This guest post was was written by Ron Rhoades, JD, CFP®, a leader in the fiduciary standard movement and curriculum coordinator of the financial planning program at Alfred State College, SUNY.
I was greatly saddened to hear of Alan Goldfarb’s resignation as Chair of the CFP Board of Standards, Inc.. Alan has, and continues to be, a leader of the profession, and he has always promoted the highest standards of conduct for the profession of financial planning. He has contributed greatly to the development of the profession through his many years of service.
As your readers are aware, shortly before I was to assume the Chair position for NAPFA, I submitted to the NAPFA Board my declination to serve, due to a compliance violation. In this post I would like to comment, from my perhaps unique perspective, on two issues. First, was the resignation of Alan Goldfarb justified? Second, was there a violation?
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Unfortunately, we don’t know all of the facts. It appears, from the few facts which have been made publicly known, that Alan Goldfarb listed his compensation method as “salary” on the Financial Planning Association’s Planner Search tool, even though he is the principal of both an RIA firm and of a broker-dealer firm. Hence, my discussion of these issues must be based upon an assumption that these are the only facts pertinent to any alleged violation of the CFP Board’s Standards of Professional Conduct. Only time will tell if other facts are present.
WAS THE RESIGNATION JUSTIFIED?
We must recognize that financial planning is not yet a true profession. However, for decades many financial planners aspire to members of a true profession.
Several steps are required to attain status as a true profession, including federal or state statutory authority to license financial planners as such. This includes the authority to exclude those from the profession who do not meet certain standards of education (including continued education), competency (as determined by admittance exams), and conduct. As to conduct standards, I would submit that a true profession must fully embrace the fiduciary standard of conduct (further elaboration of this issue must be reserved for future commentary).
While financial planning is not yet a true profession, the leaders of the various organizations forming the Financial Planning Coalition (CFP Board, FPA, and NAPFA) have been undertaking substantial efforts to move financial planning in this direction. Most notable among these efforts is the Coalition’s embrace of the fiduciary standard of conduct found in the Investment Advisers Act of 1940, and its opposition to oversight of RIAs by FINRA (which has, in the past, publicly criticized the fiduciary standard, and which – as shown by its recent announcement of making arbitration proceedings available to RIAs – has very little true understanding of the fiduciary standard of conduct and what it requires).
These key battles are ongoing. I call them the “Battle for the Soul of the Profession.”
As the CFP Board, FPA and NAPFA tout higher standards of conduct, an unfortunate consequence occurs. Perhaps the best way is to illustrate this by way of analogy. Assume a politician belonging to a political movement which touts the shared “family values” of its members consistently. Assume further the individual politician is later discovered to have undertaken some personal conduct which falls short of such values. In such event, opponents of the political movement often engage in a vicious attack – not only on the politician, but also upon the political movement which the politician supported. Obviously, in such circumstances, the political movement did not condone its member’s conduct. Yet the actions of the individual are, by mere fact of the membership, ascribed by opponents to be the actions of the political movement itself.
Similarly, as the Financial Planning Coalition organizations tout a higher standard in the circles of various policy makers, these organizations can similarly be attacked if various individual leaders – often the visitors to such organizations as the SEC and members of Congress – fail to live up to the high standards they profess. Even a minor violation of regulatory or organization rules can provide opponents of the organization’s positions with ammunition. Even an alleged material violation of the rules can result in attacks. As many political strategists can attest, “if you can’t attack the message, attack the messenger.”
Hence, in the present environment in which the Financial Planning Coalition operates, if a leader of one of its organizations is known to have, or suspected of, violating a regulator’s or association’s rules, then that leader knows that it is best – for the organization and the causes the organization promotes – for the leader to resign.
We can wish the present situation was not the case. But the leaders who resign find themselves bound by their strong personal loyalty to the organizations to which they belong. Having invested years (or decades, as in Alan Goldfarb’s case) in forging progress within the organizations, they desire no harm to come either to the organizations nor to their positions of public policy. Nor do they desire any opponent of the organizations to gain from the situation presented. They are fully aware that the organization and its causes are far more important than the issue of whether a particular person should continue in a leadership position. And they are fully aware that the attention and resources of the organizations must be devoted to advocacy of the positions, rather than advocacy on behalf of a particular person.
I have previously described my own reasons for declining to serve, in a prior post on Advisors4Advisors, and I will not repeat those reasons here. As to Alan Goldfarb and the other members of the CFP Board who resigned, if the facts are as assumed I fully understand their reasons for resigning. I can attest to the varied emotions they must be feeling – disappointment in not being able to complete their service for the organization the chief among them. I can also attest to sadness which also results – from the knowledge that others were forced to assume burdens under circumstances which were not ideal. But I also am comforted by the knowledge that there are many, many other talented leaders in the organizations who have, and can, step to the forefront to pick up the torch and carry it forward. And I am also comforted by the fact that, once the situation has been resolved (as mine has been), I can find other ways to contribute to the cause.
