Financial Planning

Am I a fee-only financial adviser?

This question “Am I a fee-only financial adviser?” is self-imposed. Even though I’ve received literally tens of thousands of consumer finance questions over the past 30 years, never has this question been raised by anyone. I could also raise the next logical question at this point of whether perhaps the public just does not care but that should actually be a different topic for another time (probably a future blog post). I raise this basic question now about “fee-only financial adviser” at this time because the financial planning industry is going through a phase where it is wrestling with the concept and the definition itself.

Before you say “of course you are”, consider that the common sense answer may not be what I’m looking for here. The underlying point of the fee-only debate is to distinguish from those who are motivated by the generation of commissions. Sure, I charge only fees and don’t get involved with commissions. As I haven’t undertaken a commission transaction in many years, it would seem that there is no connection to the commission-based industry. But what about affiliations with commission-generating firms? What about residual commissions from transactions a decade ago? Some might logically say that of course any accountant provides some financial advice in the mix of services provided to a client in return for an agreed upon fee; so isn’t that’s fee-only financial advice if the adviser is paid only a fee and not product commissions? Yet it turns out those most obvious considerations are not the only factors considered by some industry forces. I am interested in what others have to say on the subject.

Background

The complicating factor in my personal question stems from my ownership of Freedom Benefits, a business that is related to health insurance. Freedom benefits is not a producer, agent or broker, nor am I individually. I don’t personally get involved in the insurance transactions of Freedom Benefits web site users but I am the owner of the business and I do write articles or record videos that promote the business and refer people to it. There’s never been an overlap of a client being both a customer of Freedom Benefits and a client of my accounting/advisory practice. But it is theoretically possible that his could happen and therefore create a conflict of interest stemming from this compensation model. So what’s not clear is whether my compensation from Freedom Benefits falls into the category that “fee-only” seeks to distinguish itself from in the financial services commission model.

Perhaps even more significant is that I’ve never rules out the possibility that I could handle a commission-based transaction as part of compensation in the future if it appeared that it would be in the client’s best interest. Besides, even if I did say so, there is no impediment for me or any other adviser from changing our business model in the future to adapt to changing circumstances. A declaration of “fee-only” is clearly a momentary condition regardless of what definition or standards apply.

The Wikipedia entry for the term “financial adviser” is very well written and provides background context that need not be reproduced here. I should note here that the industry uses the terms “advisor” and “adviser” interchangeably without any other implication. It’s only the “fee-only” part that I needs to focus on in my question. I notice that of the industry authorities listed (as well as some not listed in the Wikipedia article), apparently the only ones that apply to me with regard to use of the term “fee-only financial adviser” would be state accountancy organizations where I may practice under reciprocity rules (meaning that it is legal to practice there even though I may not be directly licensed with the state authority). State CPA associations tend to receive guidance on developing industry issues from the American Association of Certified Public Accountants (AICPA) which serves as a national authority on issues. So in the event that a state does not have specific regulations on the term “fee-only” then the fall-back authority for me would be the AICPA.

The other authorities, including Financial Industry Regulatory Authority (FINRA), Certified Financial Planner (CFP) Board and National Association of Personal Financial Advisers (NAPFA) that do regulate the term “fee-only” do not apply to me because I am not a member nor under their jurisdiction.

State law

I did not find any governing law on the topic of “fee-only” from the three primary states where I actively practice. I did not search the laws in all 50 states and DC where I hold insurance licenses.

AICPA

New standards adopted by the American Association of Certified Public Accountants (AICPA) for CPAs acting as financial planners add nothing to this specific consideration. THe guidelines do not specifically use the term “fee only financial adviser. Rthaerm they focus on disclosure of compensation, which, in my limited observation, I’ve never seen a case where a CPA did not go through significant efforts to disclose and document anyway. Michael Kitces’ detailed discussion of this subject shows how the new AICPA standards might apply to future legal cases. But this is of little use to an adviser planning how to label his practice now. We already knew that disclosure of compensation was required, so there’s nothing new here.

The AICPA published an article that weighs in on the issue by criticizing the fee-only financial adviser business model for not being holistic and ignoring clients life insurance needs. The article points out that commission-based compensation “despite the fact that most life insurance can be purchased only in this way”. I agree with the premise that CPAs avoid discussing life insurance to the detriment of their clients.

To help practitioners determine which regulations apply, the AICPA offers an assessment tool. I learned that I may be subject to the rules for referral arrangements, but that topic is also outside of the focus of this blog post.

NAPFA and CFP Board

Even though I am not a member of either NAPFA or the CFP, it is worth considering whether I could be a member and, if so, would I be considered a fee-only financial adviser. Well-known financial planning industry author Bob Veres recently wrote about this issue. I don’t link to it here because the issue is apparently not yet resolved and the discussion would more likely lend to confusion rather than lead to an answer to the question posed. The distinctions being argued about the consequences of ownership interest in other financial service companies are too complex for my basic question posed here.

For about seven years In the 1990s NAPFA was actually engaged in a legal campaign to trademark the term “fee-only” and cancelled its trademark application in 2000 amid industry opposition. I made a direct written inquiry to the Membership Director of NAPFA posing the question directly. See the next post in this blog for the response. In short, NAPFA invites me to consider them when I am no longer an owner of an insurance company.

Conclusion

Notwithstanding any response I may receive from NAPFA and without regard to whether that association’s practices may be applicable at some time in my future, I arrive at the primary conclusion that I do not have any third-party basis to assert that I am a “fee-only financial adviser”. I believe that if  a third-party reference or implied determination did exist, it would likely have tangible value for myself and for consumers.

Second, I conclude that here is neither any legal nor professional ethics detriment that would persuade me from using the term “fee-only financial adviser”.

Third, I am clear that the determination of whether I (or any other person) am a “fee-only financial adviser” is a momentary issue. No regulation contemplates or prohibits the possibility that this determination will change in the future, either from evolving industry trends or a change in the advisor’s business practice, (CFP Board uses a “look back” period of one year to determine compensation model so presumably a prior determination of business model may carry for at least a year after a change  in business practice).

Finally, and still most perplexing, is the issue of insurance. I conclude that:

1) It is inappropriate for a financial adviser to ignore a client’s insurance simply because of discomfort with the compensation issue.

2) It is inappropriate, in most cases, to charge a fee when compensation is already intended to be included in the price of the product.

3) No-load insurance products are not the answer, for many reasons outside the scope of this post.

4) Considering #1, #2, and #3 above in total, it is wrong for NAPFA and some public media to imply that fee-only is in the best interests of middle market consumers when the facts simply do not support this conclusion.

5) It would be misleading to advertise “fee-only financial advice” and then at some point later realize that it is in some future client’s best interest to offer to handle an insurance transaction without a fee based on splitting the included commission with an insurance specialist. It does not matter that this is not my business model. Rather, simply the possibility that is could and the realization that it actually should happen in the client’s best interest is enough to cause discomfort with the use of the phrase “fee-only”.

6) The term “fee-based financial adviser” may be more appropriate and descriptive term to describe the most-efficient and most-preferred arrangement for compensation for financial advice for the majority of middle market clients. Yet I am unlikely to use that term out of concern that it implies a commission connection within the business model; something that I and many other accountants do not wish to consider.

The end result, it seems, is that I’ll likely continue to avoid using any descriptive label like “fee-only”, avoid association with financial planning organizations that push such labeling of service, and continue to keep the compensation issue off the front page in communications about my work.

Leave a Reply

Your email address will not be published. Required fields are marked *