Executive Summary
Earlier today, CNBC released its second annual list of the "Top 100 Fee-Only Wealth Management Firms" to the public. In cultivating the list, CNBC noted that consumers should "make sure you understand how that [advisor] gets paid, and that means [understanding] fees vs commissions" and that "fee-only financial planners... do not accept any commissions or other compensation based on product sales." Independent RIAs were then ranked based on a "proprietary formula" including assets under management, having staff with professional designations like CFP or CFA, average account sizes, growth of assets, years in the business, and comprehensiveness of advice (even on insurance solutions).
Yet a deeper look at the Form ADV Part 2 disclosures of just the top 10 firms on CNBC's "fee-only" list reveals that 9 out of 10 of them share in insurance commissions, own an insurance agency, or are under common ownership alongside an insurance affiliate to which advisory clients are referred. In other words, 9 out of 10 of CNBC's "Top Fee-Only" firms would not actually be fee-only under the CFP Board's compensation disclosure rules.
Notably, the CNBC list does focus exclusively on registered investment advisers (RIAs), and in most cases the RIA firm does not receive any insurance commissions directly (though it does happen in at least one situation, as RIA status does not technically ban commissions). Nonetheless, in 9 out of 10 cases, the RIA does have a clearly related entity or relationship that generates commissions - to the point that ironically, those "fee-only" firms themselves actually disclose those commissions and the conflict of interest it creates in their own Form ADVs!
Ultimately, the fact that a firm (or its related entities) get commissions doesn't automatically merit any complaints or mean it is a "bad" firm - it's about doing whether the firm does what's right for the client (and is held accountable for it), not how the client pays for it. Nonetheless, this incident suggests that at best, the phenomenon first revealed in the now-infamous Camarda vs CFP Board case - where advisors hold out as "fee-only" based on their RIA but have a commonly owned/related insurance entity to collect commissions anyway - may be far more widespread and common than realized. And in the meantime, these firms are placed in an awkward position with the CFP Board, with its existing precedent in the Camarda and subsequent Goldfarb cases to issue public letters of admonition when commission-and-fee firms hold out as "fee-only" - though notably, in this case there is no evidence that any the firms themselves have ever represented themselves as "fee-only", beyond the unfortunate fact that CNBC has misclassified them as such on its very public list of "Top 100 Fee-Only Wealth Management Firms"!
CNBC And Meridian-IQ Proprietary Formula For Ranking The Top 100 Fee-Only Firms
While there are many lists to rank the "top 100" (or 50 or 500) advisors, the recent CNBC Top 100 Fee-Only Wealth Management Firms is unique in its effort to specifically list not just advisory firms in general, but specifically those that are "fee-only" in the services they provide to clients. Noting the importance for consumers to understand the conflicts of interest that arise with commission-based arrangements amongst advisors, CNBC deliberately limited its list to "fee-only" financial planners that operate under a registered investment adviser (RIA) with a fiduciary responsibility to act in clients' best interests, highlight that the firms "do not accept any commissions or other compensation based on product sales". Accordingly, CNBC suggests that they will "have fewer inherent conflicts of interest."
To specifically rank the firms, the CNBC team worked with industry data tracker Meridian-IQ to create a "proprietary" formula to rank firms. Notably, the CNBC process did not involve advisors asking to be on the list, submitting an application, etc. Instead, ranking data was drawn directly from regulators like the SEC, FINRA, and state regulators, and combined together to come up with a quantitative ranking. Given its "proprietary" nature, CNBC did not disclose the exact formula used, but noted the following were included as criteria:
Criteria For Ranking In CNBC Top 100 Fee-Only List
- Assets under management
- Having staff with professional designations, such as CFP or CFA
- Working with third-party professionals, such as attorneys or CPAs
- Average account size
- Growth of assets
- Years in business
- Number of advisory clients
- Providing advice on insurance solutions
Unfortunately, though, a deeper look at the firm included on the CNBC list include a number that are known for having related insurance affiliates. And in fact, it turns out the approach is far more common than most have realized.
CNBC Top 100 Fee-Only Firms Fail Fee-Only Requirements
As a part of the registration requirements for an RIA, all firms must submit Form ADV, a public disclosure document which includes, in "Part 2", an explanation under "Item 10" of "Other Financial Industry Activities and Affiliations". This disclosure documentation must be provided to new updates (along with annual updates thereof), and is publicly available to anyone through the Investment Adviser Public Disclosure (IAPD) search database.
Accordingly, I looked up the Form ADV Part 2 disclosures for each of the top 10 firms in CNBC's list of top Fee-Only firms, with the remarkably simple approach of just searching for the word "insurance" and seeing what came up in Section 10 on disclosed affiliates. Here's what I found (in order of the top-10 ranking on CNBC's list), quoted directly from the companies' Form ADV Part 2 documents:
Creative Planning
Insurance Activities through Creative Planning Risk Management, Creative Planning Benefits, and Creative Planning Risk Services
Creative Planning has three related insurance agencies.
Creative Planning Risk Management provides individual life, disability and long term care coverage through various insurance companies.
Creative Planning Benefits provides group health benefits through various insurance companies.
