National Association of Personal Financial Advisors
Encyclopedia
National Association of Personal Financial Advisors (or NAPFA) is an American financial planning trade organization created in 1983 to expand the use of Fee-Only financial advisors by individual consumers. NAPFA established the first set of professional standards for Fee-Only financial advisors and has updated them to reflect changes in industry practices. Due to these standards, NAPFA members retain a reputation for excellence and integrity in a profession that has suffered numerous scandal
s in the last several years.
According to its website, NAPFA's core values are as follows: competency
, comprehensive financial planning, objective Fee-Only compensation, a client-centered fiduciary relationship, and complete disclosure of fees.
NAPFA members are distinguished from other financial professionals in several ways.
The combination of strict Fee-Only rules and a peer review have kept NAPFA's membership small compared to other professional financial planning organizations. As of September 1, 2010, NAPFA had approximately 2,400 members.
NAPFA's Board members, staff, and individual members are regularly quoted in leading consumer finance
publications. They are valued for providing objective advice that is not affected by sales recommendations (because they are not compensated for sales recommendations).
, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. This definition is in direct contrast to most advisors, who earn commission
s, discount
s, and other incentive
s when their clients purchase financial products. Also, unlike other financial planners, NAPFA members are required to clearly disclose the fee in advance.
However, NAPFA members differ on how they charge the fee. Some advisors charge an hourly rate, similar to an attorney
or CPA
. Rates vary by region of the country and an advisor's experience level and expertise. Some advisors charge a retainer fee
schedule that is paid quarterly or annually. Other advisors charge based upon a percentage of the client's assets under management
, such as a 1% fee on the assets per year. Regardless, the fee must be made clear to the client.
NAPFA does not permit its members to be compensated via the industry-standard 12b-1 sales & marketing expense fees for mutual fund
s. From NAPFA's perspective, there are two problems with these fees: undermined objectivity
and inadequate disclosure.
NAPFA has prepared a short report that compares how advisors are compensated. It can be found on NAPFA's website at www.napfa.org, under the link for Consumers.
The plan must contain numerous specific elements that are common needs of many individuals and families. These include the following: a client's goals and objectives, net worth
statement, cash flow
analysis, recent tax return
and analysis, insurance needs (medical, home, life, disability, long-term care, auto, umbrella, other), investment analysis and recommendations, retirement needs and projections, and estate plan and related elements (will, Advance health care directive, durable power of attorney
, etc.).
programs. These are designed to teach consumers how to manage their financial affairs, as well as to identify when they might need the assistance and support of a Fee-Only financial advisor.
s was the impetus behind the creation of the organization—the radical idea in the early 1980s that Fee-Only financial planning, without high and hidden commissions, would be better for consumers.
Over the years, NAPFA's influence has resulted in greater awareness and adoption of Fee-Only principles by leading financial advisors, other major financial industry trade association
s, and government regulations. Since 2008, NAPFA has joined with two other organizations in the Financial Planning Coalition (FPC) to push for greater change for consumers, at a time when an economic downturn and investment scandals have affected the financial security of nearly all Americans. NAPFA, the Financial Planning Association, and the CFP® Board of Standards formed the Financial Planning Coalition to work with Congress
and federal agencies to strengthen the rules on financial advisors' fiduciary conduct, fee disclosures, and conflicts of interest.
Among the FPC's successes in this area have been greater disclosure of 12b-1 marketing fees by mutual funds and the SEC study in fall 2010 of a need for a consumer-first fiduciary requirement on investment brokers.
Scandal
A scandal is a widely publicized allegation or set of allegations that damages the reputation of an institution, individual or creed...
s in the last several years.
According to its website, NAPFA's core values are as follows: competency
Competence (human resources)
Competence is the ability of an individual to perform a job properly. A competency is a set of defined behaviors that provide a structured guide enabling the identification, evaluation and development of the behaviors in individual employees. As defined, the term "competence" first appeared in...
, comprehensive financial planning, objective Fee-Only compensation, a client-centered fiduciary relationship, and complete disclosure of fees.
NAPFA members are distinguished from other financial professionals in several ways.
- Adherence to a Fee-Only standard is strict: NAPFA members cannot accept compensation in any form from any source other than their clients. There are no exceptions. NAPFA believes that this minimizes potential conflict of interestConflict of interestA conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
between a financial planner and their clients.
- The fiduciary relationship requires that members always put their clients' interests before their own and that they disclose any potential conflict of interest prior to the client making a decision. This fiduciary standard is in direct opposition to the fiduciary standard by which investment brokerInvestment brokerInvestment brokers are individuals who bring together buyers and sellers of investments. They need a license to operate. They act on behalf of buyers and sellers of stock...
s are held, a standard under which their legal responsibility is to their employer ahead of their client.
- NAPFA is the only financial planning organization to require a peer reviewPeer reviewPeer review is a process of self-regulation by a profession or a process of evaluation involving qualified individuals within the relevant field. Peer review methods are employed to maintain standards, improve performance and provide credibility...
of a candidate member's work output prior to granting membership.
- Peer review ensures that a NAPFA member has the ability to provide comprehensive financial planning across a wide range of potential client needs—investmentInvestmentInvestment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
s, taxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es, estate planningEstate planningEstate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses...
, college savings, insuranceInsuranceIn law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, long-term care insurance, retirementRetirementRetirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
spending, and more.
The combination of strict Fee-Only rules and a peer review have kept NAPFA's membership small compared to other professional financial planning organizations. As of September 1, 2010, NAPFA had approximately 2,400 members.
