NAPFA Provides Consumers with Quality Control while Maintaining Flexibility for Financial Advisors

NAPFA is the National Association of Personal Financial Advisors.

NAPFA membership consists of financial advisors who provide comprehensive financial planning services on a fee-only basis.

NAPFA member David B. Jacobs serves as a representative for this interview.  David serves on the committee for both the School of Retirement and the School of Risk Management for NAPFA University.

Annuity Digest: Please tell us a bit about NAPFA and how the organization serves financial services consumers.

David: NAPFA holds its members to the highest standard available in the industry.  All financial advisors need to:

• Hold the Certified Financial Planner (CFP) designation.
• Develop a comprehensive financial plan that is subject to peer review and approval.
• Have practices that are strictly fee-only.
• Serve as fiduciaries and registered investment advisors (RIAs)
• Fulfill continuing education requirements on an ongoing basis.

Annuity Digest: Do NAPFA advisors receive and compensation outside of fees?

David: None whatsoever—all NAPFA advisors are strictly fee-only.  There is no compensation from commission or any form of product transaction.  Fee-only can include hourly rates, fixed retainers and fees on assets under management.

Annuity Digest: Are there any recommended or required procedures, analytic tools, software, presentation formats, etc? 

David: There are no required financial planning formats.  There are minimum required components of the financial plan that are peer reviewed. 

NAPFA is focused on advisors being able to provide comprehensive planning.  Comprehensive planning involves all the components of the CFP program.  This does not mean that all client engagements are completely comprehensive—some clients will come in for specific services.

Annuity Digest: What about broker-dealer relationships, insurance company relationships, licensing, etc?

David: A broker-dealer is needed but a registered investment advisor is not a series 7 rep.  Schwab, Fidelity or TD Ameritrade are used by NAPFA RIAs with a dozen or so smaller custodians.  With insurance, some advisors may have a license but they are not selling insurance – it is there because if a state requires licensing to render advice.  Some states say that CFPs are able to render insurance advice.

Annuity Digest: What is the governing regulatory body for NAPFA advisors?

David: Either the Securities and Exchange Commission (SEC) if the advisor has client assets exceeding $25 million, or state regulatory bodies

Annuity Digest: Are asset management services always outsourced to a third party manager, or do any of the advisors manage funds directly?

David: It’s really all over the map.  Some advisors invest in individual stocks and bonds, some stick to mutual funds, some get into alternative investments (e.g. movie deals, hedge funds), and some outsource to third party managers.  It is really the full gamut—there is no unified investment philosophy at NAPFA.

Annuity Digest: What are the safeguards for objectivity within the area of asset management?

David: There is nothing that NAPFA imposes in terms of due diligence.  Objectivity is driven by fee-only compensation and fiduciary obligation.

Annuity Digest: How are product and service transactions handled by NAPFA advisors?   

David: With insurance, it is always outsourced to a third party because advisors are not able to receive commissions. 

Some NAPFA members who are CPAs will handle client tax issues, although many will outsource that as well.  There are attorney referrals for estate planning, although the advisor remains very close to that estate planning process.

Annuity Digest: Are NAPFA advisors required to refer all implementation issues to a third party?

David: Not in all cases.  For example, a CPA may provide tax services on a fee-only basis.

Annuity Digest: Are there preferred relationships or networks in place for different products and services? 

David: There are a few. 

For example, in the annuities arena a company called Income Solutions provides NAPFA members with immediate annuity wholesale quotes at a low (1%) transaction fee.  This allows NAPFA advisors to avoid being at the mercy of individual insurance agents.

Annuity Digest: How are annuity products and transactions handled by network members?

David: It is completely up to the advisor.  Some advisors have relationships with individual agents, some leave it up to the client’s agent relationship, some use wholesalers, etc.  There is no single standard.

Annuity Digest: How is quality control maintained at the advisor level?

David: Nothing is imposed by NAPFA—once initial membership vetting process is over the advisor runs their business as they see fit.

Annuity Digest: Do NAPFA advisors receive any referral fees on outside transactions? 

David: A NAPFA planner cannot receive a referral fee period (all fees from client directly).  However, the reverse can be different.  For example, a NAPFA advisor may pay a fee to Schwab for a client referral.  In other words, referral fees are OK in one direction but not the other.

Annuity Digest: How do advisors typically deal with sequence of returns risk and longevity risk?

David: Many NAPFA members deal with clientele who are fairly well-off and these risks tend not to be a huge issue.  In these cases, longevity risk can be self-funded. 

There is some use of immediate annuities to provide a floor of protection for certain.

There are also some 1035 exchanges of life insurance policies.  For example, when cash values reach certain levels an inexpensive variable annuity might be used.

Annuity Digest: What are NAPFA’s views regarding life-cycle planning, human capital, consumption smoothing?

David: It is difficult to make a generalization on an organizational level.  That said, there are likely a much higher percentage of NAPFA advisors who pay attention to life-cycle tenets than the typical wire-house.  On other hand, there are likely NAPFA advisors who completely ignore it.

Annuity Digest: What are NAPFA’s views regarding modern portfolio theory and mean-variance optimization in light of the financial crisis?

David: Again, there is nothing at an organizational level.  There are probably higher percentage of NAPFA advisors with passive, weak market efficiency beliefs.  Again, though, there are some who believe in active management and the ability to deliver alpha.

Annuity Digest: Do you see overall momentum within the industry and among consumers towards the fee only model – particularly in light of the financial crisis?

David: I definitely see momentum away from commission-based advice.  In the 1990s, there was a successful push at creating a line in the media between commission people and fee people.  By the late 1990s, wire-houses started implementing fee systems with wrap accounts.  Most people cannot tell difference between a wrap or brokerage account an advisory account.  The language that is used is essentially identical between Merrill and an advisor account through a registered investment advisor.  I would say there is not necessarily a huge move away from wire-houses per say.

Annuity Digest: Can you provide some high-level comments on annuities?

David: There is a general hesitancy to recommend or use variable annuities—particularly putting new money into a variable annuity.

Unless there is a huge need for tax deferral, it is rare that a NAPFA advisor will use a variable annuity unless the variable annuity already exists or is part of a life insurance Section 1035 exchange. If an advisor is going to use a variable annuity, it will be a product with no surrender fees. 

Fixed indexed products are used even less than variable annuities because of the high fees.  Structured products are the closest thing to fixed indexed products, and NAPFA advisors do use structured products. 

There is fairly frequent use of immediate annuities on a relative basis and this use has been growing over past decade. 

There is not any widespread use of standalone living benefits at this point. 

The same holds true for longevity insurance—there are relatively few NAPFA advisors playing with longevity annuities at this point.

Annuity Digest: Thank you David.