Creative Planning Risk Services provides property and casualty coverage.
Clients of Creative Planning may be referred to a related insurance agency. Creative Planning does not receive a referral fee; however, some of Creative Planning’s personnel that are insurance agents may receive commissions for the sale of insurance products. The receipt of insurance commissions is in addition to any advisory fees charged by Creative Planning.
In other words, Creative Planning explicitly acknowledges that it has insurance companies under related ownership along with its RIA, to which clients are referred and to which clients will pay commissions in addition to their fees.
Carlson Capital Management
ViaForte, Inc. (“ViaForte”): ViaForte applies advanced estate planning strategies and design to utilize opportunities and offer access to financial vehicles provided by insurance companies. The team at ViaForte works with individuals, financial services firms, and business to business advisors including advisory clients of CCM. ViaForte’s agents are licensed with various insurance companies. As such, ViaForte may receive commissions in connection with any insurance product purchased through ViaForte. The client should be aware that ViaForte and CCM are under common ownership. ViaForte products that include securities are offered through M Holdings Securities, Inc. a Registered Broker/Dealer, Member FINRA/SIPC.
In other words, Carlson Capital Management (CCM) explicitly acknowledges there is a sister insurance agency called "ViaForte" where advisory clients will pay insurance commissions to the CCM-related entity.
CPS Investment Advisors
CPAlliance Insurance Services, Inc. is an Independent Insurance Agency that sells Life, Health & Disability insurance for a commission. The owners of CPS have a majority ownership (100%) of the company CPAlliance Insurance Services, Inc.
In other words, CPS Investment Advisors (CPS) explicitly acknowledges that it is the 100% owner of an insurance agency to which clients may pay a commission.
Jackson Thornton Asset Management
Jackson Thornton Risk Management Services, LLC (JTRM) is a licensed insurance agency owned by the accounting firm of JT&Co. which also owns JTAM. JTRM may provide services to advisory clients of JTAM. JTRM offers whole and term life insurance products. JTRM and its associated persons are able to implement recommended insurance transactions for advisory clients for separate and typical commission compensation.
In other words, Jackson Thornton Asset Management (JTAM) explicitly acknowledges that it owns an insurance agency as a subsidiary and that advisory clients may end out working with that subsidiary and pay "separate and typical commission" compensation [in addition to advisory fees].
BKD Wealth Advisors
We are, through common control and ownership, affiliated with BKD Insurance, LLC (BKDI). BKDI is an insurance agency and may provide analysis of, and recommend, the purchase and sale of certain insurance products. Insurance licensing is primarily handled through BKDI and not through BKDWA. We utilize the services of Schwartz Benefit Services, Inc. (Schwartz) for most insurance recommendations. Upon agreement, you may be introduced to Schwartz for insurance and analysis recommendations. The recommended products may also be sold to you if it meets your needs. Schwartz pays BKDI up to 50% of the commissions and other compensation received in exchange for the introduction on certain types of insurance products. Commissions are paid to the firm, not to specific individuals within the firm.
In other words, BKD Wealth Advisors (BKDWA) explicitly acknowledges that there is a related insurance agency under common control, along with an outside arrangement with Schwartz Benefit Services, and that commissions generated by referring clients to Schwartz for insurance implementation will be paid back to BKD's related insurance entity.
SB Capital Management
The Adviser has a California insurance license to sell life and disability insurance. Sandy Singer (a Principal) has a license to sell life and disability insurance. The Adviser earns commissions on these insurance products in addition to any fees earned from financial planning, investment management or other services offered. The commissions are based on the standard commission schedule of the provider of the insurance products and are generally not negotiable.
In other words, Singer Burke (SB) Capital Management explicitly acknowledges that one of the principals of the RIA is also a licensed life and health agent, to whom clients will pay insurance commissions (if they choose to do business) in addition to any advisory fees paid.
Adams Hall Wealth Advisors
Insurance Company or Agency
We are under common control with Mariner Insurance Resources, LLC; ERS Insurance, Inc.; and ERS Securas LLC; duly licensed insurance agencies. We do not render or recommend insurance advice or services to our clients. Certain of our Advisory Affiliates, in their individual capacities, are licensed insurance agents and in such capacity may recommend on a fully disclosed basis the purchase of certain insurance-related products.Real Estate Broker or Dealer
We are under common control with Mariner Real Estate Management, LLC. One of our affiliates, Ryan Anderson, is a licensed real estate broker and owner of Mariner Real Estate
Management, LLC.
In other words, Adams Hall Wealth Advisors explicitly acknowledges that it has a related insurance entity to which clients could be referred, and for which the parent holding company will generate (fully disclosed) insurance commissions. In addition, Adams Hall also has a related real estate broker under common control, to whom clients may be referred and generate real estate brokerage commissions as well.
AKT Wealth Advisors
AKT Wealth Advisors LP’s parent company, AKT Services, LLP, also owns... AKT Benefit Advisors LP... and AKT Benefit Advisors LP provides group health benefit, life, and disability insurance services.
In other words, AKT Wealth Advisors explicitly acknowledges that it has a related insurance agency under common ownership that may generate insurance commissions on the sale of group health, life, and disability insurance policies to the firm's (small business) clients.
