Erasing CFPs Compensation Methods is a “Doozy” of a Mistake
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Yesterday the CFP Board defended its decision to erase compensation categories on its website. In Investment News, the Board CEO Kevin Keller said, “It’s about fiduciary, not about fees,” and, “It’s part of a natural evolution of not focusing on how a person is paid but the professional obligation.”
Mr. Keller is wrong on the facts, the law and common sense. Starting with the Advisers Act of 1940, methods of compensation have always been integral to how commissions and brokerage sales serve issuers and manufacturers, while fees and fiduciary advice serve investors.
The Advisers Act was meant to differentiate “legitimate advisory organizations” from conflicted sales of “tipsters and touts.” At the time it was enacted, leading advisors advocated that investment advice should only be compensated by fees and advisors should not engage in other businesses. In 1963, the Supreme Court noted this legislative history and affirmed the fiduciary duty of investment advisors.
What the authors of the Advisers Act understood is how the compensation method is, part and parcel, closely tied to the ability of an advisor to act as a real fiduciary. That acting as a real fiduciary is far easier when conflicts really are avoided whenever humanly possible. This is the opposite of what the CFP Board is espousing.
Conflicts can be overcome and a financial representative receiving a commission can act as a fiduciary. But it’s not for the faint of heart. As the CFP Board calls for, dealing with a material conflict requires managing the conflict and obtaining informed customer consent. Doing so is difficult. It’s a burden. It’s a burden by design because a material conflict can cause irreparable harm to the financial welfare of the customer.