Image Credit: Christophe Vorlet
By Jason Zweig | Oct. 20, 2017 11:06 am ET
In mid-October, the Certified Financial Planner Board of Standards disciplined six financial advisers for allegedly claiming to be “fee only” when they also received commissions.
That’s a reminder of how loosely investors — and many advisers — understand one of the most popular and alluring terms in the financial-advice industry.
As a 2013 investigation in The Wall Street Journal showed, up to 11% of certified financial planners working at big brokerage firms described themselves on the CFP Board’s own website as “fee only” when they also could get commissions.
The CFP Board has since “taken steps to prevent” planners who are registered at brokerage firms from claiming they are fee only on its website, says its general counsel, Leo Rydzewski. “It becomes a concern for us when someone is representing their method of compensation in a way that’s inaccurate.”
A commission is a payment by the client — or a third party — for a specific transaction, typically to trade a stock, bond, fund or insurance. Fees, which may be hourly, annual or a percentage of assets, are paid only by the client for advice and services rather than transactions.
You might expect that a “fee-only” adviser would never charge commissions. It isn’t that simple, as the Journal reported in February. And financial planners use the term in baffling ways.
There is no official regulatory or legal definition of “fee only.” The CFP Board permits certified financial planners to use that term “if, and only if,” all their compensation comes from the clients as fees, not commissions.
According to a new analysis of Securities and Exchange Commission disclosures by my colleague Andrea Fuller, almost 3,900 firms described themselves as offering both investment management and financial planning to individual clients as of March 31. More than 90% declared to the SEC that they don’t charge commissions.
Some, however, state in one disclosure filing that they do charge commissions — while claiming, on another SEC form, to be “fee only.”
Consider Mediqus Asset Advisors, a Chicago-based firm that managed $790 million as of March.
The firm’s Form ADV on file with the SEC declares that Mediqus takes commissions. On the other hand, the firm’s official brochure, also filed with the SEC, states that its investment-advisory services are fee only.
On still another hand, the official brochure adds that Mediqus or its advisers “may receive a commission from the purchase or sale of publicly traded stocks, bonds, mutual funds, unit investment trusts, REITs or other publicly traded securities or insurance products” by clients not using “our fee-only investment advisory services.”
A disclosure on file with the Financial Industry Regulatory Authority says Mediqus’s president, Joel Blau, spends approximately five to 10 hours per month selling life insurance and fixed annuities.
“If it says five to 10 hours, we have to correct that,” says Mr. Blau. “That’s definitely not correct. There’s no way we do anywhere near that much.”
Ronald Paprocki, chief executive of Mediqus, says commissions probably account for less than 1% of its business. Yet because Mediqus is affiliated with a brokerage, he says, it must disclose that it may take commissions even though all its investment advice is fee only.
“That’s a dilemma,” says Mr. Paprocki. “The whole reason we’re talking to you about this is because it probably is confusing.”
Certified Advisory Corp., a financial-planning and investment firm in Altamonte Springs, Fla., manages about $1.3 billion in assets. The firm repeatedly describes itself as “fee only” on its website.
Certified’s official SEC brochure says the firm is “‘fee only,’” but its representatives “may or may not be characterized as ‘fee only.’”
About 3% of the total revenue generated from Certified’s clients has come from sales of insurance and securities on a commission, says its president, Joseph Bert. Those commissions aren’t earned by Certified, he says, but by representatives the firm retains as independent contractors.
Mr. Bert says the commissions are fully disclosed and derive from occasional, “one-off transactions” outside the usual scope of the firm’s practice, such as buying long-term care insurance or setting up a gift account for a client’s child.
The term “fee only” can be a marketing magnet. “People are commission-averse,” Mr. Bert says, “and we’re trying to separate ourselves from all the other firms out there that are just trying to sell a product and call it financial planning.”
Confusing? You bet. If you want to hire a financial planner who charges only fees, you will have to ask probing questions. Start with these: Are you a fiduciary, who must always act in my best interests? Will you put that in writing? Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services?
If the answer to the last question is yes, “fee only” is just talk, and you should walk.
Source: The Wall Street Journal, http://on.wsj.com/2gTMVrb
CORRECTION: The CFP Board permits certified financial planners to use that term “fee only” only if all their compensation comes from the clients as fees, not commissions. An earlier version of this article stated that standard had been proposed, but not yet finalized.
For further reading:
Books:
Definitions of COMMISSIONS, FEE, FIDUCIARY, FINANCIAL ADVISOR, in Jason Zweig, The Devil’s Financial Dictionary
Chapter Ten, “The Investor and His Advisers,” in The Intelligent Investor
Articles:
Advisers Who Call Themselves Fiduciaries May Not Live Up to It