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July 02, 2014 at 09:29 AM
As you may have heard, last Thursday (June 26), the National Association of Personal Financial Advisors announced a change to its membership standards, involving its definition of “fee only.” Here’s how NAPFA CEO Geoffrey Brown described the change: “The National Association of Personal Financial Advisors (NAPFA) today notified its membership that it will discontinue its policy of allowing members to have up to a 2% ownership interest in a financial services firm that receives transaction-based compensation.”
Even though Brown estimated the change would affect 125 or so NAPFA members, if myriad reports in the trade press are representative, that small—but apparently quite vocal—minority are more than a little unhappy with the change.
I find myself in the curious position of agreeing with the NAPFA rule change, and at the same time, agreeing with the advisors who oppose it. [Let me state clearly: I was for it before I was against it.] I’ll try to explain.
First, keep in mind that the most important criteria for an advisor being accepted as a NAPFA member is that he/she has to meet the organization’s definition of “fee only.” And charging financial services commissions or even owning more than a small portion of a business that charges commissions has always been a no-no under NAPFA rules. But as Geoff Brown reportedly admitted, NAPFA’s position on how much ownership is permissible has varied over the years: from zero tolerance to as much as 5%, to the 2% ownership stake which was the standard from 2004 until last week.
As far as I’ve been able to determine, the reason for this ownership exception is to allow for personal investments (such as wirehouse stock in a mutual fund portfolio), or regulatory ownership requirements (such as the 1% stake in his accounting firm’s BD that cost Allan Goldfarb his chairmanship of the CFP Board two years ago).
Yet this history of rethinking the ownership percentage suggests the NAPFA Board has had some uneasiness with member ownership of commission firms for decades.
Since I came across this rule in the Goldfarb case, I, too, have felt some uneasiness about it. While the rationale behind the rule makes sense to me (that professional advisory firms should be client-compensated, standalone businesses, separate from the financial services industry), the solution of limiting a percentage of ownership seems problematic: 1% of a small brokerage firm is probably not much of conflict of interest; 1% of Fidelity Investments would be quite another matter. On that basis, I applaud NAPFA’s decision to eliminate the rule.
