For an organization that's committed
But that insistence on transparent fees in return for fiduciary planning services posed a real conundrum for the
These so-called "trailing commissions," which usually result from sales of products like annuities or disability and long-term care insurance, sometimes last for years. If they furnish large amounts of money — $10,000 annually, say — they can usually be sold or assigned to someone who will be happy to have the additional income.
But if the "trails" provide only hundreds of dollars a year, they can be difficult to unload. Jeff Jones, the chair of NAPFA's board of directors, said he and his colleagues were loath to turn away former insurance representatives simply because they couldn't shed their old commission contracts. At the same time, the organization wasn't about to budge
So what they did, according to Jones, was to arrive at a rather elegant compromise: Under a policy NAPFA's board approved in May, advisors who cannot shed $2,500 or less in trailing commissions will be able to keep their fee-only status by giving the money to nonprofit groups.
But donation will not be the first option. Before deciding which 501(c)3 charity they might want to favor, insurance agents-cum-advisors must first try to transfer their trailing commissions to an unrelated third-party. If there are no takers, they next have to reach out to the entities paying the commissions and ask them to stop.
Only when that fails does bestowing the money on charity become a possibility. Jones said NAPFA and its more than 4,600 members remain committed to the idea that the simplest and most transparent way to pay for advisory services is through fees charged either as a percentage of assets under management, as a retainer or at an hourly or flat rate. Unfortunately, other industries don't always fit squarely into that model.
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Jones said he isn't seeking to cast aspersions on the insurance industry.
"The insurance world is necessary," he said. "We need people to sell these products that our clients need. It's just the trails that are a problem."
Jones recently sat down with Financial Planning to discuss the nuances of NAPFA's new trailing commission policy. (This interview has been edited for clarity and brevity.)
Financial Planning: Why are trailing commissions sometimes hard to eliminate?
Jeff Jones: Well, many of these trails are contractual obligations, and they are assigned to certain individuals and certain social security numbers. That's who an insurance company is going to issue a check to. And some of our members, they were getting these small checks that they have been unable to cancel or unable to transfer or reassign. As long as they were receiving this money, they didn't have a path fully into the fee-only fiduciary world, which includes NAPFA. So one of the big reasons we did this was so we could build that pathway. NAPFA needed to be welcoming to people who were open to our way of delivering services and charging fees.
FP: How will you know advisors are actually donating their trailing commissions?
JJ: I think the piece that's often overlooked with this is that we are going to monitor for this and report to the (Certified Financial Planner Board of Standards) anyone who is found to have broken that obligation. Advisors will have to prove they donated their trails and attest to the fact that they donated their trails. And if they are found to have broken that rule, we will terminate their membership and report them to the CFP Board for breaking the definition of fee-only.
FP: Do these trails ever go away on their own?
JJ: Eventually, over time, they will dissipate. However, if someone sold an insurance product last year and they decided to make the transition to the advisory world now, we felt it was unfair to penalize them as if we were somehow punishing them for past transgressions.
FP: Besides providing a pathway to providing fee-only advice for people with trailing commissions, are there other goals for this policy?
JJ: The second piece to this is to define fee-only to eliminate as much confusion as possible for the American consumer. We have put in more guardrails and more protections and made sure that any trails falling under this policy truly were de minimis.
And rather than have multiple definitions of fee-only, we and the CFP Board have aligned our definitions. Because the public can be easily confused simply by the number of titles out there: financial advisors, financial planners, certified financial planners, financial counselors.
But we at NAPFA believe the bottom line is that the best way to deliver service is for a fee that is easily understood by our clients. If your advisors can't give you a very clear definition of how they are being paid and what they are being paid, then you should be very cautious.
FP: What can advisors do if they have more than the limit of $2,500 in trailing commissions?
JJ: They would have to go and reassign or sell or cancel anything over $2,500. Unless they do that, we will not consider them for membership.
FP: Do you think trails over $2,500 should be fairly easy to unload because of their value to third parties?
JJ: Yes, generally we believe that should be the case.
FP: Have you received much criticism of this policy change? What are the critics perhaps not understanding?
JJ: Any time you make a major decision or a change, you are going to have those who raise issues. I think many people just don't realize how difficult it is to stop a trail. Many people seem to think if you just try hard enough, you can do this. But we have had other members come out in defense of this policy and say, 'I had trouble getting rid of these trails myself.'
So that has been the major criticism. But it's nothing new really. It's part of an argument that goes back 40 years. There are still NAPFA members who do not agree on the definition of fee-only.