GHP Investment Advisors
While it does disclose some related accounting entities to which clients may pay separate fees for separate accounting work, GHP Investment Advisors (GHPIA) is the one RIA out of the CNBC's Top 10 that actually does appear to be "fee-only" and does not generate insurance commissions for itself or a related-party entity under common control.
- GHP Investment Advisors Form ADV Part 2
Droms Strauss Wealth Management
Droms Strauss Advisors, Inc. has a wholly-owned subsidiary company, DSA Risk Management, LLC (DSRM). DSRM was formed primarily for the purpose of offering risk management services and certain insurance related products to clients not otherwise available other than by a duly licensed insurance entity. Products sold through DSRM may result in commissions being paid to DSRM. The payment of commissions to DSRM may result in a potential conflict of interest. In order to mitigate this conflict DSRM fully discloses such commission arrangements to Droms Strauss clients before the client purchases any such products.
In other words, Droms Strauss Wealth Management explicitly acknowledges that it created a wholly-owned subsidiary to allow clients to purchase commission-based products, with (fully disclosed) commissions paid to the related entity.
Fee-Only Firms With Disclosed Commissions To Related Entities
So there you have it. Directly from the firm's Form ADV Part 2 documents, 9 out of the top 10 "Fee-Only" firms on CNBC's list are not actually fee only under the CFP Board's compensation disclosure definitions. In fact, to comply with SEC disclosure requirements, the firms have explicitly acknowledged the fact that there are related entities that may generate insurance commissions in addition to any advisory fees paid by clients. And given that 9-out-of-the-top-10 firms don't qualify based on a simple review of their Form ADV, one wonders how many of the other "Top 100 Fee Only Firms" on CNBC's list aren't actually fee-only either?
It's worth noting that these wealth management firms containing related insurance entities are not doing anything "evil" or Machiavellian. From a practical perspective, having a separate entity to be licensed for insurance purposes is actually a necessary requirement under many state insurance laws, and the reality is that in many cases - e.g., term insurance - clients will pay the exact same thing for the insurance no matter where they buy it. In other words, an insurance commission might get generated, but the client isn't even paying more for it, because in many categories of insurance there is no such thing as a [viable] "no-load" insurance alternative. Ultimately, it's about doing what's right for the client and being accountable to a fiduciary standard for it, not the means by which you're compensated.
Nonetheless, the fact that the companies acknowledged the existence of the commissions and disclose them in the Form ADV means, almost by definition, these firms are not fee-only! In fact, holding out as a "fee-only" advisor while the advisor (or his/her parent firm) has a related entity that is an insurance agent is the exact issue that brought about the complaint with the CFP Board against Jeff and Kim Camarda, and the subsequent Camarda vs CFP Board lawsuit that has ensued. Similarly, an advisor holding out as being "fee-only" while working for a company with a related entity that generates commissions was what led to the resignation and subsequent public admonition of former CFP Board chair Alan Goldfarb. And after an article on this blog pointed out that under the related-party rules, any advisor working for a broker-dealer is in violation of the "fee-only" rules simply by the fact that they work there, the CFP Board had to reset the compensation disclosures on its own website after a follow-up story in Financial Planning magazine revealed hundreds were in violation of the "fee-only" disclosure rules.
In point of fact, if these held themselves out to the public as "fee-only" with very-similar-to-Camarda disclosures that they can actually receive insurance commissions through related parties, it could place them in violation of the CFP Board's rules as well - a situation where the CFP Board, under its Camarda-and-Goldfarb precedent, could issue public letters of admonition to the CFP certificants employed at most of these firms (though clients would likely have to file complaints for the CFP Board to become aware in the first place). Similarly, for the firms involved that have CPA/PFS licensees (rather than CFP certificants), if they held themselves out as fee-only while subsequently disclosing commissions it could potentially be a violation of the AICPA's current Statement on Standards in Personal Financial Planning Services as well.
Of course, it's important to note that there is no evidence that these firms are marketing themselves as fee-only. In fact, as the CNBC methodology notes, these firms did not apply to be on a fee-only list - CNBC just named them to list on its own. Which means hopefully the CFP Board will be forgiving in recognizing that the firms didn't market themselves this way, and at worst perhaps just ask the firms to request CNBC to remove the firm names from a list that doesn't accurately characterize them.
In any event, this debacle perhaps, somewhat ironically, makes CNBC's point better than it stated itself. As CNBC wrote, "before you hire any financial professional—whether it's a stockbroker, a financial planner or an investment advisor—you should always find out, and make sure you understand, how that person gets paid, and that means fees vs. commission." Perhaps the same approach needs to be better applied when generating top-advisor lists, too?
On a personal note, I'd point out that it's an unfortunate reality in today's world that calling out publications for mis-labeling fee-only advisors requires identifying and "calling out" the advisory firms as well. My apologies in advance for any of the firms mentioned in this article who never intended to hold out as fee-only in the first place, didn't want to be, and have simply been swept into a story by CNBC that mischaracterized their compensation. Hopefully in the future such advisor lists will have a better vetting process, to ensure that advisors aren't put in the awkward position that CNBC has created here.
