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July 09, 2014 at 06:13 AM
To get more clarity about the issues I raised in my last blog (The 2% Solution) about the recent change in NAPFA’s membership standards, I had a conversation with Geoffrey Brown, the fee-only financial planning organization’s CEO.
I have to admit I may be more confused now.
On its face, the new standard seems simple enough. The old standard allowed NAPFA members to own up to 2% of a commission-charging “financial services industry firm.” I was able to determine what that means in NAPFA’s view: On its website, under “Membership Standards,” Section 2. Prohibition of Certain Ownership Interests and Employment Relationships explains:
“Financial services industry firm includes any entity or individual that offers any type of financial service, e.g., securities broker or dealer, investment adviser, asset manager, investment company, banking institution, savings institution, trust company, mortgage bank, credit union, savings and loan association, insurance broker or dealer or agent, real estate broker or agent, commodities broker or dealer or agent.”
Not a bad list, with the curious exception of “real estate broker or agent.” For example, the definition of “financial services” on qfinance.com reads: “the business activity of the financial institutions that offer money management services such as banking, investment, brokerage, and insurance.”
Note the emphasis on “money management services.” As the saying goes, some of my best friends are real estate brokers, and I’ve never known any of them to have anything to do with “money management,” except perhaps of their own IRAs.
This is admittedly a small point, which in all likelihood applies to only one of the 125 members or so that Geoff Brown says will be affected by the rule change. That member is Rick Kahler, of Rapid City, N.D., who, in addition to his fee-only advisory firm, owns 50% of his family’s real estate agency. According to Kahler, he’s been a NAPFA member since 2009, when his application was initially turned down, but was then approved for membership under the condition that he “added a line on my ADV which stated that I’m not active in the real estate firm nor do I received any commissions from it.”
Hence my confusion: To start, Kahler’s admission as a NAPFA member came at a time when ownership in “a financial services industry firm” was limited to 2%. Moreover, I still don’t understand why ownership in a real estate agency is even on the list. Apparently, I’m not alone.
In a comment to Ann Marsh’s June 27 story on financialplanning.com (NAPFA Faces Member Loss After Fee-Only Rule Change), “Tom B” wrote:
”For the record, I’m on NAPFA’s Compensation Task Force which is charged with interpreting the Fee Only rule in the context of new member and existing member renewal applications. I do not believe Mr. Kahler’s ownership of a 50% stake in a real estate sales firm violates the definition of ‘fee only’ unless he is charging clients a fee for financial advice in connection with their acquisition, disposition or retention of real estate.”
According to Geoff Brown, “NAPFA’s membership committee is working with Kahler and other members to help them understand what the new membership standards require, and to meet those standards so we don’t lose any members. It’s an ongoing process; we will look at each situation on a case-by-case basis. If it’s a little more intricate, we’ll help the member develop a plan that meets their needs and our regulations.”
