27 Sep The Cat’s Out of the Bag

“You may think a “fee-only” financial advisor will never charge you commissions or other sales charges that could induce him to favor selling you something that is better for him than you. Think again. ” (Jason Zweig, Wall Street Journal, page B1, Sept. 20, 2013).

Mr. Zwieg’s article exposes the large number of Certified Financial Planners who market themselves as “fee-only” when they are not. It quotes the director of the financial planning program at Alfred College in Alfred, N.Y. as saying, in such cases advisors are “holding themselves out to the public as “fee-only” because they know those words attract clients, but if you charge fees and commissions, then you are saying one thing when you are another. That’s a bait-and-switch tactic that is inherently misleading.”

According to the CFP Board, the term “fee-only” can be used only if all compensation comes from fees. If any related party (such as the broker-dealer with whom the advisor is licensed) receives commissions, the advisor cannot use the term.

The Wall Street Journal however, uncovered many CFPs describing themselves on the CFP ‘find an advisor’ website as “fee-only” when, in fact, they work for or are affiliated with broker-dealers. Among the firms cited were LPL Financial Holdings, Amerprise Financial, Morgan Stanley, Merrill Lynch, Wells Fargo, and Raymond James Financial.

Notification of the impending WSJ article prompted the CFP Board to take down the compensation description on the profiles of all advisors claiming ‘fee-only’ status on its website, requiring them to review the definition and resubmit their compensation status.

The article goes on to point out that it is not only CFPs who are falsely representing themselves. The example provided is a registered investment advisory firm in Pennsylvania who is not a CFP, and whose website specifically  stated that the company “is a fee-only financial planning firm…. Fee only planners, like us, are compensated solely by fees paid by their clients and do not accept commissions or compensation from any other source… We do not earn any money from commissions, trailers, or markups.”

The firm’s ADV brochure, a form filed with the S.E.C., discloses that the advisor may in fact receive “a usual and customary commission” for selling “investment products” and “normal commissions” for selling insurance.

As President Ronald Reagan is quoted as saying, “trust but verify.” The only simple and effective approach to verifying the bona fides of a purported ‘fee-only’ advisor of which I am aware, is through the National Association of Personal Financial Advisors (NAPFA). Before gaining NAPFA registration, advisors are carefully vetted to ensure that they are truly fee-only, that they are competent in all areas of financial planning, that they have signed a fiduciary oath placing their clients’ interest above all others, and that they continue to reinforce and expand their knowledge through rigorous continuing education requirements.

It is sad commentary on the financial services industry that consumers cannot rely upon the word alone of financial advisors and their firms for honesty and forthrightness. Fortunately, we have the National Association of Personal Financial Advisors (NAPFA) to vet advisors for us so that we can trust comfortably and confidently the motivations, competence, and allegiance of the financial advisors whose guidance we enlist in our stewardship over our family’s financial wellbeing.