Goldfarb's CFP Board Sanction Shows Risk to Advisors | Lord Abbett

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Practice Management

The case goes to the heart of the planning industry’s struggle to clearly disclose how they earn money for a client base that is simultaneously uninterested and vulnerable. 

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).

When advisors are asked to describe their compensation on the FPA website, they can choose to check one of four options: fee-only, commission-only, a combination of fee and commission, or salary.

But as one prominent advisor learned the hard way, those options are dangerously limited, given the industry's often complex business models—and the answers that planners select can contain minefields for the advisors, their firms and their clients.

Indeed, say several industry observers and participants, Alan Goldfarb's sanction by the CFP Board in June goes to the heart of the planning industry's struggle to require professionals to accurately, clearly and comprehensively disclose the way they earn money—to a client base that is simultaneously disinterested and vulnerable to abuse when misinformed.

"The dually registered model really is a problem," says industry thought leader (and Financial Planning columnist) Bob Veres. "It really is an issue, and none of us know what to do about it. The disclosures have to [address the question of], 'What hat were you wearing when you were a fiduciary and is it possible to switch that hat?' And those are the questions that have not been adequately answered."

CFP Board Sanction
For Goldfarb, the former chair of the CFP Board, the sanction by an ad hoc Disciplinary and Ethics Commission follows a departure from his prior firm and an investigation that led him to lose his position on the board. Today, he is essentially starting over as an entrepreneur after more than 40 years as a planner.

When faced with the FPA questionnaire, says Goldfarb—who at the time was director of financial strategies for RIA and insurance agency Weaver Wealth Management in Dallas—he made the choice to check the "fee only" box. In all other communications with clients, he says, he disclosed the fact that Weaver's parent company paid him a salary and owned a broker-dealer.

Goldfarb says that the clients he served directly paid only fees—a fact that he says his supervisor at Weaver attested to in a letter to the board. A copy of his ex-firm's Form ADV from March of 2012 cites the broker-dealer and insurance company relationships and describes the way both generate revenue, although it does not mention that Goldfarb owns a 1% interest in the broker-dealer.

He disagrees with the CFP Board's conclusion that his salary may have been composed of commission, and denies that he was being dishonest about the source of his income. "No one was trying to hide anything here, which is why I think this was blown out of proportion," Goldfarb says.

Other Planners Exposed
Many experts interviewed for this story—all of whom qualified their comments by pointing out that they were not privy to details of the hearing—say Goldfarb fell into a quagmire that could easily trip up other planners, opening them up to similar sanctions or accusations. That's especially true given the increased popularity of the dually registered business model, they say.

Some planners, like Jeff Fishman of JSF Financial in Beverly Hills, California, have chosen to avoid the risk of affiliating either with the FPA or NAPFA.

"I'm a huge believer in disclosure," Fishman says. However, he adds, "I'm not a member of the FPA only because, I've got to tell you, years ago I found them to be too sanctimonious on this kind of topic. There was an ideological divide and, personally, I found it very frustrating."

Fishman makes his own disclosures on the home page of his company’s website. Under his firm’s logo, JSF Financial is identified as an RIA. At the bottom of the home page is a line stating that the firm offers services through a broker-dealer, Mid Atlantic Capital, and pointing out that the broker-dealer does not hold an ownership stake in the RIA.

Barbara Roper, director of investor protection at Consumer Federation of America, says she can see both sides of the Goldfarb case. Roper has worked alongside the FPA, NAPFA, and CFP Board for years to advocate for the broad adoption of a fiduciary standard to better protect consumers.

"It certainly seems there's reason to believe [Goldfarb's] claims that he did nothing to try to hide his compensation from clients," Roper says. "On the other hand, these issues of compensation are sensitive issues and I understand why the CFP Board would want to be scrupulous in maintaining high standards."

Dan Moisand, a former CFP Board chairman and former chairman of board's Discipline and Ethics Commission, went further. "I have a great deal of respect for Alan Goldfarb and I have a great deal of respect for the people at the CFP Board," Moisand said, "so I'm kind of at a loss to seeing this come to a public sanction like this."

The hard work that remains to be done by the CFP Board and the FPA, according to Moisand, Roper and other experts, is to review the existing terms they require members to use to describe compensation, with an eye toward potentially redefining them or adding new ones.

Given the multiplying business models in use by financial planners, Roper adds, some may be too complex for clients to grasp. And in that case, she says, some of those may need to be deemed illegal under Dodd-Frank if a workable fiduciary standard is to be broadly applied.

"If it's too complex to disclose," Roper suggested, "then maybe it's too complex to exist."

Complex Arrangement
On the face of it, the decision of the commission that was convened to address the Goldfarb matter is simple: Goldfarb clicked "fee only," but the commission concluded that because the "RIA and broker-dealer [in which Goldfarb had an ownership stake] received or were entitled to receive compensation such as commissions and 12b-1 fees... Goldfarb misrepresented his compensation model."