In conclusion, I would opine that “yes” – the resignation was justified, in the current environment. The issue presented to the leader who resigns is not whether the violation – if it occurred at all – was major or minor. Rather, the issue presented is whether the organization and its advocacy positions may be jeopardized by the leader not resigning. Given the current high level of public advocacy by the Coalition, especially regarding the highest standard under the law – the existence of even the suspicion of a material violation is grounds enough for a leader to resign, in order that no detriment to the mission and vision of the organization.
WAS THERE A VIOLATION?
As stated above, we have limited knowledge of the facts. But, if the facts are as assumed above, some legitimate questions appear to arise as to whether a violation of the CFP Board’s Standards of Conduct has occurred.
On the FPA’s Planner Search function the compensation categories available to financial planners is described to consumers as follows:
“How Planners Charge. Financial planners can be paid in a variety of ways, and each has its merits. Choosing the appropriate method depends on your individual situation. FPA advocates for the highest standards for competent and ethical planners, regardless of compensation or business model. However, before entering into a relationship with a planner, you should have a clear understanding of how he or she will be compensated.
Fee-only. All of the financial planner's compensation from his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.
Commission-only. There is no charge for the planner's advice or preparation of a financial plan. Compensation is received solely from the sale of financial products you agree to purchase in order to implement financial planning recommendations.
Combination Fee/Commission. A fee is charged for consultation, advice and financial plan preparation on an hourly, project or percentage basis. In addition, the planner may receive commissions from the sale of recommended products used to implement your plan.
Salary. Some planners work on a salary and bonus basis for financial services firms.
Please Note: In all of the above categories of compensation, you should request information on any real or potential conflicts of interest. In addition to commissions received from any financial product sales, you should ask whether there are outside incentives or bonuses to be gained by the planner for certain recommendations.”
Again, I assume that Alan Goldfarb’s alleged violation involves his description of his own personal compensation, on the FPA’s Planner Search function, as “salary.”
I must admit a great deal of confusion as to why a “salary” category even exists. Should I be using it, as the owner of an RIA fee-only firm? I am personally paid a salary and bonus. Of course, the amount of the salary and any bonus I receive, as well as draws (dividends) paid from profits generated by the firm, is dependent upon the fees the firm receives from clients.
Likewise, take the case of a bank trust officer who is an FPA member. The bank’s main source of compensation are the trustee fees paid to it, typically based upon a percentage of the assets managed by the bank for the client. Yet, what if the bank sells its proprietary mutual funds? Is additional compensation received by the bank, not in the nature of “fee-only”? Many states require rebating the funds’ “management fees” to clients. However, the “administrative fees” charged to clients by the funds – which are often paid in part by the fund to affiliates of the bank (who no doubt are designed to generate profits themselves), seem to generate for the bank holding company an additional means of compensation. Is the bank “fee-only” in that circumstance – since all of the compensation is not paid “exclusively from the clients” as the FPA’s definition for “fee-only” states, above.
What about a banker who works as a registered representative for a broker-dealer affiliate of a bank, but who is paid a salary plus bonuses? Even if the compensation received by the broker-dealer is only in the form of 12b-1 fees, the definition of “fee-only” as set forth by the FPA does not appear to be met. But is the banker able to describe himself or herself as compensated by means of a “salary”?
Here is my question – can ANYONE describe himself or herself as paid under the “salary” compensation category adopted by the FPA. Does not the compensation paid flow to the firm, and the firm’s method of compensation, become attributed to the financial planner who works for the firm?
Alternatively, should NEARLY EVERYONE who works for a financial services firm – and who hence is paid by means of salary and bonuses in most instances – describe their method of compensation as “salary.”
On this issue, I would opine that the FPA’s definition of “salary” appears ambiguous. Perhaps there should be no “salary” category – as the category does not appear to describe the method by which fees are paid to the firm (which would be the key fact a consumer would desire to know).
Perhaps it is the existence of this “salary” category of compensation has caused the confusion – not only for Alan Goldfarb, but perhaps for hundreds (or more) of FPA members who may describe their method of compensation as such.
It is unfortunate that this situation occurred. It is further unfortunate that the media coverage of the situation may, if it continues, detract from coverage of the important public policy battles which lie ahead.
Alan Goldfarb, in resigning, noted that his purpose in resigning was to preserve the CFP Board’s ability to move forward on the important public policy issues of the day, without undue distraction. I take him at his word, and believe others should as well. Only if other facts surface, not now publicly known, should we then begin to comment thereon.
In the interim, I hope that the Financial Planning Association can point to either a previously provided explanation of the “salary” category, and when it may or may not be utilized by an individual financial planner. Or perhaps the FPA should eliminate that category entirely, if it determines that it is, indeed, ambiguous in nature. I, for one, am interested in learning more about the FPA’s categories, and when they may or may not apply. I am also interested in learning if many other individuals within FPA may have described their compensation method, using the “salary category,” incorrectly. I hope other commentators will provide illumination on this issue.
Lastly, I hope that the CFP Board’s disciplinary process with regard to this issue will, with the consent of all parties and respective of the need for due deliberation of any issues presented, be expedited, in order to remove any clouds which may be perceived to exist.
Ron A. Rhoades, JD, CFP®
November 11, 2012