In my mind, the most slyly misleading term in the financial planning space is “fee-based.” You started to hear broker-dealer executives use this phrase not long after the National Association of Personal Financial Advisors began to talk to the press about the conflicts of interest around commissions, and how those conflicts went away if an advisor was compensated in a “fee-only” manner—paid directly by the client. The term was loosely applied to any rep who earned AUM fees while also selling annuities, life insurance and non-traded REITs, deliberately giving the public the false impression that this advisor was similarly unconflicted in giving advice.
Of course, there were gray areas, such as the advisory firm transitioning to 100% fees but still collecting trails from past sales, or the firm that sells term insurance once or twice a year to clients who can’t find what they want on their own. Increasingly, advisors are calling themselves “fee-only” if they have renounced their Series 7, even if they have a thriving cash value life business and collect significant commissions from those recommendations.
The CFP Board waded into controversial waters when it began sanctioning some advisors—including its own board chair—for self-defining as fee-only when they appeared to be subject to business/advice conflicts not present with, say, NAPFA members.
This was controversial because:
A) the CFP Board gave no warning or clear prior definition of where this line would be drawn before starting enforcement; and
B) the Board appeared to give a free pass to hundreds of brokerage reps who held the CFP designation, described themselves as fee-only on their websites, and appeared to have more manifest conflicts than the people who were under formal investigation. The wirehouse reps were simply invited to revisit the descriptions on their website; no harm, no foul, except that there almost certainly WAS harm while the misleading representation had been on the site.
Until recently, if you wanted a clear, strict definition of fee-only, you had to look to NAPFA membership standards, where trails and those occasional term life sales would disqualify you from consideration. NAPFA also drew a hard line against commission-offset arrangements, a position I questioned until I talked with a sly salesperson who frankly told me that he sold the highest commission products on his shelf and then simply adjusted his “fees” so that the commissions happened to exactly cover them. When there were no commissions coming in, he simply charged a (somewhat lower) fee anyway. Heads he won, tails—well, you know the outcome.
The CFP Board, in its new Practice Standards (including the revised version) has taken a clear and firm approach to the “fee-based” problem, which might eliminate the term among people with the CFP designation. Under “Specific Representations,” in Article A, Section 12(b)-ii, the standards (revised version) currently read as follows:
ii. Fee-Based. CFP Board uses the term “fee and commission” to describe the compensation method of those who receive both fees and Sales-Related Compensation. A CFP® professional who represents that his or her compensation method is “fee-based” or any other term that is not fee-only must:
a) Not use the term in a manner that suggests the CFP® professional or the CFP® Professional’s Firm is fee-only; and
b) Clearly state that either the CFP® professional earns fees and commissions, or the CFP® professional is not fee-only.
Of course, this version has not yet been vetted or approved by the board. And non-CFP reps will not fall under these restrictions, so even when this becomes the law of the CFP land, you might still hear the term “fee-based” if you listen closely around the profession.
But it’s a step in the right direction. I believe true fiduciary advisors can help drive out the odious “fee-based” term by sharing these standards with prospects in competitive situations.
They can ask if the other advisor described him/herself as “fee-based” and then note that, under the standards of the CFP Board, this is misleading and would be grounds for an investigation. The prospect can decide whether to work with somebody living under higher standards or lower ones—which is how an orderly marketplace should function anyway.