Fee-Only Model Minimizes Conflicts of Interest
How compensation for financial planning services is handled is no small thing. Two of the three ways—fee-based and commission—involve compensation from the products that the financial advisor sells. The third is fee-only, which comes straight from the consumer’s pocket, whether it’s via an hourly rate, a percentage of assets managed, a flat fee, or a retainer. It’s what separates the National Association of Personal Financial Advisors (NAPFA) from others in the financial advising world. As these advisors like to say, they get paid only for what they know.
“It’s a wonderful way to practice,” said Ellen Turf, CEO of NAPFA. “You get paid for your knowledge and experience. You’re not sitting there with your client and doing a wonderful plan for them, and then changing your hat and selling a product. That’s not a bad thing, but it doesn’t feel good. It leads to a conflict of interest.” Fee-only services, she believes, have “the least amount of conflict of interest.”
It sounds like a simple, straightforward concept. But getting into the business is more complicated than that.
“It’s not an easy career path, especially out of college, to get started,” she said. It’s easier to go to the commission side, “because that’s where they can get a job. Then after a number of years, when they’re more seasoned, they can see their way clear to make that jump.”
Even then, it’s not an easy change to make. “It helps if you having a savings account so you can afford to make the switch,” Turf said, adding that it takes around three years to get established. “We continue to work on trying to create an easier career path.”
When it comes to fee-only services, “I think there’s a perception that unless you’re wealthy, you can’t work with a fee-only advisor,” she said, adding that wealth has nothing to do with it. It’s just a matter of people not being used to paying financial advisors directly.
NAPFA has 2,200 members in various categories of membership; 1,400 are registered financial advisors. But not just anyone can join NAPFA. There are a number of rules to follow, forms to file, and comprehensive plans to submit for peer review, among other requirements. Members take a “fiduciary oath,” created 25 years ago, when the organization was formed. “We’ve been known for it, we live and breathe by it. We believe it’s the only way to practice,” she said. And there is oversight of the membership. “Each year upon renewal, we make sure there are no changes or updates about the way they do business. It’s important to us that the names we hold out to consumers are the good guys.”
NAPFA’s members don’t specify specialties that use the word “senior,” Turf said. Silver Planet has warned about “senior specialists,” a term that is confusing at best.
Turf says “anybody can call themselves a financial advisor”—noting that there are around 600,000 out there practicing—and “it’s a very unregulated industry.” (She adds that NAPFA is part of a coalition “working on getting this profession regulated.”) And there are “hundreds” of financial planner designations. After researching some of them, she said, “The truth of the matter is, there are only a handful of designations that are meaningful and impactful to consumers.”
In August, the NAPFA site began a monthly free Webinar series of presentations on personal finance. Consumers can call an 800 number and listen to advisors talk on various topics, such as the basics of financial planning and investing, kids and money, and protecting your assets. Upcoming presentations include managing 401(k)s, leaving a legacy, financial planning related to small business owners, and another one geared to women. The series will continue for a year and then be reevaluated. Meanwhile, for a schedule, see the July newsletter. Past presentations are also available for the listening.
“We’ve had 150 to 175 people sign up on a monthly basis for these,” said Turf, who is the moderator for the Webinars. “It’s great to be able to give all this information free to consumers, and they have an opportunity to ask questions. It’s worked out quite well.”
She feels strongly that consumers should be educated about finances, noting it’s the best way to prevent future problems. “Given the economy over the last 18 months, I think Americans are searching for answers and reaching out to financial advisors to find out what they have done wrong and what they can do,” she said. “I think people have been frozen by what’s going on.”
The Web site offers a “Financial Advisor Diagnostic” to help consumers choose a financial planner, no matter the method of payment. It gives not only a list of questions to ask but also the answers they should be hearing—and where red flags might be raised if the answer isn’t a good one. “Educated Americans are best positioned to handle their financial affairs,” she said. “If you don’t know what you are doing, and you are trusting someone, you’d better know who you are trusting.”
National Association of Personal Financial Advisors (NAPFA)
Silver Planet Feature Writer