So what do you think? Is this "much ado about nothing" when it comes to fee-only disclosures? Or are these problematic examples of compensation disclosure violations that deserve to be recognized as such? If CNBC has trouble separating the fee-only advisors from the rest, what does that mean for consumers?
Michael,
I looked at the list and scoffed, recognizing right away that I knew many not to be be fee only by the CFP Board definition.
Yes, many advisors are only using term insurance or selling LTC policies the client needs. However, I’ve seen many firms use high cost insurance products and annuities that are inappropriate. To prevent this confusion, the definition of fee only needs to be clear cut, and there should be no insurance sales allowed if you call yourself fee only.
What is wrong with calling yourself “fee and commission” if you know you are doing the right thing? People shouldn’t be ashamed of that and feel the need to hide behind a fee only moniker. For me, I find being truly fee only makes it easier to get clients to purchase the insurance they need – we help them shop for it through many different agents, and they know we are truly attempting to find the best product for their needs. Fortunately, most of what is needed are low or no commission products so they aren’t “paying twice.” And if they are buying something from an agent who will make a commission, they are comfortable that we’ve looked at the options for them. My dream is for the insurance industry to one day be fee only too!
Michael, keep up the great work on calling all this out…
I remember when this list came out last year! I tweeted at you immediately letting you know that Creative Planning (a Kansas City firm…which is what tipped me off that this list was inaccurate) was not a fee-only firm!
Michael, did you send this article to CNBC? No harm in sharing your wisdom, right?
Great article. This points out an industry dynamic that I deserves more attention. If a fee-only advisory firm truly does exist (in this context charging fees via AUM), are they really providing comprehensive financial planning services free from any conflict of interest? Or are they an investment management only company. A firm charging soley by AUM will be conflicted by the incented to drive asset to the platform.
If they do offer financial planning services, the firm may run into the issued commented on above. It’s somewhat of a no win situation.
This dynamic, for me, exposes a flaw in the “RIA is a fiduciary because they are an RIA” model. An RIA isnt a fiduciary because they are an RIA. They are a fiduciary because of how they act, the expertise they maintain, the decisions the make, and how they represent themselves to a client/prospect.
Compensation is an important variable when investors select advisors to help them achieve financial goals. Investors control the payment of fees. Third parties control the payment of commissions. Investors should control the compensation of financial professionals the same way they control the compensation of other professionals (CPAs, attorneys). The potential for conflicts of interest goes way up when third parties control the compensation of advisors.
Which is preferable – addressing the client’s insurance needs through an insurance agency that’s under common ownership with the RIA firm and where advice is delivered in accordance with fiduciary duty or sending the client to an unrelated insurance salesman that won’t even realistically be held to the suitability standard (let’s face it, state insurance regulators are abysmal)?
“Fee-only” is not a legal definition, although, perhaps it should be. It’s an industry term that NAPFA and the CFP Board define according to their own agendas. What about the plethora of “CFP practitioners” that have never done a single comprehensive financial plan for a client, but got the designation for no other reason than marketing – having the initials next to their name lends them credibility that they may not have developed otherwise. Should they be called planners?
What is preferable, in my opinion, is working with and using a service such as Low Load Insurance Services who works only with fee-only financial planners. They do not work with the general public. They are incredibly thorough and very responsive to client’s needs and the planner’s recommendations.
Unfortunately, most of the no/low load insurance products that are currently available are not competitive. In a few cases, we’ve found acceptable options within this category – certain variable annuities are a good example. The sad fact is that insurance companies control the sales channels for their products and they have no incentive to change what works for them – and that’s commission-based sales. Hopefully, this will continue to evolve, but over the last 10 years it has done so very slowly. What really matters is putting the client’s best interest first regardless of the compensation model for the product that best fits the need.
Correct me if I’m wrong, but I find insurance companies with the words “low load” in their name to be incredibly deceptive. As this post states, in most cases there is no such thing as “low load” insurance. Ironically (or maybe not, depending on your views of NAPFA), most NAPFA advisors I’ve talked to don’t even realize that insurance loads are fixed in most cases. They’ve drank the marketing Kool-Aid of particular companies and think they are getting their client a “low load” on an insurance product, but in many cases that is simply not true. I find it interesting that the same group of advisors that will get incredibly uptight about minor differences in descriptors (e.g., fee and commission vs. commission and fee) will turn around and champion some companies who use names or other marketing material that suggest they sell products that don’t even exist.
I appreciate the responses! And, I apologize for not clarifying my response to Bella. The reason I mentioned Low Load Insurance Services in my reply to Bella was because they work directly with the planners. If you, as the planner, recommend a 10-year term policy, they won’t try to turn it into a whole life policy as some other, unrelated insurance salesmen (as Bella mentions for a negative alternative when comparing to an in-house insurance person) might do. That’s why I mentioned them…I did not clarify enough. And, even if I were to recommend them, I would also provide a few other options for the clients to consider and let them decide who to work with. Low Load isn’t always the answer and it shouldn’t be the only answer.
Additionally, Michael’s post says there is no such thing as “no-load” insurance, not “low load”. In the end, I agree with Brent, “What really matters is putting the client’s best interest first regardless of the compensation model for the product [or service] that best fits the need”.
