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Advisory Opinion 2003-1

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Part I - PRINCIPLES
Part II - RULES
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Advisory Opinion 2003-1
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CFP Board designees must avoid possible misrepresentation when using the term "fee-only."

Background

The Board of Professional Review ("BOPR") views misrepresentation of compensation arrangements to be a violation of the Code of Ethics and Professional Responsibility (Code of Ethics). The Code of Ethics defines the term "fee-only" as denoting "a method of compensation in which compensation is received solely from a client with neither the personal financial planning practitioner nor any related party receiving compensation which is contingent upon the purchase or sale of any financial product." BOPR Advisory Opinions 97-1 and 97-2 allowed for a designee to use the term "fee-only" to describe the compensation received from a specific client, even if other methods of compensation were used with other clients, and could offer "fee-only" services to a client, even if the designee also received commissions from the same client or other clients for other services. In light of recent regulatory trends regarding the misrepresentation of methods of compensation, media focus on the issue, and the perceptions of the general public, the BOPR has redefined the appropriate use of the term "fee-only."

The purpose of this Advisory Opinion is to reduce confusion on the part of CFP Board designees, their clients, and the public, and to maintain consistency with other organizations' use of the term "fee-only." Thus, the Board of Governors withdrew Advisory Opinions 97-1 and 97-2 in January 2002 and the Code of Ethics definition can no longer be considered an accurate reflection of the BOPR's position on this issue.

Issue

When may a CFP Board designee use the term "fee-only" to describe the designee as an individual, the designee's practice or the designee's services?

Analysis

A fee arrangement exists when the CFP Board designee is compensated solely by the client, or another party operating exclusively on behalf of the client, for professional services provided. The BOPR has defined types of compensation arrangements. The following qualify as fees:

Hourly, fixed or flat fees;
Percentage fees, which are based on some aspect of the client's financial profile, such as assets under management or earned income; and
Performance-based fees, which are tied to the profitability of the client's invested assets.

Use of the Term "Fee-Only"

In order for a CFP Board designee to describe his or her compensation as "fee-only", all compensation from all clients must be derived solely from fees. Minimal exceptions may be allowed provided the compensation is inconsequential and independent of the purchase of any product or service. Likewise, when using terms including, but not limited to, "fee-only services" and "fee-only firm," the same requirements apply.

Potential Rule Violations

Cases involving misrepresentation of compensation arrangements or failure to disclose compensation arrangements warrant investigation of whether that CFP Board designee has violated the Code of Ethics. The rules implicated in this analysis include, but are not limited to, Rules 101(a) and (b), 102, 201, 202, 401, 402, 606, 607 and 702. The BOPR must consider whether the CFP Board designee is a financial planning practitioner (as defined by the Code of Ethics) in determining which, if any, rules have been violated. While any and/or all of the rules mentioned above may apply in a particular case, this advisory opinion focuses on three rules that would most often be implicated in a case involving misrepresentation of and/or failure to disclose compensation arrangements: Rules 101(a) and (b), 401 and 402.

Rule 401

Rule 401 of the Code of Ethics requires CFP Board designees to disclose to the client material information relative to the professional relationship, including compensation structure. The BOPR urges that disclosures under Rule 401 be clear, straightforward and unambiguous so as to be easily understood by all parties. In cases involving CFP Board designees who represent themselves as "fee-only" to a client but accept compensation not defined as fees by the BOPR from that relationship or other client relationships, the BOPR presumes that the CFP Board designee has failed to disclose material information relative to the professional relationship.

Rule 402

Rule 402 requires CFP Board designees in a financial planning engagement to make timely written disclosure of all material information relative to the professional relationship, in all circumstances and prior to the relationship, including sources of compensation. Adherence to the provisions of Rule 402 by CFP Board designees in financial planning engagements allows the public to make informed decisions about whether to use the professional services of the CFP Board designee. Rule 402(a) is violated when the CFP Board designee in a financial planning engagement, in the disclosure provided to the client, represents himself or herself as "fee-only" when, in fact, that designee accepts compensation not defined as fees by the BOPR in that relationship or other client relationships.

Rule 101(a) and (b)

Rule 101(a) and (b) prohibit CFP Board designees from soliciting clients through false or misleading advertisements and/or promotional activities. The use of the term "fee-only" must be used carefully and only when the CFP Board designee derives all compensation from all clients solely from fees. The BOPR presumes advertisements and/or promotional activities to be false or misleading when they contain the term "fee-only" and the CFP Board designee advertising or promoting his or her services accepts compensation not defined as fees from that client relationship or any other client relationships.

Summary

The public regards compensation structure as important information when choosing a financial planning professional. The Code of Ethics requires CFP Board designees to act with integrity and fairness toward the public in all activities. The appropriate use of the term "fee-only" in all public discourse provides a key opportunity for CFP Board designees to demonstrate professionalism by avoiding casual use of the term. The BOPR advises CFP Board designees to avoid using the term "fee-only" except when all compensation from all clients is derived solely from fees. CFP Board designees should also avoid the use of other terms designed to induce the public into a distorted belief that the designee receives "fee-only" compensation when in fact the designee receives commissions, referral compensation, or any other form of compensation not defined as fees by the BOPR.