A Case Study in Low Trust: NAPFA

Industry associations occupy a rare and privileged status in our society. Associations serve two masters: their industry membership, and the consumers those industries serve. 

Largely unregulated themselves, if they do a good job they can avoid regulation for their industry.  If they do a bad job, they can accelerate abuses–and end up getting regulated.  You’d think most associations would want to avoid regulation.  And so, they trumpet their service to the consumer.

The question is, what do their actions say? 

All too often, it’s food for cynicism.   The National Association of Personal Financial Advisors  has lately exhibited such cynical behavior. 

Last week NAPFA’S chairwoman Diahann Lassus represented the Financial Planning Coalition in front of the House Committee on Financial Services.  She testified strongly in favor of a fiduciary standard for all individual financial planners.  So far, so good.

Then yesterday NAPFA issued a press release sounding a different tone, commenting on proposed custody-related SEC regulations put in place partly to curb Madoff-like abuses.  One clause in particular proposes spot-audits of RIAs (registered investment advisers) who deduct their fees directly from clients’ accounts.  

NAPFA Says It’s Pro-consumer, but it’s Hard to See How.

To read NAPFA’s press release headline, you’d think they were the Consumer’s Friend:

NAPFA Believes SEC Mission for Custody Rule Changes is Commendable, but views Commission’s Proposed Changes as Not a Proper ‘Means to an End’

OK. The SEC would like to audit certain advisers.  NAPFA thinks that’s a bad idea.

Why?  Get this.  Because, NAPFA says, audits:

1.    won’t protect consumers
2.    would cost more than they’re worth
3.    will cost consumers additional expense and inefficiency.

Are you kidding me?  In this post-Madoff  environment you’re telling us that spot-auditing some RIAs won’t help consumers?  Tell it to Madoff whistle-blower Markopolis, who clearly disagrees. Cost more than it’s worth?  I think a few Ponzi schemes prevented or uncovered would easily cover costs.

NAPFA’s better idea?  Leave it to NAPFA.

The industry, including NAPFA, suggests that instead of the SEC, we rely on a professional oversight board made up of–the industry.

A little problem with that.  There are NAPFA members out there today who have been convicted in court of professional malpractice–with no NAPFA action taken.  There are RIAs out there who violate ethics guidelines by lending to their clients.  In fact, just recently a former NAPFA president was sued by the SEC for accepting $1.2M in kickbacks. 

The response of NAPFA chairwoman Diahann Lassus to that last one? “’The reality is that this situation, in comparison to the Madoff scheme, and many other things that have happened out there, is very small,’ Lassus said.”  Well that’s a relief.  And Nixon wasn’t a crook.

Not a good track record.  So just what does NAPFA suggest?  Hold on to your hats.

  1. Encourage consumers to thoroughly read and review all statements to identify all questionable account activity
  2. Offer incentives for whistleblowers who bring to light dishonest advisor activity
  3. Provide means for consumers to report fraudulent activity anonymously

In other words: the way to protect consumers is to encourage the consumers to read more fine print, find financial Dog the Bounty-Hunters, and offer an anonymous tip line.

Enforce ethical and fiduciary standards?  Do audits themselves?  Nah, that’d cost the planners too much.

Suppose this were legislation about child abuse at daycare facilities, and the government proposed spot-audits to prevent it.  How would parents react to a daycare association recommendation that, instead of audits, parents read the fine print of their daycare contracts, and phone any concerns into a tip-line?

If NAPFA won’t even discipline its own court-convicted members–arrogantly flunking a rather basic test of ethical self-enforcement–what right do they have to claim that they’re better qualified to protect consumers than the SEC?  I cannot see it.

There are many very fine, ethical financial planners.  There are of course a few bad apples as well (Lassus herself says she hears "nightmare" stories, and "sadly, these stories are not unusual").  But when it comes to NAPFA, you can’t help but notice the rot in the barrel itself.

Can Financial Planning Avoid More Regulation?

I’m all in favor of industry associations behaving responsibly, realizing that the long-term health of the industry depends on feeding the long-term and short-term health of the consumer, rather than serving short-term member greed.  That means self-enforcement, and I would love to see it happen. 

But at some point, an industry forfeits its right to be trusted anymore on its own.  The financial planning industry–as represented by its associations–has about crossed that line.  It’s hard to take seriously the idea that they have earned the right to self-enforce.  Bring on the SEC.

10 replies
  1. David in Australia
    David in Australia says:

    Charles well said!  I run an advice firm in Australia offering Family CFO services.  I have had occasion to travel to the US and speak with advisers I have an assocoation with.  Frankly I was amazed at how lax the SEC regulations are.  To contrast the systems, an AFSL (Australian Financial Services Licence)holder in Australia must be audited by a registered company auditor and submit audited accounts to the auditor each year.  Further, the regulator actively investigates complaints and will ban, permanently or for a period, if a complaint is upheld.  As a licensee I am criminally liable for the conduct of my advisers.

    I agree with Charles – tighten it up and the good, honest advisors will just keep on, while the charlatans may just get caught out!