Ah yes, you are correct that it says “no load”, but the statement would also be true for “low load”. I’m not criticizing you in anyway for sending a client somewhere, but I still don’t see how a name with “low load” in the title isn’t flat out deceptive when many insurance products have fixed loads. I believe this is further evidenced by the general lack of understanding of insurance loads by NAPFA advisors.
Yes – I know you’re not criticizing; and I agree with what you’re saying. I just didn’t fully explain what I was thinking the first time around in my initial response to Bella. I do, however, like that you all provided further insight into my recommendation of LLIS. Thanks!
Derek,
John is right, there aren’t many types of insurance that have a “low load” option either. A few types of permanent life insurance can be ‘blended’ into a lower load alternative (though that has other ramifications), but most types of coverage only has one fixed commission structure. It will get paid to the .com website, the insurance company’s internal profits, or any agent who sells it, but there is no lower-cost version without the load in many/most cases.
And ironically, with a few of the reduced-or-no-load life insurance policies out there, they actually give WORSE results than fully loaded life insurance, because the companies eliminate the load cost but tend to adjust other costs anticipating worse persistency (i.e., the expect no-load insurance buyers to have high short-term lapse rates) which ends out harming cash value accumulations anyway.
– Michael
Or how about recommending an insurance product and an agent that knows they can’t abuse your client, because you’ve already prepped them on what they need? Yes, you’re leaving some money on the table by not collecting those commissions, but the incentives are too powerful to expect advisors to always do the right thing if they’re getting that cut. That’s the whole reason advisors identify themselves as fee-only or not!! And it’s absolutely ridiculous for advisors wanting to collect commissions while still claiming they’re fee-only to the public. It’s unbelievable that this is not regulated! And I can understand CFP and FPA casting a blind eye on all this because they’re so dependent on the big brokers for their budget, but for NAPFA to not start cracking heads? Jesus.
Here’s #1’s founder and CEO Peter Mallouk accepting the award and not even mentioning that he sells insurance and owns the law firm it refers it’s own clients too. (He did the same thing last year.) This is in no way fee only. Come on, he sells insurance to the clients, read the ADV for Creative Planning.
http://video.cnbc.com/gallery/?video=3000385353
Notice he doesn’t claim to be fee only nor does he use this award to promote himself on his website… because he knows it’s a lie…
http://www.thinkingbeyond.com/
It is discouraging that this unworkable set of definitions persists (e.g., fee only versus fee based). We were fee only for most of the life of our firm, but as a CPA based firm we were essentially the last of the large regional firms to create an insurance practice, which our clients wanted and needed from us.
We do not sell insurance/brokerage related investment products, like variable annuities and structured products. The problem is that there are no labels that distinguish between a fiduciary advisor acting in a “fee only” manner but simply adding capacity for life insurance as needed, and the worst kind of broker selling products and exploiting unwary clients to maximize his compensation.
Roger,
Strictly speaking, I think that label IS “fiduciary”, applied across the advisor’s entire spectrum of services (not just pertaining to its RIA-related functions).
And as I’ve noted in the past on this blog, there actually IS such thing as fiduciary and (some limited) commissions co-existing – see https://www.kitces.com/blog/can-a-fiduciary-duty-for-investment-advisers-co-exist-with-commissions/ – though certainly there are some commission-based products that are simply too conflicted to survive that environment.
The point we need to ultimately reach is one where a fiduciary duty – a robust one that can protect consumers – can be applied effectively across the full scope of an advisor’s activities and to which the advisor can be held accountable, and then allow compensation models and products to sort themselves accordingly.
– Michael
I agree, I would support eliminating the fee-only/fee-based thing entirely and focusing instead on fiduciary responsibilities. Transparency, full disclosure and the obligation to place the clients’ interests first would be essential elements.
But the securities industry would never sit still for such clarity, it would undermine their business model.
Clearly identifying oneself as fee-only is what transparency is all about. Doing away with the fee-only label and differentiating advisors only by whether they are a fiduciary would only benefit lawyers and advisors taking commissions – not consumers, and not advisors willing to forego commissions. I believe your claim that your firm uses commission products to the benefit of your clients, and I believe there are other firms like yours out there behaving ethically in spite of the incentives to abuse that trust – but like Freakonomics colorfully illustrates with their books and podcasts – the best way to predict human behavior is to look at incentives. Commissions create powerful financial incentives to steer your clients towards products and services that can benefit you much more than them. Meanwhile, the fiduciary oath becomes a problem for misbehaving advisors only if the client wises up and is willing to take you to court. If regulators want to clean up this industry and help consumers – they need to focus on eliminating bad incentives. Mandating fiduciary rules while ignoring compensation is regulatory theatre – like the TSA does with airport security. Regulators in the UK and Australia have taken the step – ban commissions for anyone calling themselves a financial advisor. That’s the only solution.
Fee only is wholly inadequate as a differentiator for consumers. Classic case of detail guys with no understanding of the client and how he thinks getting fixated on what they believe.
The question is, how does a firm do great work for clients, and how do clients choose those firms instead of the myriad others?
