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When considering insurance, collaborate to ensure purity of advice

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The Certified Financial Planner Board of Standards dictates that CFP practitioners may use the term “fee-only” if they solely collect fees for advice and they do not own or work for a financial services business that charges commissions — even if the advisers themselves do not receive commissions.

The CFP board recently investigated its own board chairman, Alan Goldfarb, over his compensation. Goldfarb disclosed his compensation as “fee-only” and “salary” and claimed that his salary stemmed exclusively from fee-only activities. However, he was drawing his salary from a wealth management concern whose parent company owns a broker-dealer (a commission-generating enterprise) of which Goldfarb owned 1 percent.

The board sanctioned Goldfarb and asked for his resignation, and he ultimately departed his firm — all fallout from his inaccurate compensation disclosure.

Although this may seem draconian, the purity of the fee-only concept is crucial to its success.

Independent fee-only advice is resonating with consumers, and brokers are taking notice. Unfortunately, too many advisers now claim to be fee-only just because they have access to a few fee-based products when they are still affiliated with a broker-dealer. But unless the adviser collects commissions in one capacity or another, there isn’t much reason to have a broker-dealer affiliation. Even if an adviser within a broker-dealer-associated firm uses fee-based products, the firm still collects commissions and major conflicts of interest exist.

Commissions are a difficult temptation from which to turn. For example, a retiree with a $500,000 401(k) rollover might find a commission-driven adviser seeking to sell a variable annuity to provide “guaranteed” returns with limited downside. The adviser may or may not mention the potential $50,000 gross upfront payout from the sale.

In our opinion, for the vast majority of people, the variable annuity is the most inappropriate and abused product our industry has ever devised. The risk of falling for a good sales story and buying a variable annuity is one reason to stay away from a commission-based planner.

In the world of financial planning, commissions are inherently dangerous, almost by definition. When advisers can choose from a wide variety of products to present to you, they will undoubtedly consider how much the product pays them before making a recommendation. The degree to which the commission factors into this recommendation may vary based on the integrity of the adviser, but it clearly shrouds the advice in a cloud of doubt.

Commissions are also front-loaded, so it might take a fee-only planner anywhere from three to 10 years to earn commensurate compensation. Clearly then, the fee-only adviser has a much better incentive for a strong long-term relationship. Furthermore, fee-only planners who charge a percentage of assets under management have an incentive to grow your account over time as their compensation is directly tied to your continued success and not an upfront commission check. The fee-only structure is much more transparent, allowing you to truly understand what you are paying.

The actual legal standards for true fee-only planners are different from those of commissioned planners or brokers. Brokers are required to follow a suitability standard. Under suitability, the recommended product doesn’t have to be in the best interests of the client. The product just has to be suitable — in other words, satisfactory. For example, given two available annuities with different underlying annual fees, the adviser may sell the more expensive product without fear of repercussion.

On the other hand, regulators hold fee-only advisers to a fiduciary standard, meaning they have a legal requirement to act in the client’s best interest. As such, they must only offer advice that they believe is of the highest quality.

Because the opportunity for rip-offs is so rampant in the broker-dealer world, the compliance requirement for these operations is onerous. Unfortunately, like much government regulation, the compliance misses the forest for the trees. You can sell someone a terribly expensive and totally incomprehensible variable annuity as long as you fill out enough forms.

Just as counterproductive, this compliance handcuffs even the best commission planners from offering straightforward advice, because their internal overseers are frequently unwilling to document simple, understandable recommendations. Rather, institutions prefer noncommittal and impenetrable ideas, regarding these as less hazardous from a liability standpoint.

Many clients have a true need for certain commission-based products, such as life, disability and long-term care insurance. For many high-net-worth individuals, these products are vital to protecting business and family interests. When considering insurance, we strongly advise collaboration with a fee-only financial planner, attorney and/or accountant to ensure the purity of the advice.

Ben Atwater and Matt Malick are partners at Atwater Malick LLC, a registered investment adviser, which has offices in Lancaster and Dauphin counties. Email them at and

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