NAPFA's Board members, staff, and individual members are regularly quoted in leading consumer finance
Consumer finance
Alternative financial services in the United States refers to a particular type of financial service, namely sub-prime lending by non-bank financial institutions. This branch of the financial services industry is more extensive in the United States than in some other countries, because the major...
publications. They are valued for providing objective advice that is not affected by sales recommendations (because they are not compensated for sales recommendations).
Fee-Only
NAPFA defines a "Fee-Only" financial advisor as one who is compensated solely by the clientCustomer
A customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. This definition is in direct contrast to most advisors, who earn commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
s, discount
Discounts and allowances
Discounts and allowances are reductions to a basic price of goods or services.They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services.They...
s, and other incentive
Incentive
In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...
s when their clients purchase financial products. Also, unlike other financial planners, NAPFA members are required to clearly disclose the fee in advance.
However, NAPFA members differ on how they charge the fee. Some advisors charge an hourly rate, similar to an attorney
Attorney at law
An attorney at law in the United States is a practitioner in a court of law who is legally qualified to prosecute and defend actions in such court on the retainer of clients. Alternative terms include counselor and lawyer...
or CPA
Certified Public Accountant
Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
. Rates vary by region of the country and an advisor's experience level and expertise. Some advisors charge a retainer fee
Retainer agreement
A retainer agreement is a work for hire contract. It falls between a one-time contract and full-time employment. Its distinguishing feature is that the employer pays in advance for work to be specified later...
schedule that is paid quarterly or annually. Other advisors charge based upon a percentage of the client's assets under management
Assets under management
Assets under management is a financial term used denote the market value of funds being managed by a financial instutition on behalf of its clients, investors, depositors, etc. This metric is a sign of size and success against competition...
, such as a 1% fee on the assets per year. Regardless, the fee must be made clear to the client.
NAPFA does not permit its members to be compensated via the industry-standard 12b-1 sales & marketing expense fees for mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s. From NAPFA's perspective, there are two problems with these fees: undermined objectivity
Impartiality
Impartiality is a principle of justice holding that decisions should be based on objective criteria, rather than on the basis of bias, prejudice, or preferring the benefit to one person over another for improper reasons.-Philosophical concepts of impartiality:According to Bernard Gert, "A is...
and inadequate disclosure.
- Objectivity: A mutual fund pays 12b-1 fees directly to the selling brokerBrokerA broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
-dealer, to be shared with the selling broker. This violates NAPFA's rules—though it is neither illegal nor unusual—and it potentially could influence an advisor's recommendation about selection of a fund.
- Disclosure: NAPFA has written to the Securities and Exchange Commission (SEC) to explain that the fees are removed from the clients' assets without notice or invoiceInvoiceAn invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...
to the client, are not reported on their investment statements, and are generally invisible to the client except through reduced investment returns. In 2010, the SEC adopted rules to improve disclosure of 12b-1 fees.
NAPFA has prepared a short report that compares how advisors are compensated. It can be found on NAPFA's website at www.napfa.org, under the link for Consumers.
Comprehensive
NAPFA's membership requirements include proof that a financial advisor can produce a comprehensive financial plan for a client. Proof is demonstrated through peer review of a financial plan submitted by the prospective NAPFA member. The plan can either be from an actual client with whom the advisor is working, or it can be a plan produced from a sample set of facts and situations developed by NAPFA to test a candidate's knowledge.The plan must contain numerous specific elements that are common needs of many individuals and families. These include the following: a client's goals and objectives, net worth
Net worth
In business, net worth is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time...
statement, cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
analysis, recent tax return
Tax return
A tax return is a tax form that can be filed with a government body to declare liability for taxation in various countries:* Tax return * Tax return * Tax return * Tax return...
and analysis, insurance needs (medical, home, life, disability, long-term care, auto, umbrella, other), investment analysis and recommendations, retirement needs and projections, and estate plan and related elements (will, Advance health care directive, durable power of attorney
Power of attorney
A power of attorney or letter of attorney is a written authorization to represent or act on another's behalf in private affairs, business, or some other legal matter...
, etc.).
Consumer Education
In addition to developing standards for financial advisors and enforcing those standards, NAPFA engages in a variety of free consumer educationConsumer education
Consumer education is the preparation of an individual through skills, concepts and understanding that are required for everyday living to achieve maximum satisfaction and utilization of his resources....
programs. These are designed to teach consumers how to manage their financial affairs, as well as to identify when they might need the assistance and support of a Fee-Only financial advisor.
Consumer Advocacy
NAPFA has always advocated on behalf of consumers' interests. In fact, protecting consumerConsumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s was the impetus behind the creation of the organization—the radical idea in the early 1980s that Fee-Only financial planning, without high and hidden commissions, would be better for consumers.
Over the years, NAPFA's influence has resulted in greater awareness and adoption of Fee-Only principles by leading financial advisors, other major financial industry trade association
Trade association
A trade association, also known as an industry trade group, business association or sector association, is an organization founded and funded by businesses that operate in a specific industry...
s, and government regulations. Since 2008, NAPFA has joined with two other organizations in the Financial Planning Coalition (FPC) to push for greater change for consumers, at a time when an economic downturn and investment scandals have affected the financial security of nearly all Americans. NAPFA, the Financial Planning Association, and the CFP® Board of Standards formed the Financial Planning Coalition to work with Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
and federal agencies to strengthen the rules on financial advisors' fiduciary conduct, fee disclosures, and conflicts of interest.
Among the FPC's successes in this area have been greater disclosure of 12b-1 marketing fees by mutual funds and the SEC study in fall 2010 of a need for a consumer-first fiduciary requirement on investment brokers.