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.

The Banality of Bad Behavior in the Financial Planning Business

My eye was caught by a headline in “When Bad Firms Happen to Good Advisors.

Some well-regarded experienced financial planners, the story said, signed on with the most recent mini-Madoff–Sir Allen Stanford and his Stanford Financial Group. Then they got burned.

Interesting story, I thought; even really good, ethical planners got sucked in, it seemed. Here is Bob Hogue, a Houston planner looking to move from Bank of New York:

Stanford offered service providers he knew well: Lockwood Financial’s platform of money managers, with which he had already built his business on, top-notch client and data management technology provided by Odyssey Financial Technologies (a leading European vendor), and a custodial relationship with Pershing, the custodian he was already using. Adding to the appeal, Pershing guaranteed easy transition of client data, no change in account numbers, if Hogue and the three FAs in his Dallas office moved to Stanford. “There weren’t any other firms offering all that,” says Hogue. He and the three other Bank of New York financial advisors joined Stanford’s Dallas office in November, 2007.

There was all the hooplah, too—yacht cruises, fabulous food, beautiful facilities. But Hogue et al weren’t seduced by that.

Or were they?

What Passes for Good Behavior in the Financial Planning Business

Stanford advisors got incentives for selling the CDs, including a 1 percent commission and, depending on the size of the sale, eligibility for a 1 percent trailing fee for each year on the CD’s contract, as well as trips and bonuses and invitations to the annual sales meeting, awarded based on how much money an advisor funneled into Stanford International Bank. [italics mine]

Wait a minute. What do CDs yield– – 3-4%? At those rates, commissions would eat up half the owner’s yield. We cry “usury” at credit card charges in the 20% range–how about 40-50%? And on a CD?

And, if these CDs were in fact yielding higher—7%, 8%–then they were far outside the normal risk range of the usual buyers of CDs.

What kind of a financial planner rakes 50% off the top of a “conservative” product that his customer could buy for nothing at an FDIC-insured bank? Or sells a highly risky product to people looking for conservation of wealth?

According to, apparently the answer is “good advisors.”

50% fees on CDs? Good? In what dictionary? Let’s get real.

What Good Behavior in Financial Planning Should Look Like

A financial planner friend tells me that when she gets calls from wholesalers pitching products for her to sell, after they describe their new product, their next line is typically “let me tell you how much commission you can make on this.” When she says, ‘never mind that, what’s the yield for the customer?’ the response is usually, ‘uh, hang on a minute, let me look that up.’

That’s the normal pitch. Wholesalers are not stupid. This means: the average financial planner is not in it for you, they’re in it for themselves; that’s why the wholesalers lead with commissions, not benefits to clients.

The same planner tells me she often finds clients who have been put 100% into a variable annuity product, for example, when they have near-term needs for retirement or college expenses. “It makes no sense,” she says. Until you check out how the previous planner made 5%, 6%, 7% commissions up front by selling them this concoction. Then it makes a ton of sense. For the advisor.

Earth to–bad advisors do this, not “good” advisors! This is the banality of evil. The incessant trickle-down of selfish, anti-customer, opaque behavior eventually makes routine, daily ripoffs get termed “good.”

Madoff and Stanford are anomalies. But the daily, garden-variety, grinding low-ethics, customer-hustling, devious behavior is all too common. See, for example, Michael Zhuang’s comment on a blogpost of just last week.

Can Ethical Behavior Be Increased in Financial Planning?

There are many ethical, customer-focused, honest, trustworthy planners. I know some of them, they do exist. They are as good professionals as in any industry. And there are seedier, greedier industries out there.

But so what? Since when is “he’s worse” an excuse for unethical behavior? Just last month the SEC charged a former President of NAPFA, one of the industry’s two professional associations, with kickbacks.  (Well, at least he wasn’t a Madoff….)

What can you do as a consumer? Search hard for the good planners. Don’t let yourself get snow-jobbed. Ask a lot of questions. Do not be intimidated. This is still a caveat emptor business. So caveat.

But–if you run a financial planning firm, you can make a real difference. Dare to be above average. Look at client-focused behavior in other industries. Talk to highly successful firms who are known for straight dealing. You know who they are in your business–emulate them. Read up on trust. Conduct focus groups. Talk to your critics. Steep yourself in the literature on how short-term anti-customer behavior kills long term shareholder wealth. Dare to do good!

Call me naïve, but I still believe that a critical mass of people in the financial planning business know the difference between today’s norm of selfish, short-term anti-client mindset and the longer-term client-focused strategy that is possible, and that in fact creates loyalty and mutual profitability. 

If I’m right about that, then it just takes some concerted courage by a few to speak up and start making a difference. And if you’re still reading, maybe you resemble that remark.