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Cracking Open the Fiduciary Door 

This is really none of my business, but I can’t help saying that I hate the new policy at the National Association of Personal Financial Advisors regarding trail commissions.

‘Hate’ is a pretty strong word, but here I think it fits.  For those of you who haven’t gotten the news (basically everybody who is not a NAPFA member), the organization that has consistently, often bravely championed no-commission advice to consumers, that has enacted tough, strict membership policies to ensure that all of its members are compensated strictly by fees paid by clients (in other words, not paid by a product company to recommend its products) has opened the door a little bit to advisors who are receiving trail commissions.  Specifically, members can now be accepted in good standing even if they receive trail commissions from annuities and other products sold in the past, so long as they donate those commission revenues to a charity.

What’s to hate about that?  First of all, that opening now makes it impossible for me and other writers in the financial space to categorically say that all NAPFA advisors are paid strictly by fees all the time.  As of this new policy, we will have to offer qualifiers, which, I hate to say, are going to sound like weasel words.  We will have to cheapen the hard, strong language that we’re accustomed to using when we recommend working with a fee-only planner.  (NAPFA members are absolutely paid only by their clients, period, accepting no outside compensation whatsoever, except… well, now they can accept trail commissions on products sold in the past, but they have to donate that commission money to a charity.  I’m sure somebody on NAPFA’s staff is carefully monitoring every single trail commission payment to every NAPFA member accepted on that premise to make sure that this actually happens on a timely basis.  Well, pretty sure…)

More importantly, my experience tells me that whenever a door like this is opened, even a crack, some pretty creative ideas will find their way in.  It brings me back to the days when some advisors were developing ‘fee-offset’ compensation models, and asking for NAPFA membership.  The idea was that the advisor would recommend commission products alongside fee-only solutions, selecting whichever (we were told) would be more beneficial for the client.  All commissions the advisor collected would offset the advisor’s yearly planning fees, so there would be no net commissions stuffed in the advisor’s pockets, and the arrangement would allow for total product/recommendation/advice impartiality.


I actually thought this sounded like a good idea (I was younger then), until a veteran advisor took me aside and showed me how his former partner was gaming that system to great effect.  The former partner was telling clients that the commissions on the products they were buying would be used, totally, 100%, to offset his fees.  He would then sell high-commission alternatives to what a fiduciary advisor would recommend, collect significant (obscene?) commissions, and then raise his fees dramatically to cover up those commissions.  Because they never had to write a check or see invoices on money taken from their investment accounts, customers thought they were paying nothing for this advisor’s advice, when in fact they were paying quite a bit more than they would have paid if they had hired a NAPFA advisor to do what I have to imagine would be better work for them.  

It was exactly like the product salespeople who were telling their customers that their advice cost nothing, except this advisor’s approach was more sly and misleading.  You open these doors, and that’s what you get: sly and misleading.  (NAPFA wisely rejected fee-offset planners, and many of them shifted gears and went fee-only.)

Honestly, I can’t tell you how somebody would game this new provision for his/her benefit, but I also wonder how hard it is for these would-be NAPFA members to do 1035 exchanges out of the trails to products that don’t pay you to recommend them.  DPL, for one, has a very client-friendly, advisor-friendly exchange process into a wide variety of fiduciary products.  So does LLIS.  Don’t try to tell me you don’t have time to do these exchanges and rid yourself of trails accordingly.

And for those advisors who argue that they absolutely must wait until the surrender charge runs out, I would argue that even if the client has to pay off the residual commission, he/she will be getting out of a product that is going to be more expensive over the intervening years than whatever the fee-only alternative will be.  Remember, the surrender charge (and trail) is often a percentage of the assets in the annuity, and if the markets have gone up, that annual cost will go up as well.  I once modeled the return that annuity companies were getting as they collected fees out of annuity portfolios to pay the trails, and discovered that, in most market scenarios, they were making out like bandits.

In other words, I can think of no real excuse to keep collecting trail commissions if that’s not your model.  If you truly want to be a fiduciary advisor, with a true fee-only mindset, don’t let trail commissions get in your way.  

I generally (that word again) hate to criticize NAPFA because the policies it promulgates are always well-meaning—even if sometimes naive.  This policy was undoubtedly enacted as a way to encourage advisors who are mostly fee-only to step across that line and become true fiduciaries.  

But I will (that word yet again) hate to have to add those qualifiers when I speak to the public about NAPFA members, and I don’t look forward to seeing the consequences of a clever sales agent or two finding a way to attain NAPFA membership without being a fiduciary.   It seems inevitable, and I will (once again with that word) hate to see it happen to such a great organization.