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.