After a sudden resignation last fall, Alan Goldfarb, the former Chair of the Board of Directors of the CFP Board, has been found to have violated the CFP Board’s Rules of Conduct for failing to properly disclose his compensation, after he claimed on FPA’s PlannerSearch that he was "fee-only" and later "salaried" when in reality a "related party" was eligible to receive commissions from Goldfarb’s clients. As a result, the CFP Board’s Ad Hoc Disciplinary and Ethics Commission that investigated the matter has issued a public Letter of Admonition for Goldfarb’s conduct.
Yet the details of the case suggest that the matter was not as clear as the initially reported findings suggested; Goldfarb’s ties to the "related" broker-dealer were through a parent accounting firm that owned both his RIA and the broker-dealer, and Goldfarb himself held only a small 1% equity interest in the firm and was otherwise not compensated. By contrast, even NAPFA guidelines dictate that less-than-2% interests are de minimis, yet the CFP Board declare that because of these related interests Goldfarb should not have labeled himself as "fee only" even though all of his clients in reality only ever did in fact pay him fees through his own RIA.
At a higher level, though, the real issue in the Goldfarb case is that such a strict interpretation of what does and doesn’t constitute "fee only" could cause even many large and well-known RIAs to "fail" the test, and renders the definition of "salary" almost moot, and is a problematic reminder of how opaque the CFP Board’s adjudication process can sometimes be due to its privacy obligations as a private entity. In addition, taking such an extreme position regarding "fee only" will arguably result in so many financial planners being classified as receiving both commissions and fees – regardless of whether the commissions constitute 0.1% or 99.9% of total compensation – as to render the disclosure relatively useless as a consumer protection. Furthermore, the Goldfarb result also leaves us unclear about where to draw the lines on what constitutes "trivial" or immaterial compensation conflicts, related parties, overlapping ownership of holding company subsidiaries, and complex real-world arrangements that could unwittingly render advisors on the wrong side of the line.
In the end, a strict interpretation of the Goldfarb conclusions about what constitutes "salary" and "fee only" could mean that thousands of current CFP certificants are not complying properly with the rules, and that many need to update their information immediately! But perhaps ultimately, the best outcome for this whole situation is to hope that it can serve as a catalyst for better clarification on the rules for compensation, and an improvement in the transparency of CFP Board’s enforcement process to allow clearer *(and better?) precedents to be set for the future.
Facts/Details On Goldfarb
According to the CFP Board’s Ad Hoc Disciplinary and Ethics Commission (formed to investigate the matter separate from the standard Disciplinary and Ethics Commission members to avoid any conflicts of interest, given Goldfarb’s history and leadership with the organization), Goldfarb misrepresented his compensation by claiming he was "Fee-Only," later revised (when his fee-only status was questioned) to a claim of compensation via "Salary," when disclosing his method of compensation on FPA’s PlannerSearch website. At issue was the fact that the accounting firm that owned Goldfarb’s RIA also owned a broker-dealer subsidiary, for which Goldfarb had some form of employment relationship and in which he also held an ownership interest. As a result, the CFP Board concluded that Goldfarb "and related parties" (i.e., Goldfarb’s employer the accounting firm and his partial ownership of the broker-dealer) could potentially receive a commission related to Goldfarb’s clients, and that as a result he was not "fee-only" as stated (and that because Goldfarb and/or his firm received fees paid by his clients, his compensation was not "salary" either). Given these conclusions, the CFP Board issued a public Letter of Admonition to Goldfarb for failing to properly disclose his compensation.
Of his own volition, Goldfarb has subsequently provided further detail regarding the nature of the arrangements at issue in the case, with several important distinctions, including:
– Goldfarb’s financial interest was a mere 1% equity ownership in the accounting firm’s broker-dealer and insurance agency subsidiaries, in exchange for Goldfarb serving nominally as president (as the only person in his firm with a securities principal’s license) in a purely oversight function. He was not otherwise compensated for his role beyond his small ownership interest.
– All actual billing activity for Goldfarb’s clients was done through Goldfarb’s RIA, Weaver Wealth Management, and all clients were charged only hourly, project-based, or assets-under-management fees. At no point did any of Goldfarb’s clients actually implement any products or solutions with the broker-dealer, nor did any of them ever actually pay any commissions at all.
– The relationships between Goldfarb and his RIA and these other businesses were fully disclosed in his Form ADV materials; they were not disclosed on the FPA website, due to the simple fact that the FPA’s website had no space to allow further explanation of such details. But all clients received full disclosure of all these relationships before doing any business with Goldfarb.
