When purchasing a product or service, it’s only natural to want to know what it will cost. But in the context of paying for professional services in particular, “what you pay” isn’t only a matter of measuring the value (relative to what you get), but also of understanding the incentives of the person providing the service and their conflicts of interest. From the person selling new clothes on commission (and who tells everyone they ”look great” in whatever they’re wearing coming out of the dressing room) to the surgeon who thinks ‘every’ health issue may require surgery to resolve, it’s crucial to understand when advice is at least at risk of being compromised.
However, when conflicts of interest become too widespread and of concern to consumers, businesses can differentiate specifically by highlighting their efforts to mitigate or entirely avoid such conflicts. Which, in practice, is what has happened with financial advisors over the past 20 years as the “Fee-Only” label has shifted from a descriptive label of how an advisor is compensated into an increasingly mainstream marketing label. And leading to a growing number of disciplinary actions from the CFP Board in response to CFP certificants that misused the label in a manner that was misleading to clients.
Accordingly, in its recently enacted new Standards of Conduct, the CFP Board has further updated and refined its compensation disclosure definitions, particularly as it relates to the “Fee-Only” label. At its core, the requirement to be “Fee-Only” is still that the advisor receives only fees – now more broadly labeled as not receiving any “Sales-Related Compensation” that might include commissions, trails, revenue-sharing solicitation fees, or the like – and emphasizes the importance that neither the CFP professional nor their firm nor any Related Party receives such compensation either.
On the other hand, the CFP Board also refined the scope of Related Parties that have to be considered in a CFP professional’s compensation disclosures, recognizing that there’s no need for compensation to be ‘disclosed’ from a Related Party that had no connection to the services provided by the CFP professional in the first place. Thus, for instance, the mere fact that a family member or separately owned business happens to generate commissions is not ‘fatal’ to the Fee-Only label, as long as the CFP professional isn’t actually directing clients there (such that the compensation would be “in connection with” their financial planning services).
Ultimately, the key point to recognize is that the CFP Board does not actually require CFP professionals to be “Fee-Only” and not accept commissions, nor does the organization specifically endorse one type of compensation model over another. However, to the extent that “Fee-Only” is becoming more popular in the marketplace, and financial advisors may feel a financial incentive to use the label, the CFP Board does require that CFP professionals use the label accurately. Which means it’s up to the advisor about whether they wish to use the Fee-Only label or not… but if they do, it is incumbent upon them as CFP professionals to do so in an accurate manner that reflects the full scope of the advisor-client relationship!