A firm can have an insurance affiliate and manage the business to ensure we always act in the best interest of the client:
1. not give commissions to the advisors at all, no incentives for them to “sell.”
2. full disclosure to the client of all insurance options and costs, including what the firm will be paid in commission.
3. not use any brokerage related investment products in the client’s investment program, stick with asset allocation and the best, lowest cost investments (e.g., DFA). No variable annuities, structured product, etc.
This is not rocket science. The insurance will be done by someone, and if you think you can control the outside insurance broker think again. We are living with the problem of insurance being commission product, no way around that reality. So we set up our firms to manage it well and prevent abuse, or we stick our heads in the sand.
It’s our industry’s own fault. The term fee-only is so poorly understood by the general public. Never mind whether an advisor collects commissions or not…consider this reality. Ask 100 people on the street to answer the following question. If you were to work with an advisor who changes a fee (let’s say 1%) to manage your investment assets, would you call them – “Fee Only or Fee-Based.” While might say “Well, that’s FEE ONLY”, the general public, in my opinion, would not agree.
We need to do a better job educating the public on what a Financial Planner does. On second thought, perhaps we need to educate financial planners on what THEY SHOULD DO, and what clients should EXPECT OF THEM, as long as they continue promoting themselves as financial planners.
Michael,
Very good article. Thanks for shining the light on CNBC’s list.
I have always questioned “What is so difficult with the term Fee-Only”? Do words not have meaning? Is it just me or is the term Fee-only just so obvious? In actuality, the term “Fee-Based” is what needs to be thrown in the trash – that term is not helpful to the investing public and is very ambiguous! I am glad that the CFP Board does not even recognize that term!
And by the way, it is not just the CFP Board’s definition… but NAPFA too as NAPFA is the real voice on Fee-only advisement. After spending five years on the CFP Board’s Disciplinary and Ethics Commission (and immediate past Chair) this inaccurate and misleading list by CNBC does not surprise me.
This is the time when CFP Board and NAPFA need to stand tall, be firm and not budge one inch on Fee-only. Educated consumers regularly demand Fee-only Advisors and in my opinion that is rightfully so! If you are “Commission and Fee” and work for your clients’ best interests… then just say that you’re “Commission and Fee”. There is nothing wrong with being honest!
Why or why do so many Advisors and firms feel compelled to misrepresent their compensation structure?
Matt Murphy, CFP
Fee-only and Fiduciary
A NAPFA-Registered Advisor
Michael, excellent catch! better than Willie Mays over the shoulder at the Polo Grounds!
What was the motivation by CNBC to promote this direct affront to NAPFA and the CFP Board if not to pleasantly say to both organizations that they are feckless.
I don’t blame CNBC, both the CFP Board and NAPFA have done a pitiful job at educating the general public about the difference between “Fee-Only” and “Fee-Based.” While the advertising campaign of the CFP Board may raise “awareness of the CFP(R) marks” ( as measured by their own PR firm ), the general public is clueless on this topic.
The CFP Board can’t even get it right. If you read some of the recent decisions coming out of the group, you have to wonder about how much hiding behind the curtain is going on.
Perhaps it is the following incredulous stance by the CFP Board that is most disturbing. The CFP Board promotes the ostentatious goal of providing a “Fiduciary” duty to a client but only if you cross an ambiguous unintelligible fine line. A line open for interpretation by how you hold the paper it is written on. For example, the Board promotes the ideology of a fiduciary standard, and yet lets Fidelity Investments sponsor their CFP Board Career Center.
Are you kidding me? (Just Google Fidelity Investments and the Fiduciary Standard and read what Fidelity thinks of the idea of a Fiduciary standard. Ron Rhoades are you still out there?)
Michael, If any of the firms that you were able to review had a CFP on payroll that is calling him/herself “Fee-Only,” they are clearly in violation of CFP rules AND they should be facing at least a Letter of Admonition, Suspension, or Revocation depending upon their involvement in promoting their fictitious claim.
NAPFA should be taking an immediate action to “educate” CNBC. As a NAPFA member, if there is no response from NAPFA and its Board, what’s the purpose of having a “Fee-Only” designation? Is it only to see the financial media flaunt the arrogance of the “fee-only” disclosure?
This all reminds me of the famous Abbott & Costello skit “who’s on first?” The CFP Board wants more CFP(R)s. Where do you get them? the big broker dealers. Worried about the term “Fee-Only?” Make NAPFA part of your coalition. Don’t want to alienate the big broker/dealers, water down the fiduciary standard and pull them into your home by offering them a sponsorship for newly minted CFP(R)s. Everything is sea-shells and balloons unless you look further down the road.
It will be interesting to see the fallout from this, but don’t wait to see either NAPFA or the CFP Board making a fuss. I think the odds of the happening would be like winning the Triple Crown.
Nice catch Michael “Willie” Kitces.!
Bill,
At this point there has been no response from NAPFA (at least, nothing public I’ve seen). No one from NAPFA has reached out to me to support on this issue.
