Fee-Only Fiduciary Confusion From the CFP Board

A reader with the handle “Watching Out” wrote an insightful (and I have to admit, unexpected) comment to my April 20 blog, Adhering to DOL Fiduciary Rule: Heal Thyself.

In case you were gearing up for the premiere of Game of Thrones, or following the circus otherwise known as the Presidential primaries, in that blog I bemoaned the need for definitions of everything, and advocated, instead, for advisors simply acting in the best interests of their clients.

But Watching Out countered with an example that’s near and dear to the hearts of CFPs everywhere, at least in recent years: “Who would have thought that the term ‘fee-only’ could have led to such confusion and perhaps unjust punishment to some. Knowing the rules and definitions are important. Better to ask that clever question now before some lawyer asks the clever question in a court room.” 

Bazinga! For those of you who have been busy catching up with the Kardashians in preparing for its season premiere Sunday, WO is referring to the CFP Board’s seemingly uneven enforcement of CFPs’ use of the term “fee-only.”

Said enforcement led to the resignation of the Board’s former chairman, Alan Goldfarb, and a bitter ongoing lawsuit with CFPs Jeff and Kim Camarda over the Board’s alleged heavy-handed sanctions while letting hundreds of Wall Street brokers off with a “stern” letter.

This was all due to confusion over the definition of “fee only.” (Although, in fairness, I should point out that Goldfarb’s “infraction” involved checking the best of bad alternatives to describe his compensation on the Board’s own website.)

Still, Watching Out’s use of the CFP Board as the poster boy for run-amok regulation over seemingly nebulous definitions is sobering. Yet, to my knowledge, the problem with “fee-only” started a few years ago, when some brokers wanted to claim they were “fee-only” advisors when they were charging fees, but when they were charging commissions to the same clients, they reverted back to being commission-taking brokers.

At the time, like many others is the independent advisory industry, this explanation sounded patently ridiculous to me. However, after gaining a better understanding of how the CFP Board defines its “fiduciary” standard for CFPs, I see where this kind of thinking came from. I also understand why the Board has been reluctant to take action against brokers for making these claims.

In my May column in Investment Advisor magazine (A Category Is Born: CFP Professional Practices), I wrote about a recently released study by the Aite Group sponsored by the CFP Board. Among many other things, the report’s authors covered the “fiduciary duty” of CFPs under the Board’s rules: “CFP professionals are held to a fiduciary standard of care when providing financial planning. Clients may believe they are receiving a financial planning service that meets CFP Board’s definition, when they are instead receiving a service that is narrow in scope and incidental to the transaction…”

So, according to the Board, CFPs are “fiduciaries” when they are acting as financial planners, but when they are acting as brokers, they are not. Is it any wonder that some brokers have made a similar interpretation of their use of the term ‘fee-only?’ And, perhaps, why the Board has been reluctant to administer its otherwise heavy handed discipline to those brokers?