For years I have recommended that you start by finding a professional with the CFP® designation. It’s become recognized internationally as the standard for financial planning. The CFP® designation is conferred in the United States by the CFP® Board and by 22 other organizations affiliated with them.
To earn the CFP® designation, one must hold a bachelor’s degree, pass six semester courses on a broad spectrum of financial topics, pass a 10-hour exam, and complete three years of experience. To keep it, designees must pay the CFP® Board an annual fee of $325, complete 30 hours of continuing education every two years, and abide by a code of ethics. The cornerstone of the code of ethics is the duty to act as a fiduciary, or in the consumer’s best interest.
Within that code of ethics, CFP®s may be compensated for their work in three ways: commissions, fees (fee-only), and both fees and commissions (fee-based). The duty to act as a fiduciary is difficult to carry out when a majority of the compensation comes from selling the consumer a product. In fact, many other countries, like Australia and the UK, do not allow individuals who give financial advice to also sell products and receive commissions.
Still, I know many excellent “fee and commission” CFP®s who do put their client’s interests first. Typically, only a small portion of their compensation comes from commissions. Some of them sell their clients term life insurance, which has a low commission, instead of sending them to a life insurance salesperson who may be tempted to upsell them more expensive and commission-laden products. Other planners establish a set annual fee and offset any commissions received against the fee.
If you’re shopping for a fiduciary planner, it’s hard to know without doing an extensive interview if a “fee-based” planner’s compensation is largely fees or largely commission.
For these reasons, when I became a CFP® in 1983 I decided to remove any potential conflict of interest and only accept fees for my financial planning services. Accordingly, I hold myself out as a “fee-only” planner. Over the years, “fee-only” has become the easiest way to be reasonably assured the financial planner is a true fiduciary.
However, a number of CFP®s have found a way to misuse this term, rearranging their compensation so they can brand themselves as “fee-only” without giving up lucrative commissions. Usually, they do this by owning two firms. One is a “fee-only” firm that charges consumers fees for planning advice. The other is a financial services company that earns commissions by selling the client financial products. The CFP® can take a salary or receive dividends from the financial services firm and thereby contend that he or she does not receive commissions. Slick.
Too slick. To stop this abuse, the CFP® Board recently passed a new requirement. It specifies that if CFP®s, or any party related to them, own any interest in a financial services company, they cannot call themselves fee-only.
On the surface, this would appear to solve the problem and make it easier for potential clients to find planners who are true fiduciaries. The problem is, like all regulations, there are unintended consequences.
Those consequences have snared me, along with several other fee-only planners who are careful to carry out their fiduciary duty to clients. In order to maintain my professional integrity, I’m even considering giving up the CFP® designation I have maintained with pride for 30 years. Next week I’ll tell you why.