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.

Have We Learned from the Financial Crisis?

Most people would agree that something went awry with large parts of the global financial system.  Most would also agree with some broad-brush characterizations of just what went wrong.  A bit too much greed, self-orientation, short-termism.  A bit too little customer focus, ethics, regulation.

Hopefully some of the overheated sectors learned something, or were at least chastened.  Then again: don’t hold your breath.  Here are some anecdotal samplings from the home lending and the financial advisory segments.

Ethical Improvements in the Home Appraisal Business

In an April story the Center for Public Integrity reports:

In a 2007 study by October Research, a real estate news provider, 90 percent of more than 1,200 appraisers polled reported feeling pressure to change property values, usually from lenders, mortgage brokers or real estate agents.

How much pressure?  All too often, if appraisers didn’t come up with numbers that fit what lenders wanted, they found themselves blacklisted.  How overtly?

Amerisave, one of the largest online mortgage lenders, has close to 12,000 appraisers on its “ineligible appraiser list,” which was removed from the Atlanta-based company’s website after the Center made inquiries about it.

Actions taken?  NY Attorney General Cuomo did some vigorous investigation; one results was a Freddie Mac new “Home Valuation Code of Conduct” to go into effect May 1. 

Who opposed it?  Why, the National Association of Mortgage Brokers, of course. 

The same people who, when JPMorgan Chase’s Jamie Dimon said his failure to terminate the company’s mortgage broker business was the “biggest mistake of his career” responded by saying Dimon’s remarks “clearly reflected his poor understanding of the mortgage industry.” 

Uh, NAMB vs. Jamie Dimon? Tthat’s one you lose on credibility alone, NAMB.

NAMB’s excuse for its role in the mortgage debacles?  Others did it too.  So much for ethical learnings.

Ethical Improvements in the Financial Planning Business

There are principled, ethical, customer-focused financial planners; I’ve met many, and know a few well.  At the same time, I think few would argue that the sector is a hotbed of high ethical behavior. reports:

According to a recent study by Prince & Associates…15 percent of the wealthy left their financial advisors in 20087 and 70 percent took at least some of their assets out of the advisor’s hands.

Why?  False advertising, says Cerulli Associates in the same article: what an advisor says he offers and what he really does aren’t in sync.   Bill Bachrach, a respected (by me as well as by the industry) consultant in this space says:   

“It’s been way too easy for former stockbrokers to gather assets and dump them somewhere and call themselves wealth managers…If asset management is all you do and you can’t point to some other way you make money, you have nowhere to hide when performance goes south.”

What’s the industry response?  Here’s Ken Fisher, a mega-marketer of financial services, responding to two former sets of clients who are suing him for failing in his fiduciary responsibilities:

The lawyers who are representing the clients in both matters are “similarly incompetent."  Both cases “will run into a concrete wall.  The person who will be sorry in the end is the client, who will wind up spending money on lawyers and getting nothing.”  [Fisher said he wanted to teach one lawyer] “a lesson he won’t forget.” 

Now there’s a client-focused kind of guy.  The kind you’d want out front promoting responsible behavior on behalf of your industry. Customer satisfaction?  Let them sue for it, then endear them to you through public insults and threats.  Great strategy, Kenny boy. 

Then there’s the case of Jeffrey Forrest,  fired by his broker dealer, sued by the SEC to keep him from working as an investment advisor.  He continues to run an RIA firm in California, and is licensed to sell insurance there.  In March, he and Associated Securities, for whom he was a top producer, were found guilty by a FINRA panel. 

Associated Securities—surprise surprise—is appealing.  Another great customer lesson: never admit you’re wrong.  Especially when you are.  Goebbels had that one down pat. 

Last but not least.  Finally, after all the Madoff hoopla—some concrete action:

SEC commissioners on May 14 voted 5 to 0 in favor of a proposal that would require the roughly 6,000 federally registered investment advisory firms that deduct their fees from client accounts to undergo surprise audits. The move is part of a wider effort by the regulator to crack down on advisers with direct custody over client holdings.

Exactly.  Bernie made off with all the money by skulking in the gray spaces between regulators: for example, he custodied his own investments and no one checked on them. 

So, surprise audits?  You betcha, right on, about time. The industry should applaud this effort to help improve its reputation.  Thank you SEC!

But, wait.  The proposal is opposed by the FPA, NAPFA  and the IAA

Why the resistance?  Here’s a taste:

A surprise audit would likely cost his firm about $3,000 a year, said Ben Baldwin…That fee would likely be passed on to clients, he said.

“There should be an uproar because it’s going to hurt a lot of consumers,” Mr. Baldwin said.

Others contend that the proposal would force smaller firms to stop deducting fees from their clients’ accounts — a move that would require them to wait for clients to reimburse them for their services.

A National Board member of NAPFA elaborates further:

“When you deduct your fee from the client’s account, you have no cash-flow problems.”

And that, I guess, would be why NAPFA opposes the SEC’s proposal.  Because it would force advisors to send invoices instead of directly deducting fees.  Thus slowing cash flow.

More Madoffs?  An occasional small price to pay if it helps protect advisors’ cash flow.

There are simply too many players like the ones quoted in this post who still see regulation as a hateful intrusion on their god-given right to extract cash from customers’ wallets unless expressly forbidden by federal law.

And there are simply not enough players who see regulation as the regrettable consequence of the presence of the former group of players.  They do business based on the simple idea that you should treat people, and most certainly customers, decently.  It can’t be easy for you to watch the first group so demean your industry’s reputation.

Many from that first group must have read a blogpost of mine from two and a half years ago: How to Get Your Industry Regulated in 6 Easy Lessons.  They’re executing the six lessons marvelously, and I have no doubt they’ll succeed beyond their wildest dreams very soon now.