I don’t know if anyone from NAPFA has been in touch with CNBC directly either, but thus far CNBC still insists that their list is accurate when it comes to fee-only firms…
– Michael
You make some interesting points. You have a good grasp of the advisor landscape. Perhaps you could take a shot at putting a list together. I imagine CNBC might vet your results so be careful.
If I put a list together it would start with performance, relative to benchmark,ms howling Sharpe ratio as well.
Aside from the fee only part of this list, why do lists NOT include the end result of these firms, which is performance? Performance relative to benchmark based on clients goals and objectives? They use criteria that give no true insight into the capabilities of the firm, as well as how well they have done for their clients. AUM may simply mean they have a great sales force. Having lots of credentials doesn’t mean quality either. Many of the big brokerage firms encourage or require, and even pay for, their brokers to get a CFP designation. Many firms set up cross referencing with other professionals as a way of generating leads for each other, so working with CPA’s and attorneys doesn’t mean quality either. How many times do we see luncheon seminars by ‘Financial Advisors” and estate planning attorneys offered? These are usually brokers looking for clients and they usually are selling annuities.
Growth of assets could be the result of an excellent sales force bringing in new business each year. It doesn’t mean performance is great! Or even good.
Account size doesn’t mean a firm does a great job for their clients. It may be their targeted market is high net worth, and they have a great marketing plan and sales force.
There are so many lists out there, but they don’t rank or rate on actual outcomes for clients by these firms.
Truth is, most clients don’t know how well their firm is doing for them. Many don’t even know their investment performance. They are content on being told they are ‘doing great’ from an absolute standpoint, and most never think about performance relative to benchmark.
There is a long way to go in regards to transparency, conflict of interest, and fiduciary responsibility in the financial advisory world. These lists don’t help at all, as evidenced in this article.
hi michael, thanks for your dedication to the industry. i tend to agree with some comments already made that the name of a company should not be misleading. if an insurance agency calls itself “low load” or” no load” insurance then i would expect that the majority of the products they sell to be such. when less than 10% of the products sold are actually low load, then this has the potential to mislead the consumer or advisor. “once in a while low load” may be more accurate.
Thank you, Michael, for bringing CNBC’s inappropriate use of the term “fee-only” to the forefront.
There exists legal precedent that the use of the term “fee-only” incorrectly amounts to either “fraud” or “deceit” under state securities laws (and, likely, federal securities laws), as I discuss at: http://scholarfp.blogspot.com/2015/06/use-of-fee-only-inappropriately-or-any.html
Hopefully your blog post will bring increased awareness to this issue, as well as to the need to fight back against the deceptive term “fee-based.”
I think the CNBC article just adds to the confusion the public has about how their advisor gets paid. For whatever reason the media, CNBC, in this case is in love with the idea of “fee only” when in fact, “fee only” may not really be “fee only” and it may not always be what is right for the client.
Michael, this is an excellent article> As always, you bring good information to light. In today’s “breaking news” world, the media often becomes part of the problem because they do not fact check. It is comforting to know there are professionals like you out there who bring professional analysis to important issues. Thank You.
I took the time to read other responses, and totally agree with those who argue there in nothing that difficult about the term “fee only.” It means, fee-only, with no commissions, in any form, for product sales.
Our company, Regional Family Offices, has solved this problem, as have others. We offer every client a “family CFO”, generally a CPA with expertise in personal taxes and personal finance, to lead the client’s team of (true) advisors in providing wealth planning services.
Once plans are complete and approved, the family CFO oversees implementation of plans. Client may use their own product providers, or if they are looking to improve quality or lower costs, the CFO may show client alternatives offered by our partners in the RFO Wealth Care Network. Our Network is a diverse group of pre-approved product providers we deem to have high quality products at reasonable pricing.
Finally, the family CFO provides consolidated personal financial reports to monitor progress towards the clients stated goals.
The key to making with work is to provide that professional advisor who is highly and uniquely qualified to serve as a family CFO, who is totally independent and objective and who has no conflicts of interest. We have worked hard to provide a total separation of Advice from Product Sales, while still providing the client with access to “all the essential resources they need to professionally manage family wealth in today’s complex world.
We hope to build a national network of locally owned and operated offices, partnering with local CPA/financial planners.
Thank you so much for writing this! I also noticed that in the list that the data was drawn from the “Meridian/AdviceIQ team.” When I did my own digging into this, it appeared that Meridian is a full database pulled from all regulatory docs. AdviceIQ is a subset database that advisors need to pay to be a part of – to the tune of $995/seat. https://register.adviceiq.com/firms/payfirm. So in addition to not being truly “fee only,” it is a pay to play feature so it doesn’t give the full picture of the investment adviser landscape.
~ Jo Walthall
Jo,
AdviceIQ is a partner/subsidiary of Meridian. The advisors involved were NOT limited to AdviceIQ, it was drawn from the Meridian database. In fact, I’m pretty sure NONE of the firms involved here are/were paying clients of AdviceIQ.
This was not pay-to-play. It was simply marketing visibility for AdviceIQ.
– Michael
Michael,
I’m looking through your back posts to see if you’ve ever talked about how the populations of “investment advisors” breaks out. I’m toying with doing an Euler diagram to try to explain the value to my clients and can’t seem to find actual numbers.
