The financial planning industry has been steadily moving away from commission-based product sales for decades. Charging clients a fee based on their assets under management (AUM) for both investment management and financial planning services has gained widespread popularity.<\/p>\n
Alternative financial planning fees<\/a> have more recently been emerging, however, as financial professionals attempt to serve historically underserved markets and separate their planning and investment management services.<\/p>\n With this movement towards AUM fees\u2014as well as other hourly, retainer, subscription, project-based, or other type of planning fees\u2014comes a host of new compliance concerns that firms must navigate, especially for those hoping to\u00a0eschew commissions entirely and be fee-only planners<\/a>.<\/p>\n In late 2018,\u00a0the SEC released an alert<\/a>\u00a0that still bears relevance today. The alert outlined the five most common types of compliance issues involving fee-only financial planning. To understand all your compliance considerations when switching to planning fees, it’s important to first understand the most common issues:<\/p>\n Understanding these common compliance issues when it comes to fee-only planning is important, but not the whole picture. There are a number of other considerations when it comes to complying with federal and state regulators.<\/p>\n A switch to fee-only financial planning can be great for the future of your firm and for your clients. Whether you’re moving to AUM fees or newer alternative fee structures, it’s important to consider these nine things.<\/p>\n The first consideration is a simple one: What regulations do you need to adhere to for fee-only planning? This should be your first consideration as there are several federal regulators that may come into play, including but not limited to:<\/p>\n There are individual state regulators at play for every firm, as well as the National Association of Insurance Commissioners (NAIC) for cases involving specific solutions and their sales, such as life insurance and annuities. While your Federal obligations may be more straightforward based on your firm’s business model, state regulators vary widely. Utah, for example, has deemed most retainer fees in financial planning as \u201cunreasonable.” As another example, Illinois and Nevada don’t allow for blended fee structures where firms charge a subscription and an AUM fee.<\/p>\n Regardless of where your business is, you may be liable to adhere to multiple state regulations, as they apply based on where clients are located, not where your firm is located. So be sure to account for the wide variance in state-level regulations in financial planning fees, especially with \u201csnowbird clients” and in light of today’s mobile, remote workforce.<\/p>\n Switching to fee-only financial planning is a big change. One that will require extensive communication with your clients. As with anything in your business, how your clients will be impacted should be a top concern.<\/p>\n Clients will inevitably have questions about your new fee structure. Be prepared to talk to them about why this change benefits them, or at least causes minimal disruption, and is beneficial to your ability to provide objective financial advice. You may even consider grandfathering in certain clients who may leave upon seeing their fees change.<\/p>\n When switching to fee-only planning it’s important to also evaluate your clients’ portfolios and ensure there are no trailing commissions from client assets that would prevent you from truly being fee-only. If you’re only making the switch to being fee-based, then this isn’t a compliance concern.<\/p>\n One immediate compliance step you can take upon implementing fee-only planning is to make a material change on your Form ADV, as most states consider this a material change. You will have to update your ADV, file an amendment, and disclose the change to clients.<\/p>\n As you’ve seen in the section above, accurately representing your fee structure, frequency, calculations or valuations, and rates is crucial for compliance. Nearly all the SEC’s most frequently found compliance issues regarding fees revolve around discrepancies between a firm’s ADV and the way fees are actually implemented in their practice.<\/p>\n When updating your ADV, you’ll also need to update your financial planning contracts to reflect the new fee structure.<\/p>\n In many cases, it’s beneficial to have separate contracts for financial planning and investment management. It drives home the message to clients that the services are separate, in turn clarifying the fees they’re paying, while also giving them a better opportunity to concretely see the services and value being delivered in exchange for what they’re paying.