CFP Board must right its wrong-way call on advisor comp transparency
Recently, and without any input from stakeholders via a draft proposal followed by a public comment period, the CFP Board made a major change to its website, where users can find a CFP with an office in their area. The CFP Board’s website deleted the ability of consumers to identify whether the CFP’s compensation method was fee-only, commission-and-fee or commission-only.
This change does not serve the public interest, and the CFP Board’s stated logic for the reasons behind the change does not survive intellectual scrutiny. I propose that the CFP Board not only reverse its decision, but also move to strengthen its compensation disclosures, adopt cost-efficient verification processes, require CFPs to agree in writing with clients to their required fiduciary duties, and suggest other measures to correct the CFP Board’s recent ill-advised action.
In making the change, the CFP Board implied that its adoption of fiduciary standards for CFPs when providing financial advice (which is very broadly defined) eliminated the need for compensation disclosures.
Yet, the CFP Board’s standards are only, by their terms, “not designed to be a basis for civil liability. Clients of a CFP professional and other third parties are not intended to be third-party beneficiaries of a CFP professional’s agreement with the CFP Board to adhere to the code and standards.”
The lack of a clearly stated requirement that certified financial planners agree to comply with the CFP Board’s standards, in writing with their clients, substantially negates the effectiveness of the fiduciary requirement found in the standards. Since CFP’s violation of the standards can only result in a maximum penalty of loss of the CFP mark, the adoption of fiduciary standards currently lacks the enforcement strength required to obviate the need for method of compensation disclosures.
The CFP Board also stated that the compensation-method disclosures were “not very specific or helpful to consumers … ” Yet, fee-only is well-defined by the CFP Board’s own standards. Moreover, such a disclosure is often sought out by consumers of financial planning and investment advisory services. The media frequently recommend that their readers seek out only fee-only advisors.
Moreover, in stating “The best way for consumers to select their financial advisor is to have a conversation with their prospective advisor,” the CFP Board assumes that consumers act with a great deal of available time in order to interview many, many advisors to find the advisor that best meets their needs, and that consumers will carefully scrutinize the voluminous pages and pages of disclosures received during the engagement process.
Yet, humans possess bounded rationality and many other behavioral biases that impair their ability to discern, process and undertake meaningful decisions — especially where such a vast disparity of knowledge exists between certificants and their clients or customers.
Moreover, financial advisors are often trained on how to take advantage of these biases via “trust-based selling” and other techniques. Unscrupulous financial advisors are further aided by their firm’s marketing juggernauts, as well as the use of phrases such as “we act in your best interests” (soon permitted under Reg BI and various state insurance regulations).
The fact of the matter is, many consumers desire to screen advisors by method of compensation. The CFP Board’s removal of their ability to screen for CFPs by method of compensation presents substantial obstacles to these consumers and will lead to consumer harm. As a matter of necessity and policy, the CFP Board exists to serve the public. Accordingly, the CFP Board should immediately restore the three methods of disclosure on its website. In so doing, the CFP Board can rightfully replace “commission-based” with “product sales-related” compensation should it so choose, with an appropriate explanation of that term, to maintain conformity with its revised Standards.
Other actions could be taken, following the dissemination of well-crafted proposals and a process for the receipt and evaluation of public input by stakeholders.
First, to provide even more meaningful information, the CFP Board could require certificants to disclose, via an update on its website, the specific types of compensation the certificant’s firm receives from that certificant’s clients or customers.
Sub-categories could be created for those who receive compensation paid directly by clients, such as “AUM/AUA fees,” “project-based flat fees,” “annual flat fees, paid quarterly or monthly” and “hourly fees.”
For product sales-based compensation, categories could exist for commissions, 12b-1 fees, payments for shelf space, soft dollars (higher brokerage commissions to broker-dealer firms in exchange for research), marketing support payments and principal trading compensation. Additional space could be provided to describe other payments that might be received by some firm or their affiliates, such as investment underwriting fees.
Second, as the Dec. 17, 2019 Report of The Independent Task Force on Enforcement by the CFP Board pointed out, the board can more effectively use technology to verify self-reported information in a cost-effective manner. For example, similar to the review process undertaken by NAPFA (the largest organization of fee-only advisors), at the time of each annual renewal of membership the CFP Board could require that certificants upload their Form ADV, Parts 2A and 2B whenever they check that they receive “fee” compensation. Each certificant’s U-4 could also be required to be uploaded, to aid the CFP Board in verification of disciplinary history.
Third, The CFP Board should mandate that all certificants are required, in the agreements with their clients and customers, or in a separate addendum thereto, to agree to adhere to their fiduciary duties as set forth in the CFP Board’s standards. Only then will the fiduciary standards possess teeth.
Fourth, the CFP Board should reverse its position on being “compensation-neutral” as, all other things being equal, higher compensation results in lower returns to investors. As this emerging profession moves away from its product-sales roots, the CFP Board should lead the process toward becoming true professionals by encouraging compensation paid directly by clients to their CFPs. At a minimum, the CFP Board should unequivocally state that product sales-related compensation should be: (1) fully disclosed by dollar amount; (2) levelized (to lessen the economic incentives that drive poor behaviors); and (3) reasonable for the professional services provided.
Fifth, the board of directors should examine itself. As the task force pointed out in its report, “the primary cause for the failings that prompted the creation of the task force are systemic, longstanding, governance-level weaknesses.” It is obvious that the CFP Board’s recent removal of the method of compensation is a monumental failure in carrying out its mission to serve the public interest.
While the CFP Board has inflicted upon itself another black eye, I am hopeful that the CFP Board will acknowledge its error and quickly and decisively undertake the necessary actions to better adhere to its mission to serve the public interest.