Let’s cut to the chase: There are good, honest, hardworking financial advisers of all business and compensation models.
Unfortunately there are people in the profession—and out—who demonize those who are not following one model over another. This is unfair to tens of thousands of advisers while hindering the profession from becoming what it can be.
Let’s be honest: Each compensation model—whether it be fee-only, commission and fee, or commission-only—comes with its advantages and disadvantages.
Focusing on compensation does the profession of financial planning a major disservice. No other respected profession focuses on compensation as a determining factor of whom you should and should not work with.
You don’t have this same compensation debate in medicine, law or accounting. So why does this focus exist in financial planning? While compensation is an important aspect of the client/adviser relationship, it is far from being the ultimate determining factor as to whether or not a consumer engages an adviser.
The debate over adviser compensation reminds me of the California Milk Processor Board’s long-running “Got Milk?” campaign. The ads didn’t differentiate between the different types of milk available to consumers, whether it was whole milk, low-fat milk, skim milk, or even chocolate milk. They just asked if you got milk. Consumers of financial planning advice should be able to seek out an adviser whose model is best for them, not because they are being told which model is right.
The Financial Planning Association, of which I serve as the volunteer president, is compensation-neutral, which means that we don’t adhere to the notion that a compensation model determines whether a professional is operating in the client’s best interest. FPA’s more than 24,000 members—and more than 17,000 Certified Financial Planner professional members—are diverse in their compensation and business models. FPA believes that how advisers charges for their services is not in itself an indicator of their competency or ethical standing. What consumers really need to seek are those advisers who have earned the right to call themselves CFP professionals.
CFP professionals are required by their certifying body, the Certified Financial Planner Board of Standards, to act in a fiduciary capacity at all times during the financial planning engagement. That means that no matter how a CFP professional is paid, he or she is required to act in the client’s best interest.
This is why FPA believes in building a recognized financial planning profession around a single designation that requires high professional standards and requirements. You don’t have ongoing debates as to whether compensation determines competency among doctors, lawyers, and accountants, do you? No. That’s because putting the best interest of those they serve first is embedded in their professions.
Let’s not focus on compensation models, but on the need for those in the profession to practice full and fair disclosure and operate in the client’s best interest all of the time. Any adviser should be willing to fully disclose all material facts that may, or may not, have an impact on the client/adviser relationship. That goes beyond compensation and should include services provided, investment philosophy, experience, education, past disciplinary actions, and more.
At the end of the day, each consumer of financial services needs to be comfortable in his or her relationship with an adviser. For some people, paying their adviser a fee will make them comfortable, while for others commissions will make more sense. It is really up to the individual and the circumstances, and the more we denigrate one form of compensation over another the more harm we do to the profession and the public.
An educated consumer is going to be a better consumer of financial services. That is what we should be focused on.
Edward W. Gjertsen II, CFP, is vice president of Mack Investment Securities in Glenview, Ill., and is the 2015 president of the Financial Planning Association. The opinions expressed in this commentary are solely his.