Investment Advisors Should Be Careful with Fee-Only Claims

June 19, 2015

Many registered investment advisors choose to market themselves as “fee-only” in an effort to convey the registered investment advisor firm does not accept or receive commissions, is not incentivized to sell specific investment products, or is somehow conflict free.  Although regulators have not defined “fee-only” or otherwise provided specific guidance for its use, the National Association of Personal Financial Advisors (“NAPFA”) provides a useful definition of “Fee-Only financial advisor.”

“[An advisor] who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial productNeither Members nor Affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations. ‘Fee-offset’ arrangements, 12b-1 fees, insurance rebates or renewals and wrap fee arrangements that are transaction based are examples of compensation arrangements that do not meet the NAPFA definition of Fee-Only practice.”

Although the “fee-only” label is not inherently wrong, self-proclaimed “fee-only” registered investment advisors are held to that standard during routine U.S. Securities and Exchange Commission (“SEC”) and state regulatory examinations.  “Fee-only” firms must prove they have no other additional income sources.

If a registered investment advisor claims itself as “fee-only,” the investment advisor needs to ensure the only form of revenue generated by the investment advisor comes from fees paid directly by clients, and no additional revenue comes from non-client, third party sources.  Client fees may come in the form hourly fees, fixed fees, and asset management fees.  The key is that such fees are paid directly by the client.  An investment advisor needs to confirm that the investment advisor does not receive revenue such as insurance or broker/dealer commissions, travel or marketing reimbursements from product sponsors, bonuses from third-parties, referral fees, and any other economic incentives.

Moreover, investment advisors need to understand the types of revenue and compensation their investment advisor representatives earn through the investment advisor representatives’ other business activities.  In other words, regulators will often “look through” the investment advisor firm to examine the forms of compensation received by the investment advisor’s representatives.  If investment advisor representatives are not “fee-only,” such claims may be considered misleading.  For example, an investment advisor’s sole revenue may come from asset management fees charged to clients, but if an investment advisor representative is earning commissions or 12b-1 trails in the managed account through the investment advisor representative’s separate capacity as a broker/dealer registered representative, the arrangement is not “fee-only.”  Investment advisors need to expect that during routine investment advisor examinations, the SEC or state examiners will inquire about any possible soft dollar arrangements, marketing and travel reimbursements, commissions, etc.  Investment advisors and their supervised persons should remember that literally any other form of revenue, other than fees paid directly from a client, could be interpreted as additional revenue and suggest the investment advisor should not refer to the investment advisor as a “fee-only advisor.”

In addition to regulatory exam inquiries, NAPFA and the Certified Financial Planner (“CFP”) Board monitor and enforce their own, often higher standard of interpretation of the term “fee-only advisor.” Members of NAPFA or CFP need to fully understand these organizations position on “fee-only advisors” to avoid a violation of their standards.

RIA Compliance Consultants will be hosting a webinar, “Conducting an Annual Compliance Review – Session 5 – Advertising and Social Media,” Thursday June 25, 2015, at 12:00 PM CDT during which we discuss an investment advisor’s responsibilities for supervising advertising and social media. The fee for this webinar is $69.95. Click here to register for the webinar.  If you are looking for more insight or guidance regarding the ongoing compliance responsibilities of investment advisors, you may want to consider signing-up for our annual subscription to live and recorded webinars for just $545.  Click here for more information or to purchase an annual subscription.

RIA Compliance Consultants can assist your investment advisor with developing the investment advisor’s advertising and marketing compliance policies and procedures or can assist your investment advisor with advertising and marketing reviews. If you would like more information regarding these or any of our compliance support services, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our consultants if you have not previously worked with RIA Compliance Consultants.

Posted by Bryan Hill
Labels: Fee-Only