A newly announced NAPFA rule change may put the group in peril of losing members.
NAPFA announced a change Thursday that brings its definition of fee-only in line with that of the CFP Board -- eliminating
"It's a real dilemma for me," said Rick Kahler, who commanded the main stage before hundreds of NAPFA members at the group's semi-annual conference, held in May in Salt Lake City. As a result of the announcement, Kahler says he may have to drop both his NAPFA membership and his CFP designation.
2% EXEMPTION ELIMINATED
The rule change eliminates an exemption, in place since 2004, that had allowed members to keep ownership stakes of 2% or less in firms that take commissions. Kahler has such a stake in a family-owned real estate firm.
The new rules are effective immediately. Geoffrey Brown, NAPFA's CEO, says the group will review members on a case-by-case basis as each member's annual membership comes up for renewal.
"NAPFA passed on a real chance to define what fee-only really is and to drive a larger discussion," Kahler says. "They pretty much took the easier route, which was to say, 'Let's go along with what the CFP Board is saying.' "
The board released a statement that "applauds" NAPFA'S move.
NAPFA requires that all of its members -- currently about 2,500 -- be fee-only planners and accept no commissions. The 2% exemption allowed larger firms more complex ownership structures, as long as they only took fees from their clients.
NAPFA began reexamining the exemption last year, when the CFP Board publicly clarified its rules for use of the term fee-only after summarily dismissing its own chairman in part over such an ownership stake.
At that point, it became clear that the board and NAPFA defined the hot-button term differently.
Now, "our two definitions between the CFP Board and NAPFA are one and the same," says Brown. "We feel pretty confident that this is the right course of action."
RISK OF MEMBERSHIP DROP
Brown says he understands that NAPFA runs the risk of losing members. He estimates that roughly 5% of its members, or about 125 planners, could be affected, although he says this is merely an educated guess.
"Members may have to choose between being members of NAPFA and rethinking their ownership stakes," he said.
The decision is the result of more than six months of investigation by a specially convened working group, Brown says. The group included former NAPFA leaders like Tom Orecchio of Modera Wealth Management in Westwood, N.J.
Brown says the working group mainly reviewed its own policies and did not examine specific member cases.
And some advisors have praised the switch. "Let's not equivocate," says Delia Fernandez, an advisor in Los Alamitos, Calif. "I don't see how you say to the consumer, 'Well, if you get that large, you can say you are fee-only but not on that 2%.'
"Come on, is that really how we want to treat our clients?"
PREVIOUS CHANGES
NAPFA's rule about ownership stakes has changed substantially over the years, according to Brown. From 2000 to 2004, members couldn't own such stakes at all. Prior to 2000, however, the exemption was as high as 5%.
If Kahler's situation is an indicator, however, NAPFA has not enforced its own rules strictly in the past.
The founder of Rapid City, S.D.-based Kahler Financial Group said he was admitted as a full NAPFA member in 2009 -- even though NAPFA knew he owns a 50% stake in a real estate company that his family has owned since 1959.
"Clearly I'm out of compliance with NAPFA and always have been," says Kahler -- a popular, sought-after speaker who has spoken at numerous NAPFA conferences over the years. "I'm out of compliance with the CFP Board because I hold myself out as fee-only."
Both groups are aware of his situation, he says, and he has been awaiting guidance from the board on the matter for about a month.
"Rick Kahler... does not have to relinquish his CFP certification," the board says in a statement. "CFP Board stands ready to provide guidance to Mr. Kahler, as well as any other CFP professional, on how he can retain his CFP certification."
NAPFA declined to comment on Kahler's case specifically.
FIDUCIARY EMPHASIS
Kahler says he wishes that the whole debate about fees and commissions would give way to a larger one on the definition of a true fiduciary. "Living up to the concept of fee-only can actually be something less than living up to the concept of the fiduciary," he says.
He offers an example of a situation that arose in his practice a decade ago, when a client needed to buy into a financial instrument known as an UPREIT -- short for an umbrella partnership real estate investment trust. The client was selling real estate properties and doing 1031 and 721 tax-deferred exchanges for shares in the UPREIT.
The seller of the UPREIT wanted to pay a $40,000 commission to Kahler on the $1 million transaction, he says. When he refused to take it and asked if the money could go back to his client, the seller said it could not.
Instead, Kahler says, he arranged for that sum to be paid to his real estate company -- with his client's full knowledge. The amount covered the client's $15,000 annual fee to Kahler's planning practice for nearly three years, he says.
"Which choice is the client going to say is the more fiduciary?" Kahler asked. "The client said, 'Wow, you are looking out for me.' This is where the concept of fee-only can fall down."
Kahler says he knows of other planners who maintain small in-house insurance operations so as not to send their clients to insurance agents who might take large commissions from them.
Over the years, several of Kahler's peers have suggested that he just stay quiet about his situation, and fly under the radar -- "but I couldn't, in integrity, do that," he says.
RAMIFICATIONS FOR STAFF
His situation is further complicated by the fact that one CFP holder on his staff may have to give up the certification as well, and another may need to stop studying for it. All employees in his firm, he says, are adamant that they continue to advertise their services as fee-only.
"Saying that we are fee and commission is much more inaccurate than saying that we are fee-only," he says.
Others have suggested that he sell or give away his stake in his family firm, which is one of the largest real estate operations in the Rapid City area, he says.
But selling an illiquid stake in a family-run company is no simple matter, Kahler says, adding that he has been trying to do so for years.
And suggesting that he give it away is "pretentious," he contends: "You just give away a few hundred thousand dollars," Kahler says to those who make the suggestion.
Alan Goldfarb, the former CFP Board chairman forced out of that position over a similar dilemma, says that NAPFA now risks pushing out many other members who ought to be in good standing out of the organization. "This, in my opinion, may be carrying the issue to an unintended extreme that would be impossible to enforce," he says.
NAPFA already is composed largely of members who are sole practitioners or in relatively small organizations. This decision is likely to ensure that it will be composed of solo practitioners going forward, say Goldfarb and Kahler.
Kahler argues that his clients have been better served because of his more complex ownership structure. But if NAPFA stands by its announcement and does not grandfather in current members under the older rule, Kahler says, "Well, then it appears I am on my way out."
His CFP designation might be the next to go, he adds. "I've got the forms to turn my CFP in," Kahler said. "I very easily could be filling those out in the next few weeks or so."
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