Thus, from Goldfarb’s perspective, he contends that because his broker-dealer relationship was minimal and non-compensating beyond a de minimis ownership stake, and that all of his clients only actually paid fees of various forms, that all of his other business relationships were disclosed in his firm’s own materials, and/or that if the CFP Board intended to criticize his compensation disclosures even though no clients ever actually paid a commission for anything, that it should have been done with a private caution and not a form of public discipline.
Categories Of Compensation
Ultimately, what’s really notable about the Goldfarb case is not just the facts and conclusion of the case itself, but the reasoning that the CFP Board used in coming to its conclusions, and the potentially broad and significant implications that it has for any/all other financial planning practitioners.
On the one hand, the CFP Board is taking a strong position that "fee-only" really means compensation must be fees ONLY, period, which seems entirely reasonable at face value given the language itself. However, the matter at hand is not simply a function of how the CFP Board interprets fee-only as it applies to an individual practitioner, but how it applies in the context of "related parties" to a financial planner and his/her employer(s) or other business(es), which the CFP Board appears to have construed rather broadly. The CFP Board states in key parts of the ruling:
– CFP Board’s definitions of “compensation” and “fee-only” prohibit a CFP® professional from referring to his or her practice as “fee-only” if any of the compensation received by the CFP® professional and any related-party, such as the CFP® professional’s employer, is comprised of compensation other than the types of fees identified in CFP Board’s definition of “fee-only.” (emphasis original)
– Based on public regulatory filings and information received from Mr. Goldfarb, the Ad Hoc Commission determined that the RIA and the broker-dealer received or were entitled to receive compensation such as commissions and 12b-1 fees. (emphasis mine)
– The Ad Hoc Commission determined that Mr. Goldfarb misrepresented his compensation model as “fee-only” because he and/or his employer received or were entitled to receive compensation that did not come from clients exclusively in the form of fixed, flat, hourly, percentage or performance-based fees. (emphasis mine)
– The Ad Hoc Commission determined that when Mr. Goldfarb changed his compensation method from “fee-only” to “salary”, “salary” was not “an accurate and understandable description of the compensation arrangements being offered,” as is required by the Standards. The Ad Hoc Commission determined that Mr. Goldfarb’s clients paid commissions and/or fees and not a salary for services rendered by Mr. Goldfarb and/or his employer. (emphasis mine)
Nature Of Employer Taints Fee-Only Status?
The reason these definitions matter is that, according to the CFP Board’s conclusions in the Goldfarb case, every financial planner working at a hybrid-RIA cannot claim to be fee-only, regardless of whether 100% of their clients pay 100% of compensation in fees (nor any advisor who works outright for a broker-dealer but operates his/her personal business on a fee-only basis anyway); the fact that the CFP professional’s employer (which is or includes a broker-dealer) receives compensation other than fees would apparently be enough to taint the relationship, even if that bears no relationship to how the planner actually conducts his/her own business with his/her own clients.
And given that any employer having an interest in a broker-dealer (or other entity capable of paying a commission) invalidates the relationship, even those working for some large RIA fiduciary-centric firms could potentially be tainted given the breadth of this ruling; for instance, HighTower Advisors (which is owned by HighTower Holding, which also owns HighTower Securities) cannot claim they are fee-only; granted, I’m not aware of any information to suggest that clients of HighTower have ever actually paid a commission for any services, but apparently the fact that there IS a broker-dealer related party that is capable of receiving commission compensation is enough to render all Hightower advisors ineligible to claim they are fee-only (as was the case of Goldfarb)!
Similarly, Fiduciary Network is owned by Howard Milstein’s Emigrant Bank, and Emigrant also owns Emigrant Funding Corporation and Emigrant Mortgage Company, which pay commissions (for mortgage and lending transactions); if these commission-paying subsidiaries of the holding company that also owns Fiduciary Network are "related parties" does that mean prominent Fiduciary Network partner firms (which include many well known fee-only RIAs) are actually in violation of the CFP Board’s compensation disclosure rules and potentially subject to public censure?
This seems a somewhat extreme conclusion, and I certainly don’t mean to call out these firms for doing anything but trying to serve their clients’ interests on a fee-only basis, nor do I believe any of these firms in practice are materially impacted by any conflict of associated in recommendations to clients due to the related parties of their parent companies. Yet it’s truly not clear why all these firms aren’t in violation of the CFP Board’s compensation disclosure rules in light of the Goldfarb ruling about "related parties" and the treatment when an employer or a related party by common ownership is capable of and could be paid a commission, even if that particular advisor and/or his entire firm does not actually implement the product and receives no commissions whatsoever.
Ownership Of Related Parties And De Minimis Interests?
