Over the past year, a series of revelations about the CFP Board’s compensation disclosure requirements have significantly shifted the landscape in how CFP certificants must explain their compensation to prospective and current clients. While the CFP Board maintains that “nothing has changed” since its rules were formally enacted more than five years ago, the fact that large numbers of advisors continued to find themselves out of compliance—with another potential shoe soon to drop—suggests that whether the organization admits it or not, the CFP Board has changed the rules of the game.
In fact, the CFP Board’s current framework is so expansive in the compensation that must potentially be included that virtually all advisors in today’s environment end up being in one broad bucket labeled “commission and fee.” That bucket includes advisors for whom commissions account for only 1% of their income along with those who earn 99% of their income from commissions (despite the clear difference in actual business model). However, that bucket also includes “commission-only” advisors who earn 100% of their income from commissions because they work for a firm that “could” generate a fee. The rules also require advisors whose entire income comes from fees to declare themselves “commission and fee” if they “could” earn a commission as well. The end result: when nearly all advisors must use the same compensation disclosure label of “commission and fee” to define a wide range of actual compensation structures from 0% commissions to 100%, the very purpose of compensation disclosure begins to lose its meaning, value, and clarity for the public that the CFP Board purports to serve.
While the CFP Board maintains that it cannot “fix” or change its rules without a long, drawn-out rulemaking process, it has already changed its rules without such a process. In addition, the Board’s elimination of its “salary” compensation category just over six months ago makes it clear that when it comes to interpreting and adjusting its own definitions, the CFP Board does have latitude to fix its own mistakes. Yet, mysteriously, the CFP Board has yet to be held accountable for the problematic definitions it is now using.
With CFP certificant stakeholders reporting behind the scenes that they are afraid to speak out for fear of retribution (justified or not), and the FPA and NAPFA apparently abdicating their advocacy roles on behalf of members to take a back seat to the CFP Board, it remains unclear what will finally push the issue. Will someone have to file complaints against 1,000 CFP certificants in violation of the CFP Board’s own problematic rules, effectively throwing those CFP certificants under the bus, just to force the CFP Board to pay attention? Will its Board of Directors finally take a more active accountability role to intervene and preserve the enforcement integrity of the organization?
Compensation Disclosure Requirements for CFP Certificants
Under the CFP Board’s Rules Of Conduct, CFP certificants are required to disclose compensation to prospective and current clients. The key rules include that the certificant shall provide/disclose:
Rule 1.2(b): Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement; and factors or terms that determine costs, how decisions benefit the certificant and the relative benefit to the certificant.
Rule 2.2(a): An accurate and understandable description of the compensation arrangements being offered. This description must include:
Information related to costs and compensation to the certificant and/or the certificant’s employer, and
Terms under which the certificant and/or the certificant’s employer may receive any other sources of compensation, and if so, what the sources of these payments are and on what they are based.
For the purpose of these rules, the key term “compensation” is defined under the “Terminology” section of the CFP Board’s Standards of Professional Conduct as: any nontrivial economic benefit, whether monetary or nonmonetary, that a certificant or related party receives or is entitled to receive for providing professional activities.
Within this framework, advisors are expected to disclose that they work either on a “fee-only,” “commission-only” or “commission and fee” basis, depending on what compensation they receive, or are entitled to receive, from one of three “buckets” as shown below. If each of the three buckets are only capable of paying fees, the advisor may call themselves fee-only. If the buckets are only capable of paying commissions, the advisor is commission-only. In all other cases, the advisor is commission-and-fee.
The Board’s Problematic Application of Compensation Disclosure Rules
While the above set of rules for disclosing compensation would seem relatively straightforward, the CFP Board’s application of the rules in recent years has created a tremendous amount of confusion. The starting point was the CFP Board’s sanctioning of former Board Chairman Alan Goldfarb, who had stated that he was “fee only” because, logically, all of his clients only paid fees (to him or his company) for services. However, because Goldfarb’s RIA was owned by an accounting firm that also owned a broker-dealer (used primarily to facilitate small-business merger transactions), and because Goldfarb himself owned a 1% interest in the broker-dealer, the CFP Board declared that Goldfarb should have declared himself “commission and fee” because he could indirectly receive a commission under bucket #3 above. That applied regardless of whether any client was doing business, had ever done business or was ever intended to do business with the broker-dealer in the first place.