<\/p>\n For those implementing a tiered fee structure, it’s important to note you may need multiple financial planning contracts for planning services depending on how greatly your services vary at each level.<\/p>\n In the past, churning in the industry used to be a problem where financial professionals would intentionally trade in high volumes to collect more commissions. Regulators have done well to stamp out this problem, but now the opposite, though likely less problematic, issue is arising: reverse churn.<\/p>\n This is where financial professionals bring on clients, aggregate assets, and collect an ongoing fee without actively managing the client’s finances. Regulators are now keen on protecting clients from reverse churning.<\/p>\n Once you begin charging fees, be prepared to demonstrate the work that goes into each client’s plan, as well as any investment management discussions or actions you’ve taken, to justify the fee you’re collecting.<\/p>\n The SEC requires any registered investment advisor (RIA) who collects a prepayment greater than $1,200 more than six months in advance of services to be delivered to offer additional disclosures to clients.<\/p>\n This includes providing clients with an audited balance sheet of the business, along with further disclosures in your ADV about any financial condition that could impair your ability to meet contractual obligations with clients.<\/p>\n While you probably will still need your FINRA Series 65 and 66 registrations, if you’re making the switch to fee-only planning, you’ll likely have to drop your Series 6 (mutual funds, variable annuities, 529s) and Series 7 (individual stocks, bonds, etc.) registrations.<\/p>\n The reason for this is that both Series 6 and 7 registrations involve the sales of primarily commission-based products, which would exclude an RIA from labeling themselves \u201cfee-only.” This is a big decision with potential impacts to your clients’ portfolios and the solutions you offer, but a necessary one for those who desire to market themselves this way.<\/p>\n As financial professionals seek to serve those who traditionally couldn’t be served with financial advice, they’re also looking to new methods of fee collection. In some instances, firms are automatically charging client credit cards for recurring planning fees. Those who do so must be careful.<\/p>\n In some jurisdictions, having access to a credit card, along with the ability to charge it, is seen as a custody violation. Be sure to check with your state regulations on collecting fees for planning and explore other alternatives for fee billing.<\/p>\n Over the years, there have been numerous misuses of the label \u201cfee-only” by CFP\u00ae professionals. As such, the CFP Board has developed\u00a0strict standards for what constitutes fee-only planning<\/a>. At the highest level, CFP\u00ae professionals and their firms must be compensated entirely through fees for advice with no sales-related compensation.<\/p>\n The CFP Board also states that \u201cRelated Parties receive no Sales-Related Compensation in connection with any Professional Services the CFP\u00ae professional or the CFP\u00ae Professional’s Firm provides to Clients.”<\/p>\n This means that any relationship a CFP\u00ae professional or their firm has with an entity collecting sales-related compensation would disqualify them from the fee-only label if it’s in connection with the planning services provided.<\/p>\n If you’re a CFP professional hoping to offer fee-only planning, it’s important to take a look at the relationships you and your firm have with other financial services providers to ensure you truly can call yourself fee-only. There is a subtle, but important, difference between \u201cfee-based” and \u201cfee-only.”<\/p>\n Making a change in your pricing model can be a huge undertaking, but one that secures the future of your firm, offers greater transparency to your clients, and opens up an entirely new market for prospective clients.<\/p>\nThe Most Common Types of Fee Compliance Issues<\/h1>\n
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9 Things to Consider for Fee-only Financial Planning Compliance<\/h1>\n
1. Where Are You Responsible for Compliance?<\/h2>\n
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2. Considering the Impact on Client<\/h2>\n
3. Making a Material Change<\/h2>\n
4. Update Financial Planning Contracts<\/h2>\n
5. Addressing Reverse Churn<\/h2>\n
6. For RIAs\u2014Do You Need to Give Clients an Audited Balance Sheet?<\/h2>\n
7. Also For RIAs\u2014Dropping Your FINRA Series 6 and Series 7 Registration<\/h2>\n
8. Ensure There Are No Custody Problems with Fee Collection<\/h2>\n
9. CFP Board’s Guidelines on Fee-only Planning<\/h2>\n
Making the Shift to Fee-only Financial Planning<\/h1>\n