Are the CFP Board’s Comp Disclosure Rules Meaningless?

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.

In other words, even being able to prove that 100% of clients only paid 100% of compensation via fees was not a sufficient defense to claim “fee-only” status. So regardless of whether a commission ever actually occurred or not, the mere presence of an entity in which Goldfarb and/or his employer owned a small interest, and which could generate commission compensation that could be paid, was sufficient to taint the fee-only status.

After the CFP certificant community signaled confusion and concern about this ruling, the CFP Board followed up with a Compensation Disclosure Webinar on Aug. 7, and released an important ”Notice to CFP Professionals” regarding accurate compensation disclosure, where it further extended this novel approach to compensation disclosure by declaring that any employment relationship with an entity that can generate commissions for any advisor will taint the fee-only status for all advisors, even if the advisor has never actually done any commissions and never intends to do so. In fact, any common ownership of a commission-related entity by the CFP certificant’s employer could taint his or her fee-only status, even if no client even does business or is intended to do business with the entity, as was the case with Goldfarb.

The problem with this approach is that it divorces “what clients actually pay” from what advisors must disclose as compensation, even though the whole point of compensation disclosure is to explain to clients how they will be compensating their advisor! In a world where any affiliation (employment, minuscule ownership, common ownership from an employer’s holding company, etc.) to an entity that can collect commissions taints the fee-only label, very few advisors are left being able to call themselves fee-only.

Any advisor who is affiliated by a broker-dealer—even if exclusively charging clients fees, and even if exclusively working for the company’s fee-only RIA—cannot describe themselves as fee-only. Nor can any advisor who invests any portion of their personal net worth in a commission-paying entity. Remember, Goldfarb was deemed “commission and fee” in part because he owned a 1% interest in a tiny broker-dealer that paid him less than $2,000 in dividends, a payment that’s smaller than what many advisors receive as a dividend from broker-dealers in their S&P 500 index fund, even if no client does business with the entity.

Even advisors working for large RIAs that are partially bought by banks or holding companies lose the right to call themselves fee-only, because banks generate commissions on mortgage products (a problem even if the advisor never refers clients to the bank for any mortgage solutions) and virtually every holding company owns an interest in some broker-dealer or bank somewhere in its portfolio of holdings (e.g., even Fiduciary Network is owned by Howard Milstein’s Emigrant Bank, which also owns two bank/mortgage companies in New York, apparently rendering many of Fiduciary Network’s large prominent fee-only RIAs as being in violation of the “fee-only” disclosure rules).

Unfortunately, the problems extend further than just fee-only compensation disclosures. Given that just having any form of affiliation to a commission-paying entity is enough to taint the fee-only compensation disclosure for advisors, it would similarly be true that having any form of affiliation to an entity that could charge a fee would taint the “commission-only” compensation disclosure, as first pointed out previously on this blog.

Given that virtually every broker-dealer and insurance company is at least capable of charging a client a fee for something—even if it’s one-time standalone advice—this means that just as every wirehouse broker who claimed to be fee-only was in violation of the rules because their company could generate a commission, so too is every “commission-only” advisor at a broker-dealer or insurance company in violation of the rules because their company could generate a fee!

Given that the CFP Board continues to maintain that it is “compensation neutral” and that it treats all compensation models equivalently, it would seem that its failure to enforce its own rules against “commission-only” advisors is just the next shoe to drop, just as it was already publicly embarrassed for failing to enforce its rules against wirehouse advisors who claimed they were “fee-only” but weren’t allowed to use the term under the CFP Board’s interpretation of its rules after the issue was first raised on my blog. 

Ultimately, it’s not clear that any advisor has, by virtue of real-world employment relationships, a business where it would actually be legitimate to call themselves “commission-only,” such that the definition may have been rendered entirely irrelevant, just as the “salary” definition was too!

In part two of this series, we’ll look at some ways to break the impasse over and clarify the details of the CFP Board’s compensation disclosure rules.