  2. Michael Zhuang
    Michael Zhuang says:

    That’s why I don’t join NAPFA, even though I am fee-only.

    I encourage my prospects not to rely on any mental trust triggers, such as hometown, race, title, golfing-skill, membership in NAPFA and etc. I ask them to build trust with me the slow way: working with me on a tiny issue of theirs, then a small issue, then … and do their due diligence every step of the way.

    In the financial service industry, or what David Swensen called the marketing industry, whenever an organization has established a good reputation, charlatans will flock to it, turning it into just another marketing tool. Judging from what has been happening lately, I doubt NAPFA can escape that.

  3. REverett
    REverett says:

    NAPFA is proposing a structure that would horrify any other regulated professional. Think of the AMA being the sole disciplinarian for medical professionals. Or the pharma industry not having the FDA for its oversight. The financial profession, which is relatively new compared to many other regulated professions, needs and consumers deserve an objective review of its practices. Madoff and Ponzi, frankly, are not the biggest threat to the integrity of the profession. The inherent focus of financial "planning" on product sales and resulting commissions are the bigger issues; it is a business model vulnerable to dishonorable practices because the livelihood of the seller is dependent upon the uninformed buyer agreeing to the sellers expert advice. And with the extremely complicated array of financial products, no consumer can be expected to know all that they need to know to avoid being taken advantage of. The vagaries of this industry beg for an informed, objective oversight body and transparency to business practices. History shows that greed triumphs over scruples.

  4. Charlie (Green)
    Charlie (Green) says:

    David, Michael, R.,

    Thanks so much to all three of you for your thoughtful commentary above.  David and Michael have more standing to speak than I do, given that they are in the business.  And R. makes intriguing comparisons to other industries in thinking about regulation, which is a powerful perspective to bring to any discussion.

    Of course, I agree with you all. But more importantly, thanks for carefully elucidating the same general message in your own unique, specific, and relevant manners.


  5. kathleen
    kathleen says:

    I’m so glad to read this. I lacked the eloquence to describe what I believe to be paramount, that an association is not trustworthy if it will not police it’s own membership and as such, is not deserving of public trust (non-members).  I have endured numerous criticisms in my own private forum (@ 1,000 members) because I believe that ethical self-enforcement is a basic tenet to have any credibility whatsoever. While I have never "broken someone’s rice bowl" I only said something (to members) after exhausting and lengthy investigation which included the other person’s right to speak freely. Imo, if someone is a liar and a cheat, they need to get into something else or go somewhere else rather than continue to taint our pool with their presence.

  6. Christopher Jaccard
    Christopher Jaccard says:

    I agree with your comments on NAPFAs 3 suggestions as being toothless; and the SEC is understaffed/underfunded to fulfill it’s duties.  However, your commentary clearly shows that you either do not understand the structure of the industry and it’s associations, or are omitting details to support your thoughts — it even appears to me that you have some bone to pick with NAPFA.

    Here are some key points for you and your readers to consider:

    1. Only registered investment advisors (RIAs) must abide by a fiduciary standard; all other "investment counselors" or "financial planners" need only apply a suitability standard.
    2. RIAs are regulated by the SEC (if assets under management are greater than $25M, individual states otherwise)
    3. Madoff’s company was "audited" – look how much good it did. 
    4. "Investment counselors" and other non-RIAs are regulated by FINRA
    5. There are several different industry associations such as FPA and NAPFA; they are not self regulatory organizations – FINRA is!  How good a job do you think FINRA does of protecting consumers?  Fox guarding the henhouse? — google it and learn for yourself!
    6. All NAPFA members work on a fee-only basis, they don’t take commissions, trailing fees, loads, etc. and take an oath to this effect.  Do you even know what a 12b-1 fee is Charles?  Millions of investors pay tiny amounts every day in fees and don’t even realize this is compensation going to their "investment counselor".  These fees never show up on a statement or transaction confirmation.
    7. When an RIA debits an advisory fee today, they generally rely on Rule 206(4)-2 which basically means if the client gets sufficient reporting and disclosure of the fee, the RIA doesn’t have custody of assets and doesn’t need to be audited.

    Christopher Jaccard, CFP
    NAPFA Member since 2001

  7. Charles H. Green
    Charles H. Green says:


    I’m not clear what point you’re trying to make. 

    Your first statement is true, and is also precisely what NAPFA president Lassus wants to change.  As her testimony stated, "…the highest legal standard—the fiduciary duty—should apply to all who give financial advice to clients."

    And I say, good for her, and good for NAPFA.

    But we both apparently agree that her detailed suggestions for accomplishing this goal are, as you put it, toothless.  And my whole point is there’s a pattern of cynicism at work here. 

    Your other items, as far as I can tell, consist in detailing how things work.  Thanks for the education, but–what’s your point? 

    I don’t think FINRA’s done a great job either, but–does that mean NAPFA has not behaved in cynical, self-serving ways?

    To your 5th point, I’m unpersuaded by all the fuss NAPFA makes about fee-only planners being somehow ethically cleaner than those who choose to be paid by comission.  The former President of NAPFA got sued not for taking commissions, but for taking kickbacks.  So much for the power of that oath to drive ethical behavior.

