Following my last blog posting, “NAPFA’s News,” I received an email asking: “You’re not a fan of NAPFA, are you?” The question gave me pause, and upon reflection, I can see why someone might think that. So I responded that for being on the vanguard of professionalism in financial planning, I’ve been a big fan of NAPFA for many, many years; but, like the Cleveland Browns, Woody Allen, and George W. Bush, they sure don’t make it easy.
Which brings me to the response to my NAPFA blog by Nigel CFP, dated July 16, who wrote in part: “What stuns me Mr. Clark, is that …the press…has spent 25 years helping to promote [NAPFA's] flawed concept of ‘method of compensation’ over education, examination, examination(sic) and most importantly, ethics.”
Despite his hyperbole, I’m sure Nigel is fully aware that NAPFA doesn’t ignore education, examination2, or ethics. But it does put “method of compensation” on a par with those other factors, when identifying a professional financial planner. And rightly so: Only a fool or a quibbler would argue that what someone is paid to do and by whom they are paid has no bearing on their job performance.
What Nigel and others who make the compensation-method-doesn’t-matter argument fail to mention, especially to their “clients” is that they aren’t paid by their clients: their pay checks come from their insurance company or broker/dealer. In fact, as an “insurance agent,” for whom are they legally an agent? That’s right, the insurance company. Not the client. Which means they are legally obligated to represent the interests of the company–again, not the client.
So why does compensation matter? Simple: if an advisor is paid directly by the client, then that advisor has a legal and fiduciary duty to represent the interest of that client. If the advisor’s compensation is paid by someone else, his loyalty legally belongs elsewhere as well. Sure, some enlightened commission-taking folks may break the law and put their clients’ interests first: but how can a client reasonably rely on them to do so?