Importance of Accurate Compensation Disclosures For Consumers

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CFP Board NoticeThe CFP Board has been in the news recently regarding its Rules of Conduction and the requirement of disclosing accurately how an advisor is compensated.

At issue are cases where advisors claimed to be “fee-only” because they are part of a firm which is fee-only. They are neglecting to report that related parties such as the advisor’s employer or another family member stands receive the benefit of commissions based on the advisor’s selection of brokerage services or commission based products.

Here is a section of their Notice to CFP® Professionals on the Importance of Accurate Compensation Disclosures:

In determining how to make compensation disclosures, a CFP® professional must consider compensation to the CFP® professional and any related party. The CFP® professional also must include as compensation any non-trivial economic benefit that the CFP® professional or any related party “receives or is entitled to receive.”

I’ve seen many prospective clients who have been convinced that they are only considering fee-only fiduciary financial advisors and yet have a number of non fee-only firms they are considering. Clients want a fee-only advisor unfortunately more than advisors want to be fee-only. As a result, many CFP® professionals use any designation to describe their compensation other than “commission.”

Terms such as “Fee-based” cloud the issue for consumers. This is a confusing way of saying “Commission and Fee” without using the word “commission.”

Until recently another practice was to use the term “Salary.” This unhelpful designation was available until recently. In removing it the CFP Board wrote:

CFP Board does not define “salary” in the Standards of Professional Conduct. A CFP® professional is required to describe his/her compensation in a manner that allows clients and prospective clients to understand how they will pay the CFP® professional and any related party. Except in very limited circumstances, salary does not provide an accurate and understandable description of the compensation arrangement being offered by a CFP® professional because it does not describe how the client will pay the CFP® professional and any related party. Therefore, CFP Board will remove “Salary” from its “Find a CFP® Professional” search engine, effective Friday, August 16, 2013.

You deserve a fee-only fiduciary standard of care.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)