    Let me be clear about my point.  A good industry association offers up vision and aspirations  beyond "we don’t break the law." I don’t see NAPFA doing that.  Instead, I see it as acting cynically.

    Merely listing the details of the legal-regulatory thicket, while interesting, not only doesn’t address that issue–it underscores my point by exhibiting more of the same.


  8. Christopher Jaccard
    Christopher Jaccard says:

    Thanks for your reply Charles, my point is NAPFA is against accounting paperwork; they are not against high standards.  You are so focused on this one little proposed custody rule, that you’re missing the context of the industry and it’s problems.  Try looking up the Merrill Lynch rule sometime…

    To be clear:

    1. NAPFAs statements on accounting audits do not contradict it’s support of a fiduciary standard.  I work at been at a firm that once had "custody" and has done this type of accounting audit.  In my opinion this would not serve to protect consumers, is costly and generally a headache — apparently the SEC thought so too because they implemented the exception with rule 206(4)-2; and as I stated, audits did little to protect Madoff’s clients.
    2. What we really need is a stronger SEC that will do frequent, surprise, in-depth audits of all people who provide investment advice — this isn’t happening now and who knows if it ever will with FINRAs puppet Shapiro running the SEC.  We need real enforcement, not more forms to fill out and administrative bungling — the fear that I have is that they will push so much administrative burden on advisors that many of the true professionals will leave or substantially change their businesses.  Look at what HMOs did to the medical profession.
    3. I do not see the cynicism that you reference in the NAPFA statements and actions.  At the end of the day, NAPFA, as you stated at the beginning of the article, must serve the membership and consumers.  It’s statements seem consistent with this dual role to me as supported in point #1.  If there is indeed a pattern of cynicism, what other examples do you have to support your case?
    4. I find your painting NAPFA as a rotten barrel to be slanderous.  I can find individuals in any organization or industry who acted unethically or fraudulently — does this spoil the whole bunch?  No, but it sure makes for a good blog entry!

    Thank you,

    Christopher Jaccard, CFP


  9. Charlie (Green)
    Charlie (Green) says:

    Christopher, thanks for your response above.  It gave me a much better sense of what each of us is trying to say.

    I could not agree more strongly with your second point above about the need for strong SEC enforcement, rather than more paper-driven, procedural approaches.  I think it’s probably the single most important regulatory approach that can be taken.  I get that you and NAPFA both strongly support the ‘less paperwork’ idea, and I’m completely with you on that as well.  Also, solely using procedural checks just allows people to think they’re being ethical, when in fact they’re just being compliant. 

    I think you’re putting more weight on the custody issue than I at least had attended.  In my original post I was strongly arguing for spot audits, a la your 2nd paragraph; though you are right the particular instance had to do with custody.  I’ll take the mea culpa on that one for not having been more precise.

    As to NAPFA overall, you suggest I’m being slanderous and ask for examples of cynicism.  I gave four examples in the article, and I’ll repeat them here for clarity.

    • 1. A former NAPFA president was sued by the SEC for accepting kickbacks.  You don’t see that one every day!
    • 2. The current NAPFA president’s several public responses to the above lawsuit have been tepid.  What should an industry association president’s reaction to corruption look like?  Look at New Jersey Governor John Corzine’s recent statement in response to corruption charges facing some state elected officials:
    • "It is not tolerable, the kinds of things we have seen happen today, unfold today, and I will not tolerate even a hint of corruption. I never have, and I never will. As long as I am governor, anyone who can no longer command the public’s trust must step aside."
    • That’s in a state where corruption is not exactly unheard of.  I’d wish that the head of an  association of an important industry sounded that strident, but to my knowledge we haven’t heard it.  Instead, we heard "not as bad as Madoff."  Tone deaf at best; and I think cynical.
    • 3. I know of a NAPFA member convicted of professional malpractice; NAPFA took no disciplinary action.
    • 4. NAPFA, and you, and I apparently all agree with the high-road approach of a fiduciary standard.  But NAPFA’s official recommendations for how to achieve it are, as you yourself put it, "toothless."  I find that cynical, in the same way that congressional politicians might publicly vote in favor of a given issue, then quietly refuse to authorize the funding necessary to make any concrete change. 

    Christopher, I at least am feeling that we’re in violent agreement on much of this, particularly the core issue of how to regulate and enforce high standards.  We seem to differ mainly in my characterization of the assocation.

    You feel it’s slanderous. I’m sorry you feel that way; I chose my words very carefully in the original post and still feel they are fair.

    The last word is yours if you like, Christopher, over to you.


  10. Christopher Jaccard
    Christopher Jaccard says:

    Thanks for your comments – I think we agree on more issues than we disagree.  Allow me finish by stating that my experience with members of NAPFA thus far has only been positive and I’ve found fellow members to be competent and ethical in their work.  Given all the terrible things that have happened, I hope that the public, regulators, and participants now push to clean up the industry and make delivering financial planning and investment advice the professional activity it ought to be.

    Thank you,

    Christopher Jaccard, CFP


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