The CFP Board sets the standards for Certified Financial Planner certification. In an email on March 2, 2020, the Board informed its membership that, “Today, we have updated [the website] to remove information about compensation method,” contending the best way for consumers to pick a CFP is through a conversation.
This puts an additional burden on consumers wanting to avoid CFPs who are compensated solely or partially by commissions. No longer can consumers screen out CFPs who sell financial products as a first step toward finding a planner who is only compensated for their advice. They will now need to call the list of CFPs that meet their other search criteria and ask them about their compensation models.
Not only will this take more time and effort for consumers, it’s bound to be much more confusing. The CFP website actually had a straightforward explanation of the three basic compensation models: Commission-Only, Commission and Fee, and Fee-Only.
While both Commission and Fee and Fee-Only advisors are held to a fiduciary standard, the major problem with a Commission and Fee planner, versus a Fee-Only planner, is the potential for a big conflict of interest. The higher the gross revenues a Commission and Fee planner earns from commissions on the sale of products (annuities, mutual funds, insurance, etc.), the higher the potential conflict of interest. If a client needs a detailed financial plan addressing asset protection, estate planning, business succession, and real estate decisions, rather than investments, there isn’t much incentive for planners whose incomes are largely from commission sales to do a lot of technical analysis for something for which they will not be compensated.
The financial media regularly educates consumers on the benefits of engaging a Fee-Only advisor. Accordingly, a growing number of consumers who want comprehensive financial planning look for an unbiased Fee-Only advisor. It makes sense, then, that many CFPs who are Commission and Fee would want to give the illusion they are Fee-Only.
They accomplish this with a creatively designed term, “Fee-Based.” This sounds a lot like Fee-Only, doesn’t it? Fee-Based is simply a “smoke and mirrors” term that means Commission and Fee, but it’s confusing to most consumers—which is the whole point.
How might a call go to some Commission and Fee financial planners? “Hi, I’m looking for a financial planner. Is your compensation model Commission Only, Commission and Fee, or Fee-Only?”
“We are a Fee-Based financial planning firm and have a fiduciary duty to put your needs first.”
What does the consumer hear? That the advisor is a Fee-Only planner who is held to a fiduciary standard. Unfortunately, what they most likely will get is a planner who makes the majority of their income from commissions, has a conflict of interest, and specializes in investment products rather than technical, advice-driven financial planning.
Why did the CFP Board take this giant step backward in transparency? My hunch is that the CFP Board receives more dues income from Commission and Commission and Fee advisors than from those that are Fee-Only. The move to eliminate compensation from the consumer search tool certainly favors their highest dues-paying constituency.
I don’t argue with the fact that a conversation with a planner is best (a handful of Commission and Fee planners receive 99% of their revenues from fees). Yet removing the compensation information makes it harder for consumers to make informed decisions. Hopefully the CFP Board will reconsider and reverse this decision soon.