For the deliverer of services and products, the issue isn’t fees. It’s about how they’re paid for the services they perform and/or the products they sell. It’s about disclosing how they’re paid. And it’s about what the customer wants when working with them. In this document, Richard Weber addresses these issues.
The National Association of Personal Financial Advisors (NAPFA) recently trademarked the term 'Fee-Only,' and began restricting its use to members of NAPFA (which requires its members to receive compensation from the customer only and never from any other source) and to other planners whose compensation meets this requirement.
Commission-based compensation for salespeople has been a long and honorable tradition, especially for products or services that are hard to sell 'over the counter.' Aspirin needs little in the way of extraordinary promotion. On the other hand, Life insurance isn’t bought — it must be sold. When a product or service requires time to develop and place, there’s usually a commission associated with the risk the salesperson takes to acquire a prospect who might not actually buy. Or, in the case of an attorney who handles a lawsuit on a contingency basis, this 'commission' might be the only way for an average citizen to have their day in court.
So, if commissions aren’t inherently bad, where’s the beef? Why the fuss about 'fee-only?' For one thing, commissions can get in our way of doing the right thing for the customer. Life insurance sales commissions and allowances that range from 50% to more than 100% of the first- year premium undoubtedly attract some salespeople to our business because they can earn so much so early in the game. In recent years, investigators have uncovered unethical sales practices attributed — in large part — to the temptation of hefty first-year commissions. Unfortunately, such churning and replacement activities have reached such epic proportions that consumerist groups have raised the alarm: The Consumer Federation of America estimates that surrender charges on Life insurance and annuity products cost policyholders more than $6 billion a year. That figure deserves attention.
'Fee-only' compensation is not the remedy to this problem. I’m neither more virtuous nor more competent because I practice as a fee-only planner (which I’ve been doing since 1993). My commission-only colleagues are no less virtuous nor competent for how they earn their living. The issue should be what the customer wants — assuming that they know it — and how we as financial services professionals respond to their wishes.
In many instances, the best compensation system might combine fees and commissions. Some products and/or processes lend themselves well to fees. These include specific projects with a clear beginning and end (such as defining financial goals and risk tolerances and integrating these goals into an asset allocation program). Once the project is completed, fees can also play a role in the ongoing maintenance and feedback needed to manage an uncertain future. In other aspects of the financial planning process, commissions might be more desirable. Most Life insurance and annuity products have the compensation built in to the pricing. It’s often difficult, if not impossible, to find certain financial products on anything other than a commission basis (for example, try to find a Lump-Sum Disability Buy-Sell policy from a no-load carrier). And sometimes the customer is more accustomed to and more comfortable with the insurance company taking care of 'the compensation thing.' Different aspects and/or different processes will lead to appropriate compensation.
Certain customers will prefer to work solely on the basis of a fee. Whether they feel that they’ll benefit from more independent thinking, or have simply grown accustomed and comfortable with this approach, the customer should be allowed to decide how they prefer to do business. And if I’ve been referred to this prospect, I should be allowed to determine whether my way of doing business is compatible with theirs.
However, there are barriers to the idea that we should be able to do what’s in the best interest of the specific customer. According to NAPFA, I can never use the term 'fee-only' if I ever receive compensation from anyone other than the client. Thus, it would be impossible to convert my planning process over to a 'fee-only' basis (and call it that) as long as there are any renewals or trailing commissions from insurance or investment products, even though I work with new clients on a 'fee-only' basis.
It’s not just NAPFA that creates the problem. I need to reconcile the sometimes conflicting rules and regulations of the NASD/SEC on licensing and Registered Investment Advisory registration — not to mention a hodge-podge of state anti-rebate and fee-charging regulations that might conflict with federal standards.
I was recently associated with a general agency dealing exclusively with low-load Life, Annuity, and Disability products. Even with this relationship and my current status as a 'I-only-charge-fees-but-I-can’t-call-myself-'fee-only’-because-I-still-receive-some-renewals-from-pre-1992-business-planner, I’m not biased toward fees. However, I have a personal preference for fees and seek prospects with similar views.
To raise the threshold of competence and professionalism, our industry must:
- Impose far tougher licensing requirements (including meaningful continuing education requirements for re-certification);
- Create a nationwide database of agents who have been terminated by carriers or reprimanded by regulators, and
- Encourage agent associations to confront and purge the relatively few 'bad actors' who have tarnished the reputation of an entire industry.
The proof will be in the pudding.