I recently had an email exchange about the current “fee-only” debate with an advisor who made this observation:
“When I read the issues behind fee-only or fee and commissions, I wonder why folks who clearly get some degree of compensation from commission-based businesses cling to the ‘fee only’ label. Could it be that they see it as a marketing tool?”
It occurred to me that his question—and the implied criticism it contains—raises an important point about financial advisor compensation and its parallels to today’s larger discussion about fiduciary standards.
The use of the term “fee-only” is currently in the news due to the CFP Board, which seems to be focusing much of its efforts over the past couple of years on taking, or threatening, disciplinary action against CFPs who describe themselves as “fee-only” while failing to meet the Board’s definition (see, for example,CFP Board to Investigate CFPs for Inaccurate Comp Disclosure).
That’s forced the resignations of some its own board members (And Now, the Rest of the Alan Goldfarb Story), threatened the Camardas (and others) with public reprimands in a high-profile case (see Jeff and Kim Camarda Talk About Their Suit Against the CFP Board), pressured NAFPA to change its definition of fee-only (see The 2% Solution: NAPFA Changes Its Membership Standard) and so on.
Some skeptical observers have suggested that the Board’s recent focus on fee-only is but an attempt (seemingly successful) to divert attention away from its failure to weigh in on the SEC’s efforts to create a fiduciary standard for brokers (which is supported by the Board’s failure to take any action against the hundreds of brokers who had listed themselves as “fee-only” on its client-referral site).
Regardless of its motives, the Board’s activities of late have raised a number of interesting questions about advisor compensation: the most important of which is this: Why does “fee-only” matter?
The short answer is that fee-only “matters” because it matters to retail investors, largely due to the efforts of Ron Roge and other members of the NAPFA board back in the early 1990s, to promote the benefits of “fee-only advisors.”