The Certified Financial Planner Board of Standards is taking a drubbing over its decision in early March to remove from its consumer-facing website, letsmakeaplan.org, any information on how advisors are compensated — a move the board says is designed to emphasize “fiduciary” and not “fees.”
The CFP Board told certificants in an early March email that it decided to get rid of the comp information as the board readies for the June 30 enforcement date of its revised Code of Ethics and Standards of Conduct. This coincides with the effective date of the Securities and Exchange Commission’s Regulation Best Interest.
Noting that the board is and always has been “compensation and business model neutral,” the email said that “to effectively integrate CFP Board’s revised Code of Ethics and Standards of Conduct — including the expanded application of the fiduciary duty,” its board of directors re-evaluated the handling of compensation representation information, including the “Find a CFP Professional” search tool on the website.
“Consumers should prioritize their search for a financial advisor, first and foremost, based on who will act as a fiduciary, not how that advisor is compensated,” Kevin Keller, CFP Board CEO, told me in a mid-March interview. “It’s like any other professional service — the first step is about understanding the value of the service being provided.”
The CFP Board found that only 7% of all searches on the “Find Tool” requested compensation method information, “contrary to the perception that compensation is a primary filter of the tool,” the email stated.
In the new Code of Ethics and Standards of Conduct, CFPs “are required to describe to clients how they are compensated before or at the time of engagement,” the CFP Board wrote in its email.
The three compensation method categories previously provided — Commission-Only, Commission and Fee, and Fee-Only — were broad enough to capture the various compensation methods that financial planners use today, but not very specific or helpful to consumers, the CFP Board said.
The best way for consumers to pick their advisor, the email continued, “is to have a conversation with their prospective advisor.”
In June 2019, the board of directors voted to remove the compensation method field from the LMAP search tool, and on March 2, the CFP Board notified CFPs that it will be taking the action to remove the comp information prior to June 30.
“With our updated Code of Ethics and Standards of Conduct, the appropriate F-word consumers should consider is ‘Fiduciary,’ not “Fees,” CFP Board told certificants.
Committee Cries Foul
But the Committee for the Fiduciary Standard shot back in a March 6 letter to the CFP Board that the certifying body gave “no advance notice” of its decision to remove information about a CFP’s compensation method, nor was there any comment period.
“There was no outreach undertaken to CFP professionals, including those in past leadership positions within the CFP Board (who often participated in earlier decisions regarding the disclosures of method of compensation, and issues surrounding verification of those disclosures and the value of the accuracy of such disclosures in various disciplinary proceedings,” the committee wrote. “Any change of this magnitude should only be undertaken following consultation with all stakeholders, including consumers, Certified Financial Planners, and leaders of the profession.”
The committee also balked at the CFP Board’s claim that the fee information wasn’t “specific or helpful” to consumers. “This is untrue,” the committee retorted. “The CFP Board itself has taken great measures to delineate who may call themselves a ‘fee-only planner.’”
The term “fee-only” is, in fact, defined within the CFP Board’s Code of Ethics and Standards of Conduct, the committee said.
“Largely as a result of the profound growth of fee-only financial planners, the consumer media’s advice to those who seek to engage financial planners, and the continued movement of the profession from its product sales roots to compensation paid directly by the client, many consumers today look for fee-only CFP,” it said.
Ron Rhoades, director of the Personal Financial Planning Program and assistant professor of finance in the Gordon Ford College of Business at Western Kentucky University, agreed in a mid-March email to me that the CFP Board’s “disclosure of method of compensation on its web site was incredibly helpful to consumers.”
Fee-only, Rhoades said, “was sought by many consumers on its web site, as an initial screening device. By forcing consumers to now interview CFPs to discern the compensation method, it exposes consumers to trust-based sales techniques. Consumers, possessing various behavioral biases — such as bounded rationality that advisors have been trained to take advantage of — will be put at increased risk.”
The CFP Board’s move, “as a result, fails in its mission to serve the public interest,” Rhoades said.
As to wanting to emphasize “fiduciary,” Rhoades stated that “while I appreciate the CFP Board’s new fiduciary standard, the reality is that — by its terms — the standard does not create a private right of action.”
As a result, he continued, “many broker-dealer firms and insurance companies are addressing the CFP Board’s requirements not by adopting levelized compensation and ensuring reasonableness of compensation, but via disclosures that are seldom read and even less of the time understood by consumers. In other words, the CFP Board’s fiduciary standard lacks teeth.”
Popular advisor and Nerd’s Eye View blogger Michael Kitces tweeted in early March: “Woa. Big announcement from @CFPBoard going out to CFP certificants this week: the CFP Board is entirely removing any discussion of how advisors are compensated from its Let’s Make A Plan website, and instead force consumer to dig into advisor disclosures instead.”
Kitces added that “In the long run, though, the @CFPBoard isn’t doing itself any favors by hiding compensation information from consumers & telling them to work harder to find it. It’s ALREADY required disclosure under Form ADV. Why make consumers do more work if there’s nothing to hide?”
Will Nunn, with Horizon Financial Planning in New Orleans, agreed, stating in a response to Kitces’ tweet string that: “This is a move in the wrong direction, we need more clarity around how clients pay for services, not less.
“If CFPs want to be better fiduciaries, they should disclose MORE information. There’s ample evidence that investors don’t read Form ADV. I’m pretty sure that Form CRS, with its myriad of requirements and mandated page limit, will not solve this problem either.”
CFP Yea Votes
But some CFPs support the move.
Melissa Brennan with ARS Private Wealth in Plano, Texas, told me in an email message that “since the Board raised the bar by expanding a licensee’s fiduciary obligation to his client, I am in agreement with eliminating compensation descriptions.”
Compensation by itself, Brennan said, “is not a useful tool for consumers to use as a preliminary screen. Like everything else in financial planning, ‘it depends’ — on the client’s circumstances, the services provided by the advisor, the advisor’s obligation to his client, and what products need to be deployed to execute the client’s plan. No compensation method is completely free of potential conflicts of interest.”
Allan Katz with Comprehensive Wealth Management Group in Staten Island, New York, also said he was in favor of the CFP Board’s move. “Based on the explanation I have read from the CFP Board, I believe this makes sense,” Katz said. “The primary function of the CFP Board is to ensure that advisors achieve a higher standard of Ethics and Education — that we act in a fiduciary capacity when dealing with clients.”
The CFP Board’s “rationale for removing method of compensation is that regardless of how an advisor models his/her business, the fiduciary standard remains the same,” Katz said. “Therefore listing how compensation is earned should be a moot point.”
Washington Bureau Chief Melanie Waddell can be reached at [email protected].