Facing criticism, the Colorado Division of Securities expects to tweak its 6-month-old guide designed to help today’s financial advisors navigate regulations, the agency’s chief examiner said.
The Certified Financial Planner Board of Standards in a letter Sept 12 accused the division of bias favoring the asset under management (AUM) fee model and of issuing guidance without public input “subject to the rule-making process” on matters “legally binding on registrants.”
Colorado’s Chief Examiner Jeffrey Eaby said Oct. 21 that this is a misunderstanding of its “Ongoing Financial Planning Guide,” which was published for the first time in March to address frequently asked questions about compliance amid expanding fee models.
The guide poses no new rules for financial planning professionals, Eaby said. Existing rules were adopted after public disclosures, hearings and feedback in standard rule-making processes. Most are models of the North American Securities Administrators Association (NASAA), he said.
The CFP Board did provide input to a NASAA project group looking at this issue of fee-for-service (FFS) models, the board’s vice president for public policy, Maureen Thompson, said Oct. 24.
The recommendations of Securities Division staff, Eaby said, are “somewhat generically written and apply to all the different (fee) models.” The division’s update will clarify portions of the guide “in small ways” to bridge the gap in understanding that the feedback revealed, he said.
The guide’s purpose isn’t to distinguish between fee models but to help financial advisors who have continuing client relationships to comply with regulations, he said.
Advisors may use either AUM or FFS models to charge for a one-time service or a long-term relationship, and the regulations apply to both, he said.
“Ongoing financial planning has certainly become more popular and more prevalent over the past few years,” Eaby said.
Who’s an ‘ongoing’ planner?
The CFP Board does make a distinction between the AUM and newer fee models.
Colorado is the only state that the CFP Board knows to publish a guide for how nontraditional financial planners may meet fiduciary obligations, which parallel the certification board’s enforced standards of competency and ethics, Thompson said.
In general, state securities authorities, including the Colorado Division of Securities, regulate investment advisor firms in their states with assets under $100 million. The Securities and Exchange Commission regulates investment advisory firms with assets over $100 million.
Eaby agreed that the state and the CFP Board share the same goal. “We believe that our guidance is also consistent with the CFP Code of Ethics,” Eaby said.
“An AUM advisor and a fee-for-service financial planner both have an ongoing responsibility to monitor and update the client’s plan. That’s the main takeaway from the guidance,” he said.
“We put out the guide because we license or examine hundreds of firms a year, and a lot of investment advisors are asking questions about how they can offer this (FFS) model to their clients and be in compliance,” Eaby said.
An example is how financial planners who use a subscription-fee model can meet the Form ADV Part 2A Firm Brochure disclosure requirements to consumers.
The guidance states: “… Staff recommends that advisers describe their services with detail and identify clear deliverables that the adviser must complete during defined time periods. If a service can be completed as part of a one-time project, that service should not fall under the umbrella of ongoing planning.”
The CFP Board said Colorado was unclear in the guide’s term “ongoing financial planner.”
The board’s CEO, Kevin R. Keller, wrote in his letter to Colorado Securities Commissioner Tung Chan: “A financial planner is someone who helps clients with a lifelong plan for accumulating assets and avoiding financial risk. In contrast, an investment advisor is someone who advises on investments for an individual and often manages these investments on behalf of the client.”
The division, however, is addressing the nature of the financial relationship, not the menu of services, Eaby said.
“Any investment advisor has a fiduciary obligation to be clear with their client,” Eaby said. “And if they’re in an ongoing relationship, they have a responsibility to periodically evaluate whether the services they are providing are still appropriate.
“It wouldn’t be appropriate to charge a client for five years without providing any services,” he said.
The division staff landed on the term “ongoing financial planner” to distinguish financial professionals who offer more than a one-time relationship with a client, Eaby said.
“The same rules and best practice recommendations in the guide apply to all investment advisors, regardless of the model they offer,” Eaby said. “A financial planner and asset manager (AUM advisor) are both subsets of the statutorily defined ‘investment advisor,’ all of which are fiduciaries. Investment advisors can also offer other services.
“Both an AUM advisor and a financial planner have an ongoing responsibility to monitor and update the client’s plan,” Eaby said. “That’s the main takeaway from the guidance.”
The CFP disagrees
The CFP’s main takeaway from the guide, however, is bias against “the emerging nontraditional fee-for-service models (including retainers, subscriptions, and annual fixed or flat fees)” and in favor of traditional commission or AUM models, Keller wrote.
Innovative fee structures let financial planners tailor flexible compensation models to reach people who don’t have enough money for the AUM fee marketplace, which often requires minimum assets, Keller wrote.
What is important is whether the fees are transparent, reasonable for the services provided, and severable, according to Keller.
“With flexible fee structures, the financial planning profession has an opportunity to democratize financial advice so that more people have access to competent and ethical financial advice earlier in their saving and investment years,” Keller wrote.
The Colorado securities division, the CFP Board and other industry organizations have the same expectation, Eaby said.
“Colorado is open to all different advisory models,” Eaby said. “The consumer choice is a very good thing. All of our rules … apply to the different models.”
Colorado’s guide responds to real-world questions arising from evolving fee structures:
- “During some recent compliance exams, the Staff found several instances where clients were put in more than one model and paid for services such as cash-flow analysis under both an hourly and a flat-fee model or clients paid for asset allocation analysis twice, first as part of a financial planning arrangement and second as part of asset management services … . This type of layering arrangement with differing fees may potentially lead to a Staff finding of unreasonable fees. Consequently, the advisor should exercise extra care when determining fees for layered services.”
- “The Staff has taken the position that an advisor is charging an unreasonable fee if the advisor charges a retail client for the advisor’s availability. Fees should only be charged for work that has been or will be completed. The Staff has conducted several recent examinations and observed instances where fees were charged (often recurring charges) for clients to have access to a financial planner regardless of whether the client utilized those services.”
- “Many ongoing financial planners refer to their fee as a ‘retainer fee.’ The Staff recommends against using this term as its common use is different from most advisors’ actual billing practices and could mislead clients.”
- “Advisors must send clients a ‘notice of fee due’ each time a fee is billed. This notice, often referred to as an invoice, must be itemized. … Staff has observed instances where advisors have effectively disclosed the services … by including client notes on the invoice as a streamlined way to demonstrate to clients what work has been completed (if billed in arrears) or will be completed (if billed in advance) for the assessed fees.”
- “The Staff recommends that advisors create and maintain sufficient documentation and work product to evidence the services that they have provided clients, particularly those being charged a continuing fee for services other than portfolio management, and determine how that documentation can be produced to regulators.”
- “The Staff recommends that advisors consider basing their refund amount on those important deliverables discussed above or refund in full if the client is not satisfied with the services that have been provided to date. These factors must be disclosed in the firm’s termination policy.”
- “Advisors who do not provide continuous or ongoing asset management, or only do so for a portion of client accounts, can consider reporting Assets Under Advisement on the firm brochure.”
Same rules for AUM advisors, examiner says
“The division thinks it’s important to focus on the ongoing nature of the financial relationship,” Eaby said. “It’s important that the client understands what they’re getting and that those services actually are provided.”
Because the service brochure must be specific about the nature of the purchase, new and hybrid fee models draw new and hybrid issues for compliance with existing rules.
“The same best-practices recommendations that we give for ongoing financial planners would also apply to AUM advisors,” Eaby said. “In my mind, everything applies to both business models.”
Linda Hildebrand is a longtime newspaper editor and consumer reporter.