves as “fee-only” on its client-referral site).
Regardless of its motives, the Board’s activities of late have raised a number of interesting questions about advisor compensation: the most important of which is this: Why does “fee-only” matter?
The short answer is that fee-only “matters” because it matters to retail investors, largely due to the efforts of Ron Roge and other members of the NAPFA board back in the early 1990s, to promote the benefits of “fee-only advisors.”
Those benefits include compensation of advisors directly by their clients and, most important, the fiduciary standard that fee-only advisors have to their clients, thanks to the ’40 Act. Whether financial consumers’ understanding extends this deeply is debatable, but the fact is that today a “fee-only” advisor is widely considered to provide his/her clients with a higher standard of client care.
So to answer the above advisor’s not-so-subtle criticism: yes, calling oneself a “fee-only advisor” is indeed a powerful marketing tool, and with good reason. Working with an advisor who is required by law to put their clients’ interests ahead of their own interests, or the interests of their employer or any other party, has many easily recognized benefits. Which brings us to a “fiduciary duty.”
Just as NAPFA’s efforts two decades ago promoted the benefits of fee-only advisors, 2010’s Dodd-Frank Act has been primarily responsible for raising awareness among investors and the financial media of the many benefits of “fiduciary” advisors.
Just as happened with fee-only, this public awareness has motivated some financial advisors to describe themselves as having a fiduciary duty to their clients, whether they have such a duty or not. So today “fiduciary” has become a powerful marketing tool as well.
What’s more, just as with fees and commissions, thanks to the “broker exemption” to the ’40 Act, and current regulations (under the SEC, FINRA and the CFP Board), many “fiduciary” advisors go both ways: sometimes they are acting as a fiduciary and sometimes they aren’t—for the same client. This, of course, creates considerable confusion for clients and no small potential for abuse by their advisors.
Back in the early 1980s, NAPFA solved this problem on the compensation side by requiring its members to be compensated solely by fees paid by their clients: “fee-only.” About 10 years ago, after some considerable pressure (but still to its credit), the CFP Board agreed that “only” meant “only,” and started enforcing the use of the term “fee-only,” at least for some CFPs.
Perhaps the time has come for a new class of financial advisors to emerge: described as “Fiduciary-Only” advisors. Just as “fee-only” advisors eliminated client confusion about compensation (and changed the retail financial services world), maybe “fiduciary-only” advisors, required to act in the best interests of their clients at all times, would create a new level of trust between retail investors and their advisors, take the financial services industry to the next level—and become the next “powerful marketing tool.”