The National Association of Personal Financial Advisors wants to clarify that when the word “fiduciary” is applied to one of its members, it explicitly means they don’t accept commissions or other sales charges for their services.
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But critics argue that the new definition of fiduciary introduced by NAPFA on Monday is likely only to muddy the waters for regular investors who already struggle to understand advisors’ ethical duties and compensation sources.
NAPFA, a professional organization for “fee only” financial planners, adopted the new definition to strengthen conduct standard governing its more than 4,600 members. NAPFA Board Chair Natalie Pine characterized the new standard as a supplement to the Securities and Exchange Commission’s existing fiduciary rule, which calls on advisors to put their clients’ interests first and eliminate conflicts of interest as much as possible.
“It’s very difficult to determine: Who has my best interests at heart and who doesn’t? When do they? When do they not?” Pine said. “This provided clarity in our mind that our group has this higher-level standard.”
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No ‘hat switching’ under new fiduciary standard
NAPFA’s standard goes beyond the SEC’s by defining a fiduciary — for its members at least — as a financial planner whose compensation comes only from fees charged for managing assets and providing financial plans or performing other services. NAPFA’s fee-only members are different from “fee-based” and similar advisors who derive at least part of their revenue from commissions and other charges, often from sales of mutual funds or annuities and similar insurance products.
Critics say commissions provide a monetary incentive to recommend investments that may not be in clients’ best interests. Advisors who accept commissions are often described as wearing two hats: Sometimes they manage assets and draft financial plans and charge fees for that work; other times, they recommend annuities and other products from which they collect a commission.
In making it clear NAPFA members don’t receive commissions, Pine said, the new fiduciary standard in many ways codifies principles fee-only planners have always embraced.
“We’ve always been about putting clients’ interests first,” Pine said. “But we wanted to clarify that this is at all times. There’s no hat switching.”
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How many fiduciary standards can there really be?
But some question whether NAPFA’s new standard will clarify anything for investors, especially when many already struggle to understand what it means for an advisor to be a fiduciary.
Jeff Judge, a managing partner and founder of Chesapeake Financial Planners in Forest Hill, Maryland, said he recently took on a client who had left a brokerage firm in search of fiduciary advice. One of his first orders of business was to spend half an hour with her discussing the differences between a fee-only and fee-based financial planner.
“Now there is a new NAPFA definition in the mix,” Judge said. “It will not make that conversation shorter.”
Judge, whose firm does some commission business, said he has yet to meet a client who understood what it means for an advisor to be a fiduciary without him taking time to provide a detailed explanation.
“Adding a competing definition does not help,” he said. The SEC’s definition of a fiduciary may not be perfect, he said, but it at least asks the right question: “Did you act in the client’s best interest?”
“That question is auditable, enforceable and meaningful,” he said. “What NAPFA is doing is answering a different question entirely. Their question is: What are you allowed to charge? That is a compensation philosophy, not a fiduciary standard.”
Knut Rostad, the co-founder and president of the Institute for the Fiduciary Standard, noted that the SEC’s definition of a fiduciary is grounded in law. Registered investment advisors’ fiduciary duty to clients was established by the federal Investment Advisers Act of 1940 and has been refined through subsequent official interpretations and court decisions laying out advisors’ explicit responsibilities.
Rostad said NAPFA’s adoption of its own fiduciary standard is akin to the Chamber of Commerce deciding to have its own version of the First Amendment. Rostad said he has long respected NAPFA and its insistence on the benefits to both financial planners and clients of fee-only advice.
But he finds the organization’s latest step “bewildering.”
“There are not two fiduciary standards, there are not six, there are not 26,” Rostad said. “There is one fiduciary standard under securities law. Just as: How many First Amendments are there under the Constitution?”
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Fee-only advisors see merit in NAPFA’s new standard
Not everyone is unsympathetic to NAPFA’s goals. Brenna Baucum, the owner and lead planner at Collective Wealth Planning in Salem, Oregon, and a NAPFA member, said she thinks the new standard will make it easier for certain planners to explain what they mean when they say they are a fiduciary.
NAPFA’s definition allows for the simplest possible answer to questions like: “Are you required to put my interests first at all times? Do you receive commissions? Are you paid by anyone other than me? Could your compensation change based on what I buy or implement?” she said.
“That is where fee-only matters,” Baucum added. “It does not eliminate every possible conflict — no business model does — but it removes a major category of conflicts that consumers have a right to understand.”
Bryan Byrer, the founder of the fee-only Millennial Financial Planning in Indianapolis, said there’s no guarantee with any new conduct standard that advisors will follow it.
“Every doctor is taking the Hippocratic oath,” he said. “But does that mean that every doctor is actually doing what they should for their patients?”
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Does NAPFA’s new standard indicate a shift toward a fee-only world?
NAPFA’s new fiduciary standard goes beyond the organization’s explicit ban on commissions by also prohibiting fee-only advisors from engaging in sales contests and from accepting third-party compensation giving rise to conflicts of interest. It also calls on NAPFA members to take a fiduciary oath, pledging that they’ll:
“Always act in good faith and with candor” “Be proactive in disclosing any conflicts of interest that may impact a client” and “Not accept any referral fees or compensation contingent upon the purchase or sale of a financial product.”
Being fee-only is not the only qualification financial planners must meet to become a NAPFA member. They also must be a certified financial planner — a credential generally considered the industry’s gold standard — and complete at least 60 hours of continuing education every two years.
The Certified Financial Planner Board of Standards, which administers the CFP mark, has had its own definition of a fiduciary since 2007. But unlike NAPFA, the CFP Board does not restrict the term to fee-only planners.
Pine of NAPFA said she does not view her organization’s new standard as an implicit criticism of the SEC’s fiduciary duty. Rather, it’s meant to augment the current standard and give investors an easy means of finding advisors who put “planning first,” she said.
“We don’t take everybody,” Pine said. “So I can look to our list of planners and know that there’s a certain quality that can be expected from the people that are a part of NAPFA.”
With just over 4,600 members, NAPFA represents only a small percentage of all advisors. Even among the nearly 110,000 holders of the CFP mark alone, the NAPFA membership comes to less than 5% of the total.
Pine said she’s optimistic that more advisors are moving toward fee-only compensation. That shift would make a fiduciary standard like NAPFA’s new one more of a norm and less of an exception.
“But in this world where that’s not the case, and there are still people who are not always driven by what’s in the client’s best interest, we want to make sure we’re differentiated,” she said.