Alternatively, perhaps a somewhat narrower interpretation of the CFP Board’s ruling is that the connection of the broker-dealer subsidiary to Goldfarb’s RIA (which was also a subsidiary of the same accounting firm parent) as a related party wasn’t a problem; instead, maybe the problem was simply that Goldfarb himself had a 1% ownership interest in the broker-dealer. Yet this, too, seems to raise some concerns. The CFP Board guidelines stipulate that compensation disclosure rules relate to "any non-trivial economic benefit" (emphasis mine) that a CFP professional (or related party) receives, but there’s no clarity as to what "trivial" actually means. Ironically, as Bob Clark pointed out, even NAPFA’s guidelines – arguably the paragon of strict Fee-Only interpretations – allows up to a 2% ownership interest in an outside financial services industry firm that generates profit from commission compensation before it’s deemed material (assuming the advisor otherwise is compensated purely by fees from their own clients)! Yet in the CFP Board’s case, even Goldfarb’s 1% non-compensating interest was sufficient to be deemed non-trivial?
To put this in real dollar firms, an upfront commission on a $100,000 (to choose an arbitrary amount) variable annuity might be $5,000. The typical profit margin of a broker-dealer is in the low single digits, so at a hypothetical 4% profit margin the broker-dealer only earns $200 of profit on that investment. Goldfarb’s 1% interest would entitle him to a whopping two dollars of compensation for the $200 of profit for the $5,000 commission for the $100,000 investment. Are we really going to suggest that this "Goldfarb two dollars" is a material conflict of interest worthy of public admonition for inadequate disclosure (especially when ultimately the relationship was disclosed on Goldfarb’s Form ADV Part II anyway?)? And given that Goldfarb never actually implemented any commissionable product with a client in this matter!
Overall, Financial Planning magazine reported that Goldfarb’s total income from the broker-dealer on a K-1 was less than $2,000, while his total compensation was more than $200,000 from his fee-only business. At that level, Goldfarb could simply take one year of his salary and invest it into an ETF of broker-dealer publicly-traded stocks and receive a dividend larger than his alleged conflicted compensation arrangement! Surely we’re not going to allege that owning the publicly traded stock of a broker-dealer that generates a few thousand dollars of stock dividends is a conflict of interest when the advisor otherwise does not do any commissioned business with that (or any other) broker-dealer, or that would even render large holdings in the S&P 500 to invalidate a fee-only advisor! So where is the line for calling ownership of a privately owned broker-dealer negligible as well? And why isn’t the fact that Goldfarb never actually referred clients to the broker-dealer, intended to refer clients to the broker-dealer, or held out that he could/would refer clients to the broker-dealer, germane to the conclusion? At what point can we acknowledge the parties really weren’t all that related beyond a common owner with a negligible ownership interest?
Interpreting fee-only as fee ONLY is one thing, but if even NAPFA can acknowledge that there is limits on materiality and when a potential conflict is truly trivial, where is the CFP Board’s line if not in a scenario like this? Frankly, it would seem to me that there are fee-only advisors who have "informal" cross-referral relationships with commission-based advisors, with a "you scratch my back with clients and I’ll scratch yours" relationship that probably represent a greater conflict of interest than the facts and circumstances set forth here!
Is Anyone Ever Really Compensated By Just A Salary?
The last troubling issue from the CFP Board’s ruling is the declaration that Goldfarb could not characterize his income as a salary because the client paid the firm with some combination of fees and/or commissions, and that accordingly Goldfarb should have characterized his compensation as fee-only, commission-only, or a blend, but not salary. Yet isn’t this true for all planners? Salaries are paid by firms, not clients; is there ever such a thing as an advisor being paid a salary directly from a client, and not from an employing firm? How is that even possible? Perhaps an employee of a firm that has no responsibilities for engaging with clients – i.e., in a purely administrative capacity – might be salaried (but then that person isn’t working with clients!), or a full-time employee in a family office with a single client who really does engage the planner on a salary basis. Yet people in those positions won’t be found on a "Find A Planner" website like FPA’s PlannerSearch or the CFP Board’s "Find A CFP Professional" because they are in a limited salary capacity and therefore wouldn’t be soliciting clients in the first place!
So it would seem that by basing the compensation methodology off of what the client pays, the only three categories in the context of planners making themselves available to the public should ever be fee-only, commission-only, or a commission-and-fee blend? Yet if that’s the case, why has the CFP Board even put forth a potential category of "salary" in its compensation disclosure rules and on its own Find A CFP Professional website, if it’s not actually possible for a client to hire an advisor on that basis without at some point paying a fee, or a commission, or a combination of the two?
