When advisors are asked to describe their compensation on the FPA website, they can select one of four options: fee-only, commission-only, a combination of fee and commission, or salary.
But as one prominent advisor recently learned, those options are dangerously limited, given the industry's often complex business models - and the answers that planners select can trigger minefields for the advisors, their firms and their clients.
Several industry observers and participants say that Alan Goldfarb's sanction in June by the CFP Board reveals the heart of the planning industry's struggle to require professionals to accurately, clearly and comprehensively disclose the way they earn money - to a client base that can be simultaneously disinterested and vulnerable to abuse when misinformed.
For Goldfarb, a 40-year planning veteran who was the former chairman of the CFP Board, the sanction by an ad hoc disciplinary and ethics commission followed a departure from his prior firm and an investigation that prompted him to resign from the board late last year.
Many experts interviewed for this story - all of whom qualified their comments by pointing out that they were not privy to details of the hearing - say Goldfarb fell into a quagmire that could easily imperil other planners, exposing them to similar sanctions or accusations.
DUALLY REGISTERED RISK
It's a special problem given the increased popularity of the dually registered business model, advisors say. Some planners, like Jeff Fishman of JSF Financial in Beverly Hills, Calif., have chosen to avoid the risk by not affiliating with either with the FPA or NAPFA.
"I'm a huge believer in disclosure," Fishman says. However, he adds, "I'm not a member of the FPA only because, I've got to tell you, years ago I found them to be too sanctimonious on this kind of topic. There was an ideological divide and, personally, I found it very frustrating."
Fishman makes his disclosures on the home page of his company's website. Under his firm's logo, JSF Financial is identified as an RIA. The page's bottom includes a line stating that the firm offers services through a broker-dealer, Mid Atlantic Capital, and pointing out that the broker-dealer does not hold an ownership stake in the RIA.
"The dually registered model really is a problem," adds industry commentator Bob Veres, a Financial Planning columnist. "And none of us knows what to do about it. The disclosures have to [address the question of], 'What hat were you wearing when you were a fiduciary and is it possible to switch that hat?' And those are the questions that have not been adequately answered."
When faced with the FPA questionnaire, Goldfarb was in charge of financial strategies for RIA and insurance agency Weaver Wealth Management in Dallas. He chose to check the fee-only box. In all other communications with clients, he says, he disclosed the fact that Weaver's parent company paid him a salary and owned a broker-dealer.
Goldfarb says the clients he served directly paid fees only - a fact that he says his Weaver supervisor confirmed in a letter to the board. A copy of his former firm's Form ADV from March 2012 cites the broker-dealer and insurance company relationships and describes the way both generate revenue, although it does not mention that Goldfarb owned a 1% interest in the broker-dealer.
He disagrees with the CFP Board's conclusion that his salary may have included commission, and denies that he was being dishonest about the source of his income. "No one was trying to hide anything here, which is why I think this was blown out of proportion," Goldfarb says.
The penalty triggered mixed reactions. Barbara Roper, director of investor protection at the Consumer Federation of America, says she can see both sides of the Goldfarb case. Roper has worked alongside the FPA, NAPFA and CFP Board for years to advocate for the broad adoption of a fiduciary standard to better protect consumers.
"It certainly seems there's reason to believe [Goldfarb's] claims that he did nothing to try to hide his compensation from clients," Roper says. "On the other hand, these issues of compensation are sensitive issues and I understand why the CFP Board would want to be scrupulous in maintaining high standards."
Dan Moisand, a former chairman of the CFP Board's Discipline and Ethics Commission, was divided as well: "I have a great deal of respect for Alan Goldfarb and I have a great deal of respect for the people at the CFP Board," Moisand says, "so I'm kind of at a loss to seeing this come to a public sanction like this."
Moisand, Roper and other experts say that the CFP Board and the FPA should review the existing terms that they require members to use when describing compensation, and perhaps redefine them or add new ones.
Given the multiplying business models used by financial planners, some arrangements may be too complex for clients to grasp, Roper says. In that case, she argues, perhaps some of those models should be eliminated if a workable fiduciary standard is to be applied broadly.
"If it's too complex to disclose," Roper says, "then maybe it's too complex to exist."
On the face of it, the decision of the commission that was convened to address the Goldfarb matter is simple: He clicked fee-only, but the commission concluded that because the "RIA and broker-dealer [in which Goldfarb had an ownership stake] received or were entitled to receive compensation such as commissions and 12b-1 fees ... Goldfarb misrepresented his compensation model."
