Broker-dealer RIAs renew fraught debate: What is fee-only?

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Fee-only is in the eye of the beholder.

Broker-dealers helping advisors drop their commission business have intrigued the fee-only community, even if some of the new and growing breed of planners don’t fit its strict requirements.

These firms are straddling the industry’s fraught border between RIAs and brokerages. However, the wealth management space has never hewed to a simple, black-and-white division between salespeople and conflict-free planners — and the line between BDs and RIAs is getting more blurry each day.

Commonwealth Financial Network launched a standalone unit to serve at least 75 advisors who let go of their FINRA licenses, while Cambridge Investment Research aims to recruit so-called reverse breakaway RIAs.

Influential advisors and entrepreneurs Ron Carson and Ric Edelman also both decided to drop their FINRA registrations and brokerage affiliations. Carson's team aims to follow a few other large IBD enterprises that have set up separate entities to purchase advisors' brokerage business.

The CFP Board imposes specific guidelines on whether certificants may refer to themselves as fee-only in both its current and upcoming standards. And NAPFA — the stalwart of the fee-only movement with 3,600 members — won’t consider advisors with corporate RIA affiliations for its ranks.

NAPFA CEO Geoffrey Brown says he’s “definitely” interested in Carson’s idea, though. And major fee-only thought leaders like Carolyn McClanahan, Bob Veres and Bert Whitehead split on whether BD advisors are truly fee-only.

Whitehead, founder of the tax-focused, retainer-fee practitioner network Alliance of Comprehensive Planners, does not count the BD advisors as fee-only due to the “inherent bias” of charging clients based on assets under management, he says. Some 95% of RIAs would therefore fall short, as well.

“We’re set up so that we sit on the same side of the table as the clients,” says Whitehead, noting soft-dollar arrangements and gifts as other key considerations. “If you’re at a broker-dealer, what are they providing you and how much does that bias you?”

Sales of insurance products have long been the “sticky wickets” holding back advisors from being fee-only, says McClanahan, a Financial Planning columnist whose Jacksonville, Florida-based Life Planning Partners also uses a retainer model. Fee-only planners expected BDs to make the pivot, she says.

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“We always said that it’s going to happen one day,” McClanahan says, adding that comprehensive planners should market themselves as such, rather than simply “fee-only.” Still, she adds, BDs “can change how they’re being paid, and is it going to change their culture? And that remains to be seen. This is only going to elevate the competition, which I think is a good thing.”

Bob Veres, another FP columnist and the publisher of the Inside Information blog, warned NAPFA as a consultant years ago “to prepare for an influx of people with a sales mentality who call themselves fee-only,” he said in an email.

He’s not sure but would tend toward “yes” if asked whether an advisor with a firm like Merrill Lynch who earns only AUM-based advisory fees is fee-only. There are “many excellent dually-registered advisors out there,” he said.

“I see it as a logical progression that some advisors are making, from mostly sales to some sales and mostly fees to fee-only and true professionalism,” Veres wrote. “We would have many more fee-only advisory firms if the BDs hadn’t offered a convenient halfway solution in order to protect their franchises.”

Current and new CFP Board Standards set to take effect Oct. 1 specifically define circumstances where CFPs may call themselves “fee-only.” The existing guidelines require that any compensation to advisors come “exclusively” from clients, while the new ones say CFPs can receive no “sales-related” pay.

NAPFA’s rules are “for all intents and purposes similar to the CFP Board’s,” says Brown, citing no formal affiliation with a BD as an additional requirement for membership. NAPFA members also may not accept 12b-1 fees, insurance rebates or renewals or transactional wrap-account fees, its website states.

Carson’s idea would help advisors over “a huge hurdle” in the switch to fee-only status by taking care of their commission-based business, according to Brown, who says NAPFA is exploring whether the Cetera Advisor Networks-affiliated office of supervisory jurisdiction aligns with its membership growth plans.

Other BD advisors who have stopped taking commissions and have their own RIAs could also receive consideration, Brown says. NAPFA expects advisors to make a full transition even though its members have “a lot of understanding” of the complexities, since many are also former BD reps, he says.

“All of those channels have to exist and people need to stay in their lanes. It’s good for the industry, and it’s good for consumers,” Brown says. “Consumers need that type of clarity to make sure that they understand the type of relationships that they’re engaging in.”

Representatives for Edelman, Carson, Commonwealth and Cambridge didn’t respond to requests for comment on the technical fee-only qualifications of their advisors. Dale Brown, the CEO of IBD advocacy group FSI, declined to offer any opinions on the CFP and NAPFA definitions of fee-only status.

“FSI members — because they’re really dually-registered — they’re able to provide advisors more and more choices in terms of the affiliation models and compensation models,” Brown says. Providing advice “to a broad, broad cross section of clients,” he adds, is “a critical objective that can’t be lost in these debates and discussions.”

Michael Comstock of Brentwood, Tennessee-based Premier Wealth Management still offers some insurance services to clients to make sure they avoid life insurance policies “most people don’t need,” he says. He gave up his brokerage licenses last year but remains with Commonwealth’s corporate RIA.

Fee-only services are “where our industry is going,” Comstock says. “In the next ten years, if you're not heading in that direction, you're probably going to be left behind. If a business is already 85% to 90% fee-based, it's something they ought to be looking at.”

Ted Kerr of the Pittsburgh-area Commonwealth practice Touchstone Capital, which has its own RIA, gave up his FINRA license in 2017. While he no longer has a formal affiliation with the firm he joined in 2000, he still uses its services from “probably every department, but not in equal amounts,” he says.

Some 65 of the fee-only advisors at Commonwealth stayed on the IBD’s corporate RIA, compared to only 10 who, like Kerr, opted to use their own. The firm, which hired nearly two dozen staff members at for its RIA unit, also invited him to join its advisors council, Kerr says.

“They’re saying, ‘Not only are you part of the family, we want you to have a seat at the table and a voice,’” Kerr says. “Rather than feeling like the black sheep of the family, I feel like I’ve got a seat at the adult table at Thanksgiving.”

Meredith Briggs, whose Poughkeepsie, New York-based practice Taconic Advisors is part of the Alliance of Comprehensive Planners, sees the moves by BDs like Commonwealth and Cambridge as a response to greater demand among clients for commission-free services.

“The broker-dealers and large financial services companies are trying to figure out how they’re going to respond to this evolving market,” Briggs says. “I just hope that consumers become more aware and that more people can gain access to quality advice. That’s really a win-win for everybody.”

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Fee-based compensation RIAs Independent BDs Independent advisors NAPFA CFP Board Commonwealth Financial Network Alliance of Comprehensive Planners