What We Need From Here
Ultimately, what Goldfarb’s case ultimately illustrates is that if as an emerging profession we’re going to go further down the road of compensation disclosure – which I’d certainly argue is a plus for consumers in the long run – that we need to craft some clearer lines and tests for what really constitutes non-trivial materiality in determining types of compensation for which disclosure (and consequences for failure to disclose) are necessary. Otherwise, not only is there ongoing risk of more advisors unwittingly finding themselves in error and subject to CFP Board sanctions, but beyond that it would appear that huge numbers of planners are already in non-compliance with the current rules. Just run a search for CFP Professionals in your local city and then narrow the search to see how many advisors claim they’re compensated by salaries when they clearly work at firms where clients pay fees (or commissions or both), or how many claim to be fee-only when they clearly work for an employer that is (or has a related) broker-dealer. Is the CFP Board really intending to sanction thousands of its own advisors across the country for running afoul of the rulings set forth in Goldfarb’s case? And if not, how does the CFP Board intend to distinguish between why Goldfarb was sanctioned, but the dozen/hundreds/thousands of advisors labeled as "Fee-Only" yet outright employed by a broker-dealer are within the rules? Or is the reality simply that thousands of CFP certificants really are out of compliance with the CFP Board rules and need to change their compensation disclosures as soon as possible, to no longer be characterized as "salary" or "fee only" at all? (Note: The point here is not to say that advisors who have a non-fee-only employer can’t operate their personal business as fee-only; instead, the point is to say that if advisors truly conduct their own client business on a fee-only basis, and hold themselves out as such, why isn’t that acceptable?)
Similarly, where exactly is the line for materiality in outside ownership interests in non-fee entities? If Goldfarb’s 1% non-compensating equity interest is still a conflict, even if none of his clients ever actually did any business with the entity, and his compensation for a particular client transaction might truly amount to no more than a dollar or two, then does that mean any/every advisor who owns any interest in a broker-dealer – even if it’s just a stock that’s part of the S&P 500 – is running afoul of the rules? And how many other fee-only firms and RIAs would fail this test when rules regarding small overlapping equity interests, or parent companies that also hold commission-based subsidiaries, can be deemed "related parties?" And is that really a positive for consumers to take these definitions to a degree of potential irrationality that even NAPFA doesn’t believe is necessary? At some point, we’re no longer simplifying the complexity with disclosure, but making relatively simple situations into complex ones, due to the lack of a clear line about what constitutes a "non-trivial economic benefit" associated with a potential commission.
In addition, while I absolutely applaud the principle that fee-only should really mean fees ONLY, to lump every other advisor into the broad category of "fee and commission" seems to limit the effectiveness and relevance of compensation disclosures. After all, in a world where someone can’t be fee-only because of $1 of commissions, and cannot be commission-only because of $1 of fees (ANY AUM or financial planning fee?), then the overwhelming majority of CFP certificants will all fall into the same broad classification of fees and commissions. Yet is it really helpful when an insurance agent who once offered an hour of advice for a fee falls into the same category as, well, Alan Goldfarb and his RIA firm that only ever charged clients fees but had a 1% ownership interest in a separate small broker-dealer? Are we really helping consumers understand the compensation of their advisors to put every advisor into the same giant bucket, regardless of whether their compensation is 99.9% fee, 99.9% commission, or anything in between? Perhaps its time for some finer gradations… at the least, to recognize "fees and commissions" versus "commissions and fees" depending on which forms the majority of the advisor’s compensation, if not to simply standardize the breakdown of compensation on the website of a regulator or a third-party service like BrightScope with a pie chart that explains exactly what proportion (and type) of compensation comes from various sources.