The board declined to specify whether it found that Goldfarb's clients actually paid commission income, or simply may have done so.
But Goldfarb says the problem's root lies in the simple set of options on the FPA questionnaire, which could not easily define a complex arrangement. His former employer, Weaver Wealth Management, is owned by Weaver LLP, an accounting firm with a broker-dealer subsidiary. Goldfarb was president of the broker-dealer; he says he held a 1% ownership stake in the B-D at the parent firm's request.
Goldfarb was compensated for his planning work with a salary, he says, of somewhat north of $200,000. In addition, he says, he received roughly $2,000 in income annually through a K-1 for his 1% equity interest in the B-D.
However, none of the clients with whom he worked directly paid any commission income, Goldfarb says. Instead, his client group of roughly 50 to 75 families paid only fees to Weaver, he adds.
Industry groups like the FPA and CFP Board haven't adapted to the complexity in advisors' business models, Goldfarb argues.
"You can have a brokerage firm that does things on a fee basis in what we called wrap accounts," Goldfarb says, referring to accounts in which advisors receive an aggregated wrap fee from clients in lieu of a commission. "Our clients could acquire products that would normally have a commission, but the commission would be waived because it was coming through the advisory firm."
He offered another example. "I knew a CFP who was also insurance licensed," Goldfarb says. Even after he stopped selling insurance, the advisor "was getting an insurance commission from a policy he sold 20 years ago," he says. "What does that do to his income? What does that do to his situation?"
In Goldfarb's own marketing materials, he says he settled on the term "fee-based," the use of which he had tried to promote during his tenure with the CFP Board.
If Goldfarb was confused about which box to check, he should have contacted the FPA directly, FPA spokeswoman Lynn Brackpool says. Yet she concedes that the group's questionnaire may need some changes.
"I think what this whole situation is uncovering is that there are some nuances about how people charge and we need to work with the CFP Board to see if there is [another option] that we need to add," Brackpool says.
The situation might depend on the type of profile Goldfarb had created with the FPA, she said. That profile is no longer online. If it was a basic one, there was no place to add further description about his income. But the advanced version, costing $99 a year, provides space for elaboration - not next to the checked boxes, but in the planner's bio section, she says.
If Goldfarb had called, she adds, "I would have said, 'Err on the side of caution and check salary.'"
Yet that tactic would not have passed muster at the CFP Board. After concerns were raised about Goldfarb's use of the term fee-only on the FPA form, he says, he switched his choice to salary. But the CFP Board commission found that neither term amounted to "an accurate and understandable description of the compensation arrangements being offered," according to the sanction.
Goldfarb doesn't see it that way. "Both [fee-only and salary] were appropriate disclosures," he says, "because my clients were fee-only and because I was paid a salary by the accounting firm."
The sanction does not specify which box he should have checked.
Goldfarb says he fears his case didn't receive a fair review. Because he knew one of the members of the board's regular disciplinary and ethics commission, he says, the board decided to assemble an ad hoc commission to consider his case.
Those members "had limited experience compared to the real commission," Goldfarb says, adding that regular commission members had spent years considering cases of this nature. The regular commission should have heard the case after allowing the one member who Goldfarb knew to recuse himself, he says. The entire proceeding "may not have been unfair, but it seemed unfair."
Dan Bernstein, director of research and development and a compliance lawyer with MarketCounsel, says he suspects the board is making an example of its former leader.
"This sounds like it could've been handled by sending something private that said, 'Hey, we think you should fix this,'" Bernstein says. But the board "may not have wanted go that route [with Goldfarb] because of an appearance of playing favorites," he adds. "I think what this comes down to is the board trying to aggressively push its mark to gain public confidence. Unfortunately, they sometimes seem to want to do that at the expense of designees."
The CFP Board declined to respond to Bernstein's comments.
Given his noncompete with Weaver, Goldfarb couldn't take most clients with him to his new practice, Dallas-based Financial Strategies Group. However, those clients who were with him before he joined Weaver could leave - and he says all of them, about 15 to 20 families, did so. In two years, his other Weaver clients will be free to to follow him.
Goldfarb's new firm has about $20 million in AUM. "It's a little slow going," he says, adding that the controversy over the sanction isn't helping him grow the firm. "It's a public situation where anyone will question my ethics, where I don't think I have an ethics problem."
Ann Marsh is a senior editor and the West Coast bureau chief of Financial Planning.