The board declined to specify whether it found that Goldfarb's clients actually paid commission income, or simply could have.

But Goldfarb says the root of the problem is that the simple set of boxes on the FPA questionnaire could not readily address a complex arrangement.

His former employer, Weaver Wealth Management, is owned by Weaver LLP, an accounting firm with a broker-dealer subsidiary. Goldfarb was president of the broker-dealer; under state law in Texas, where the firm is based, Goldfarb says, he was required to hold a 1% ownership stake in the broker/dealer.

Goldfarb was compensated for his planning work with a salary, he says, of somewhat north of $200,000. In addition he received roughly $2,000 in income annually through a K-1 for his 1% equity interest in the broker-dealer, he says. However, none of the clients with whom he worked directly paid any commission income, according to Goldfarb. Instead, his client group of roughly 50–75 families paid only fees to Weaver, he added.

Industry groups like the FPA and CFP Board haven't adapted to the complexity in advisors' business models, Goldfarb argues. "You can have a brokerage firm that does things on a fee basis in what we called wrap accounts," Goldfarb says—in which advisors receive an aggregated "wrap fee" from clients in lieu of a commission. "Our clients could acquire products that would normally have a commission, but the commission would be waived because it was coming through the advisory firm."

He offered another example. "I knew a CFP who was also insurance licensed," Goldfarb says. Even after he stopped selling insurance, the advisor "was getting an insurance commission from a policy he sold 20 years ago," he says. "What does that do to his income? What does that do to his situation?"

In his own marketing materials, Goldfarb says, he used the term "fee-based," the use of which he had tried to promote during his tenure with the CFP Board.

If Goldfarb was confused about which option to select, he should have contacted the FPA directly about that confusion, FPA spokeswoman Lynn Brackpool says. Yet she also concedes that the group's questionnaire may need some changes.

"I think what this whole situation is uncovering is there are some nuances about how people charge and we need to work with the CFP Board to see if there is [another] box that we need to add," Brackpool said.

Brackpool said she might not be able to determine which type of profile Goldfarb had chosen to create with the FPA. If it was a basic one, there was no place to add further description about his income. But the advanced version for $99 a year provides space for elaboration, not next to the compensation options but in the planner's bio section, she says.

If Goldfarb had called, she adds, "I would have said, err on the side of caution and check salary."

Yet that would not have passed muster at the CFP Board. After concerns were raised about Goldfarb's use of the term "fee-only" on the FPA form, he says, he switched his choice to "salary." But the CFP Board commission found that neither term amounted to "an accurate and understandable description of the compensation arrangements being offered," according to the sanction.

Goldfarb doesn't see it that way. "Both [fee-only and salary] were appropriate disclosures," he says, "because my clients were fee-only and because I was paid a salary by the accounting firm."

The sanction does not specify which box he should have checked.

"It Seemed Unfair"
Goldfarb says he fears his case didn't receive a fair review. Because he knew one of the members of the board's regular disciplinary and ethics commission, he says, the board decided to assemble an ad hoc commission to consider his case.

The commission members "had limited experience compared to the real commission," Goldfarb said, adding that regular commission members had spent years considering cases of this nature. If the board had simply allowed the one member of the regular commission to recuse himself, it could have proceeded, he says, adding that the whole proceeding "may not have been unfair, but it seemed unfair."

Dan Bernstein, a compliance lawyer with Market Counsel, says he suspects the board is making an example of its former leader.

"This sounds like it could've been handled by sending something private that said, 'Hey, we think you should fix this,'" Bernstein says. But the board "may not have wanted go that route [with Goldfarb] because of an appearance of playing favorites," he adds. "I think what this comes down to is the board trying aggressively push its mark to gain public confidence. Unfortunately, they sometimes seem to want to do that at the expense of designees."

Starting Over
Given the non-compete he signed with Weaver, Goldfarb couldn't take most Weaver clients with him to his new practice, Dallas-based Financial Strategies Group. However, those clients who were with him before he joined Weaver could leave—and he says all of them, about 15 to 20 families in total, have chosen to make the move. In two years' time, any of his other Weaver clients will be free to follow him as well.

Goldfarb's new firm had about $20 million in assets in June, six months after it opened in December 2012, he said.

"It's a little slow going until it builds up," he says, adding that the controversy over the sanction isn't helping him to grow the firm. "It's a public situation where anyone will question my ethics, where I don't think I have an ethics problem."

In the future, he suggested, perhaps the CFP Board could offer a form of private-letter ruling like those offered by the IRS, in which taxpayers can ask—in advance of taking a particular step with their taxes—if doing so will get them in trouble.

In his own case, he says, "What I would love to see—but it will never happen—is the letter of admonition expunged. There are lesser sanctions that are private that could have been done, but I guess they felt they needed to do this."


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