CFP’s Goldfarb Case Illustrates Need for Clear Compliance Lines

Perhaps it’s time for some finer gradations…at the least, to recognize “fees and commissions” versus “commissions and fees” depending on which forms the majority of the advisor’s compensation, if not to simply standardize the breakdown of compensation on the website of a regulator or a third-party service like BrightScope with a pie chart that explains exactly what proportion (and type) of compensation comes from various sources.

A third concern is the fact that unfortunately, it’s difficult to even judge the Goldfarb decision and associated punishment relative to the history of other CFP Board compensation infractions, due to the fact that the CFP Board’s Disciplinary and Ethics Commission operates in a private environment, with only limited access to its history of disciplinary considerations through its Anonymous Case Histories database (plus any disciplinary actions where results are public), and even then only to the extent that the ruling or summary explains the facts and circumstances of the case.

If we’re going to slice the rules of compensation disclosure in a finer and finer matter, with real-world outcomes from certificants bearing legal fees for their defense to the actual consequences of public censure, shouldn’t CFP certificants have a substantive body of case history upon which they can rely in crafting their defense, and to which the Disciplinary and Ethics Commission should be reasonably bound as precedent until/unless the facts and circumstances materially differ?

Otherwise, the disciplinary process becomes a random and capricious experience for the certificant, whose punishment may vary depending upon the particular people who adjudicate the matter. (To be fair, the CFP Board has made some efforts to address this with the Anonymous Case Histories and last year’s rollout of new Sanction Guidelines, though in retrospect some have suggested that the Sanction Guidelines may have been too narrow or inflexible to handle this matter.)

For those who are simply trying to act in a prudent manner in the first place, who’s to know what’s permissible or not until suddenly the complaint comes and it’s time to defend? That was apparently the unfortunate reality for Goldfarb himself, despite his long history in advocating for and even helping to craft some of the rules which he was found to have violated.

While it is true that the CFP Board is a private entity and not a regulator, and consequently does face real world privacy law issues, surely there is some feasible and reasonable compromise; for instance, the CFP Board could write into its agreements that the decision to use the CFP certification includes permission to disclose further details in any disciplinary action that arises against the certificant, which at least ensures that future disciplinary actions will be open to the light of public scrutiny, and not operate in a black box environment like the oft-criticized FINRA arbitration panel.

Back to the Beginning: Did Goldfarb Deserve His Punishment?

As for the Goldfarb case itself, ultimately I have to admit that it’s difficult to conclude that Goldfarb’s case really deserved a public Letter of Admonition, especially since in practice his clients really did only ever pay fees to him and never paid any commissions to implement any products with the broker-dealer in which Goldfarb owned a mere 1% interest that was not a very material component of his compensation.

Goldfarb himself notes that in private conversations with former Disciplinary and Ethics Commission members, similar or more severe allegations had been dismissed in the past with a private warning and recommendation-to-fix but no public action. On the other hand, the reality is that Goldfarb did hold a very public position of leadership at the time of the allegation, and it’s hard to fault the CFP Board for applying extra scrutiny to the situation. In fact, to maintain the impartiality of the disciplinary process, the CFP Board established an Ad Hoc Disciplinary Committee specifically to review Goldfarb’s situation in the first place, which had the perhaps unfortunate side consequence for Goldfarb of putting on the case a group of adjudicators with limited experience and familiarity with evaluating such complex matters and the CFP Board’s own prior history in ruling on such matters.

Nonetheless, as I wrote in the past, I think that overall the CFP Board’s efforts to handle the process with extra diligence toward impartiality were right, that it’s a sign of strength of the organization that it was willing to investigate its own leadership in such a public manner, and that I’m relieved to see the matter concluded in a public matter that maintains some transparency to the process and outcome… even if I’m struggling a bit with whether this particular adjudicated conclusion was right. In fact, the ruling set some incredibly troubling precedents, though there was no doubt extreme pressure on the Ad Hoc Committee to err on the side of a strict ruling and not look like it was protecting its own, especially without any clear public precedents because of the opacity of their own prior rulings!

On the other hand, I will admit that the somewhat unusual ruling itself continues another troubling precedent established last year when NAPFA Chair-Elect Ron Rhoades resigned just before taking his NAPFA leadership position due to a regulatory infraction where he failed to register as an advisor in Florida where he had some clients (even though the State of Florida shortly thereafter issued a letter of warning to Rhoades that acknowledged he had appropriately resolved the relatively minor infraction).

While I do agree with the principle that those in positions of leadership should be held to a higher standard, at the same time such an approach is only viable when there is a clear body of guidance about how to navigate those standards effectively in a world where complexity is a fact of life and mistakes do happen; otherwise, these ongoing problems may leave a chilling effect on the willingness of financial planners to take on what are ultimately positions of purely volunteer leadership that can having adverse business ramifications.

In the end, it still seems to me that the CFP Board made more good decisions than bad ones in this case, especially regarding the process it used, and particularly in the spirit of maintaining the integrity of the organization. Nonetheless, the process and its results also highlight that there are still some real gaps in the CFP Board’s framework for functioning as an overseer of CFP certificants, and how to enforce on a fair and consistent basis. And the ruling may have unintentionally set some precedents about compensation disclosure that could be far, far more wide-reaching than just Goldfarb himself. 

Hopefully, the CFP Board will take this as a real opportunity to evaluate its own disciplinary and enforcement process and figure out how to improve the transparency further in the future. I hope the CFP Board also seriously considers issuing a statement to further clarify its compensation rules and why Goldfarb’s public Letter of Admonition should stand while every CFP professional who notes “salary” shouldn’t be disciplined as well (along with every CFP professional who indicates “fee-only” but has an employer that is a broker-dealer or is a related party to one).

Alternatively, if the reality is that thousands of CFP certificants are not complying properly with the compensation disclosure rules regarding “fee-only” and “salary” definitions, I hope that with the CFP Board’s latest guidance those professionals will update their compensation disclosures before it lands them in hot water, too!