A third concern is the fact that unfortunately, it’s difficult to even judge the Goldfarb decision and associated punishment relative to the history of other CFP Board compensation infractions, due to the fact that the CFP Board’s Disciplinary and Ethics Commission operates in a private environment, with only limited access to its history of disciplinary considerations through its Anonymous Case Histories database (plus any disciplinary actions where results are public), and even then only to the extent that the ruling or summary explains the facts and circumstances of the case. If we’re going to slice the rules of compensation disclosure in a finer and finer matter, with real-world outcomes from certificants bearing legal fees for their defense to the actual consequences of public censure, shouldn’t CFP certificants have a substantive body of case history upon which they can rely in crafting their defense, and to which the Disciplinary and Ethics Commission should be reasonably bound as precedent until/unless the facts and circumstances materially differ? Otherwise, the disciplinary process becomes a random and capricious experience for the certificant, whose punishment may vary depending upon the particular people who adjudicate the matter. (To be fair, the CFP Board has made some efforts to address this with the Anonymous Case Histories and last year’s rollout of new Sanction Guidelines, though in retrospect some have suggested that the Sanction Guidelines may have been too narrow or inflexible to handle this matter.) And for those who are simply trying to act in a prudent manner in the first place, who’s to know what’s permissible or not until suddenly the complaint comes and it’s time to defend (which was apparently the unfortunate reality for Goldfarb himself, despite his long history in advocating for and even helping to craft some of the rules which he was found to have violated). While it is true that the CFP Board IS a private entity and not a regulator, and consequently does face real world privacy law issues, surely there is some feasible and reasonable compromise; for instance, the CFP Board could write into its agreements that the decision to use the CFP certification includes permission to disclose further details in any disciplinary action that arises against the certificant, which at least ensures that future disciplinary actions will be open to the light of public scrutiny, and not operate in a black box environment like the oft-criticized FINRA arbitration panel.
As for the Goldfarb case itself, ultimately I have to admit that it’s difficult to conclude that Goldfarb’s case really deserved a public Letter of Admonition, especially since in practice his clients really did only ever pay fees to him and never paid any commissions to implement any products with the broker-dealer in which Goldfarb owned a mere 1% interest that was not a very material component of his compensation. Goldfarb himself notes that in private conversations with former Disciplinary and Ethics Commission members, similar or more severe allegations had been dismissed in the past with a private warning and recommendation-to-fix but no public action. On the other hand, the reality is that Goldfarb did hold a very public position of leadership at the time of the allegation, and it’s hard to fault the CFP Board for applying extra scrutiny to the situation. In fact, to maintain the impartiality of the disciplinary process, the CFP Board established an Ad Hoc Disciplinary Committee specifically to review Goldfarb’s situation in the first place, which had the perhaps unfortunate side consequence for Goldfarb of putting on the case a group of adjudicators with limited experience and familiarity with evaluating such complex matters and the CFP Board’s own prior history in ruling on such matters.
Nonetheless, as I wrote in the past, I think that overall the CFP Board’s efforts to handle the process with extra diligence toward impartiality were right, that it’s a sign of strength of the organization that it was willing to investigate its own leadership in such a public manner, and that I’m relieved to see the matter concluded in a public matter that maintains some transparency to the process and outcome… even if I’m struggling a bit with whether this particular adjudicated conclusion was right, and that in fact the ruling set some incredibly troubling precedents (though there was no doubt extreme pressure on the Ad Hoc Committee to err on the side of a strict ruling and not look like it was protecting its own, especially without any clear public precedents because of the opacity of their own prior rulings!).
On the other hand, I will admit that the somewhat unusual ruling itself continues another concerning precedent established last year when NAPFA Chair-Elect Ron Rhoades resigned just before taking his NAPFA leadership position due to a regulatory infraction where he failed to register as an advisor in Florida where he had some clients (even though the State of Florida shortly thereafter issued a letter of warning to Rhoades that acknowledged he had appropriately resolved the relatively minor infraction). While I do agree with the principle that those in positions of leadership should be held to a higher standard, at the same time such an approach is only viable when there is a clear body of guidance about how to navigate those standards effectively in a world where complexity is a fact of life and mistakes do happen; otherwise, these ongoing problems may leave a chilling effect on the willingness of financial planners to take on what are ultimately positions of purely volunteer leadership that can having increasingly real adverse business ramifications.
In the end, it still seems to me that the CFP Board made more good decisions than bad ones in this case, especially regarding the process it used, and particularly in the spirit of maintaining the integrity of the organization. Nonetheless, the process and its results also highlight that there are still some real gaps in the CFP Board’s framework for functioning as an overseer of CFP certificants, and how to enforce on a fair and consistent basis. And the ruling may have unintentionally set some precedents about compensation disclosure that could be far, far more wide-reaching than just Goldfarb himself.
Hopefully, the CFP Board will take this as a real opportunity to evaluate its own disciplinary and enforcement process and figure out how to improve the transparency further in the future, and seriously consider issuing a statement to further clarify its compensation rules and why Goldfarb’s public Letter of Admonition should stand but every CFP professional who notes "salary" shouldn’t be disciplined as well (along with every CFP professional who indicates "fee-only" but has an employer that is a broker-dealer or is a related party to one). Or alternatively, if the reality truly is that thousands of CFP certificants are not complying properly with the compensation disclosure rules regarding "fee-only" and "salary" definitions, hopefully with the CFP Board’s latest guidance those professionals will update their compensation disclosures before it lands them in hot water too!