In an impressive piece of reporting, Financial Planning’s Ann Marsh was recently surfing the FPA’s website (FPAnet.com), and discovered that the option of “salary” had been removed from the “find a planner” page, leaving consumers with only three choices: “fee-only,” “commission only” and “combination fee/commission.” She wrote about it on Sept. 5 in “FPA Changes Compensation Disclosure.”
Astute readers will have recognized the now missing “salary” option as the one that now ex-chairman of the CFP Board Alan Goldfarb first chose to describe his compensation, before changing it to “fee-only:” and running afoul of the Board’s ethics committee for owning a 1% stake in his RIA’s affiliated broker-dealer.
You may also remember that one of Goldfarb’s defenses was that the FPA’s questionnaire offered no choice that fully described his compensation; he simply chose the “most accurate” option. Which raises the second question: Did the FPA change its website in response to Goldfarb’s seemingly reasonable comments? And if so, does the change actually solve the problem for other planners?
Inspired by Ms. Marsh’s intrepid reportage, I talked to FPA president Mike Branham to find out why the change. “The CFP Board made the decision to change their site, and we wanted to be congruent with them,” he told me. “That’s where the disclosure conversation took place. But there needs to be a larger conversation on compensation structure definitions, and we are willing and interested to be part of that conversation.”
So now I’m surfing the CFP Board’s website (I know, right?), and sure enough, there’s no “salary” option under “find a CFP professional” either. But there is an explanation. It seems on August 7th, the Board issued a release, and hosted a webinar (which you can see on YouTube), which explains the thinking behind the change.
It says, in part: “A CFP® professional is required to describe his/her compensation in a manner that allows clients and prospective clients to understand how they will pay the CFP® professional and any related party. Except in very limited circumstances, salary does not provide an accurate and understandable description of the compensation arrangement being offered by a CFP® professional because it does not describe how the client will pay the CFP® professional and any related party. Therefore, CFP Board will remove ‘Salary’ from its ‘Find a CFP® Professional’ search engine, effective Friday, August 16, 2013.”
While this reasoning seemed to make sense, something about it bothered me that I couldn’t quite put my finger on. Then it hit me: A subtle change. Notice how the Board’s explanation starts out talking about how a CFP describes “his/her compensation” but then concludes that ‘salary’ “does not describe how the client will pay the CFP….”
That’s right: The problem is that the Board—and everyone else—has been asking the wrong question. When it comes to disclosing conflicts, it’s not about “compensation,” it’s about “payment.” That is, the client doesn’t need to know “how their advisor gets paid,” he/she needs to know how they pay for the services they get
It doesn’t matter to the client if their advisor gets a weekly check based on an AUM fee, a salary, a percent of the firm’s profit on them or an hourly rate. What does matter is whether they pay the firm a commission, which creates an incentive to sell them more stuff, or a fee, which creates an incentive to grow more assets.
After my minor epiphany, I looked back to the Board’s search page to see how the question was asked. And sure enough, prospective clients are asked to select “their preferred compensation method.” The Board doesn’t get it, at least not yet. But a quick look at the FPA’s planner search page reveals a choice between three options under: “How planners charge.”
This week, leaders from the CFP Board, the FPA, and NAPFA, the groups comprising the Financial Planning Coalition, are meeting in Chicago to have the “larger discussion on compensation structure issues” that Mike Branham was talking about. Hopefully, those in attendance will realize that, while financial planners have other conflicts of interest that need to be disclosed to clients, the most important conflict is how they pay their planner’s firm—not how their planner gets paid.
Had the question been posed that way, Alan Goldfarb might still be chairman of the Board.