17 July 2019

NAPFA Changes Membership Criteria

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The National Association of Personal Financial Advisors is tightening its membership rules and will no longer allow members to own even a small stake in any financial firm that charges commissions.

The association, comprised of fee-only financial planners, notified its approximately 2,500 members in an e-mail Thursday that it was rescinding the provision that allowed them to own up to 2% of a firm that generates transaction-based revenue.

The change resolves a difference between NAPFA's fee-only definition and the one outlined in Certified Financial Planner Board of Standards Inc. rules. The CFP Board says financial advisers are fee-only if they only charge fees for their services and are not affiliated with a firm that charges commissions, a rule that has caused much controversy.

“We're really trying to eliminate a discrepancy between our membership standard and [the CFP Board's] rules of conduct,” NAPFA chief executive Geoffrey Brown said in an interview. “This change in alignment is really about our members' commitment to providing financial services in a manner that is open, clear and easily understandable for consumers. The 2% exception is confusing.”

The CFP Board backed NAPFA's decision.

“NAPFA is a leader in investor protection and this change reflects their commitment to putting consumers first with a focus on transparency along with clear and understandable disclosure,” Ray Ferrara, CFP Board chairman, said in a statement. “We look forward to continuing to work with them as a partner in the Financial Planning Coalition to advance the financial planning profession and ensuring Americans have access to competent and ethical CFP professionals.”

With NAPFA's requirement that its members hold the CFP credential, it made sense for NAPFA to remove the conflict between its membership standard and the CFP fee-only rules, said Michael Kitces, a partner and director of research at Pinnacle Advisory Group.

“While this new alignment is positive, at the same time I hope NAPFA will continue to push for action with the CFP Board to resolve the fundamentally flawed compensation definitions that remain in use, for the betterment of their members and the profession at large,” Mr. Kitces wrote in an email.

An adviser who is facing the revocation of his NAPFA membership said that the organization is sidestepping a chance to shape the compensation debate.

“This was a great opportunity for NAPFA to take the lead on defining what fee-only financial planning is,” said Rick Kahler, president of Kahler Financial Group. “It appears they've decided to accept the CFP Board's definition of fee-only. Their definition is one I don't feel is entirely accurate. There are lots of unintended consequences.”

Mr. Kahler's stake in a real estate firm puts his NAPFA ties in jeopardy.

“I'm pretty sad and feel some anger about that,” Mr. Kahler said. “I was accepted into membership with [NAPFA] fully being aware of my minority ownership of the family real estate firm.”

Dave O'Brien, owner of O'Brien Financial Planning, served on the NAPFA compensation task force that recommended dropping the 2% exception. He said the goal was to provide clarity for clients.

“Anything we can do to really, really simplify things for consumers so they can understand who is getting paid by whom for what supports the goal of helping the consumer make informed choices,” Mr. O'Brien said. “A confused consumer is not what we want in financial services.”

Click here for the full article in InvestmentNews.

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