There are over 600,000 B/D registered with FINRA, for example, compared to about 2,500 members of NAPFA. I think the Alliance for Comprehensive Planners has about 170 people (that’s a group of fee-only fiduciary comprehensive planners who are retainer-based and tax-focused, a haven for CPA/CFP(R)s like me. We’re all NAFPA members, too.) Have you run across anything that talks about the numbers of fee-only fiduciary CFPs? I can find SEC RIAs, but no place that aggregates the states. (I’m not very far along in this journey, though: I sort of started with you!)
You’ve really become my go-to guy for week-end reading. Thanks so much!
I want to preface this by saying that I love the blog and I think you write genuinely interesting commentary.
Now, you asked: “Is this “much ado about nothing” when it comes to fee-only disclosures?”
My reply: Yes. It is much ado about nothing. The financial planning industry has this weird obsession about how advisors are paid. We call AUM fees fees instead of what they really are: commissions on assets under management. I’ve never understood this. In fact, I think on some level it’s dishonest because it masks the essential nature of what’s happening when someone pays for investment management and advice.
We make up “conflicts of interest” that are tied to a specific fee structure to make some professionals look bad and others good. It’s pretty divisive.
The only conflicts of interest are ones that are created when an advisor is dishonest or irrational about what he or she is doing.
You can very easily find conflicts of interest, for example, in fee-only arrangements when the advisor tries to rack up billable hours by dragging his or her feet on the planning being done. Or, in flat-fee arrangements where work is arranged to string clients along for multiple sessions. In some ways, this is WORSE than a commissionable product sale because the clients doesn’t get the full service being advertised. At least with a commissionable product (even really bad ones), the client is getting the product, for good or for ill.
No one talks about that because it makes fee-only arrangements sound sketchy.
And then there’s the harm created by not being familiar with commissionable products and maintaining a bias toward inferior low-load/no-load products BECAUSE they are low-load/no-load but which don’t have the same design and underlying financials as a better commissionable counterpart (i.e. the cost was low, which is good, but the value wasn’t there).
Over the last 10 years, I have also personally witnessed fee-only advisors recommend products that they knew next to nothing about because they had no intimate relationship with the company – because it was a company selling commissionable products and they didn’t want to “dirty” their reputation selling them directly. At the same time, the client needed a product to implement the financial solution/plan.
Of course, there is always a story about commissioned salespeople doing something dishonest.
But, it’s not the commissioned product that’s at fault. Just as it is not the fee-only structure or AUM fee that’s bad. It’s the fact that the advisor is dishonest. How one charges money for something has next to nothing to do with it. It’s almost entirely an underlying philosophical/psychological issue on the part of the advisor.
Bernie Madoff was a fiduciary, for example. We like to forget that because it’s “inconvenient” for the narrative of “fee only.”
There is no such thing as a “conflict of interest” when I take a commission for assisting a customer in the purchase of an annuity. That is pure hoakum. and hocus-pocus, too. I as an insurance agent writing up an annuity based IRA or a non-qualified annuity, for that matter, do the best job I possibly can for my customer. “Conflict of interest” is an invention of the E. Warren of Mass., the fake Cherokee princess with the “high cheek bones that her mama told her about—so the fake princess says.”
This is nothing but a progressivist agenda plank to hurt the group of 1. agents/financial advisers and 2. the middle and lower income people in this country who can’t afford to pay fees. It is a pure cynical attack by the current misadministration to hurt these two groups with myth-based garbage.
And why, for that matter, pick on a single insurance product that has proven itself over the decades and centuries? Why annuities? I get commissions when I sell life insurance, disability income insurance, dental insurance, medical insurance, and all the rest. It has always been that way and has served the public quite well.
This DOL Rule Fiasco is just that: an unecessary obstacle to Americans. It will die a natural death.
I agree with this article. Many fee-based advisors misrepresent themselves as fee-only. Consumers need to be aware. CNBC needs to do a better job on their Top 100 list. Check out this video which best explains the difference between fee-only and fee-based! https://www.youtube.com/watch?v=CzuXPk3VgPY
I can only speak from personal experience. I had consulted with a local Philadelphia “RIA” that transparently let me know they were commission based. They tried to sell me on the idea of Variable Annuities for half of a sizable inheritance. It sounded good on paper, but it just didn’t “feel right” so i did my research.. and saw how terrible a product Variable Annuities are (for my situation) and also uncovered some alarming complaints against a “Broker” company that these RIAs just happened to also have Broker licenses with.
I then consulted with Creative Planning. It was a much different experience and “felt right”. They also did not try to sell me ANY insurance policies. They, rightly, advised me to UP my insurance and get an umbrella policy – either through my existing insurance provider or through their own Insurance consultant agent… **whichever was a better price for me.** I have ZERO hesitation when a company suggests I buy from someone else if, all things being equal, I can get a better price from a third party.
That said, I guess by definition they aren’t Fee only, but in my case they were because I went with my current insurance provider, and the advice of what to get was fee only. That’s what I pay them for.
Due your due diligence and be and educated consumer. I’m personally confident having my assets with Creative Planning.
** No fees, or commissions, were collected for my opinion post ** 😉