What is “Fee-Only?” Is the CFP Board Taking the Right Approach to Defining it?
September 9, 2014
by By Bob Veres
Which is more important to your advisory practice – your CFP designation or your fee-only status? Before you answer, consider this: Your CFP mark says very little about whether you adhere to a fiduciary standard, and less about your mode of compensation.
Those issues are at the forefront of an ongoing controversy pitting the CFP Board against a prominent advisor, and there is little sign that its outcome will resolve the ongoing debate about how to define a fee-only professional engagement. If anything, it raises more questions than answers.
One afternoon in August of last year, Rick Kahler, of the Kahler Financial Group in Rapid City, SD, was reading the latest industry news on his Stairmaster when he came across a disturbing assertion in one of the articles.
“The article said that 125 members of NAPFA couldn’t qualify as fee-only advisors under the CFP Board’s rules,” Kahler says. “Why? Because the NAPFA rules say you cannot own more than 2% of a financial services company that accepts commissions. That in itself was news to me,” he adds.
“But then, under the CFP Board regulations, according to the article, it said that I couldn’t call myself fee-only if I owned any part of an affiliated entity that accepts commissions.”
It’s possible that this assertion was not correct.
When you look through the CFP Board’s 29-page Code of Ethics and Professional Responsibility, the term “fee-only” appears only twice, both times in the same paragraph, under “Definitions:”
“Fee-only.” A certificant may describe his or her practice as “fee-only” if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.
By that very clear standard, Kahler was a fee-only planner. “I don’t receive real estate commissions,” he says. However, he does have outside activities which are not discussed in the Code; he owns 50% of a real estate company which receives commissions from the purchase and sale of homes and commercial property, and he did earn real estate commissions earlier in his career.
“I was originally in real estate, when I discovered financial planning,” he says. Kahler earned his CFP designation in 1983, and gradually reduced his real estate activities as his financial planning revenues grew.
But he never mixed the two businesses. “From the beginning, I wanted a fee-only planning firm,” says Kahler. “So when I started my financial planning firm, I would not allow financial planning clients to be real estate clients or buy real estate from me, because that’s a conflict. Then,” he adds, “about 10 years ago, I stopped selling real estate altogether.”
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