Do advisors understand the extent of the public’s mistrust? Are they doing enough about it?



I don’t think so.



Advisors have failed to embrace transparency as much as they should. Even NAPFA, traditionally the industry’s strongest advocate in the fight against unethical behavior in the financial services business, has missed the opportunity.



Many consumers who trusted advisors during the bull market are now skeptical, and those who were skeptical are now cynical. Worse still, consumers who were cynical of advisors are now in contempt of them.



If you don’t believe it, read the comments from readers responding to reporter Ron Lieber’s article in this past Saturday’s issue of The New York Times, “How A Personal Finance Columnist Got Caught Up in Fraud.” Lieber bravely reported that he—The New York Times’ personal finance columnist—had hired an advisor who is now being investigated by the Securities and Exchange Commission for his connection to irregularities alleged to have been discovered in his clients’ accounts.



From the first reader’s comment (“The lesson I have learned is that you can't trust financial planners.”) to the last (“It is worth the time and effort, obviously, to be in complete control of one's assets.”), the public’s outrage boils over. Yet financial advisor discussion boards, trade magazines, and conferences are not addressing “the trust issue.”



There’s no mad scramble to find solutions, no urgency to address the trust issue. Look at the lack of comments on my blog posts in the past few weeks.

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  On March 11, in Closing A Door On Madoff Opens A New Era, I wrote that a new era for investment advisors had begun. “It’s an era in which trust is founded on undisputable proof presented at repeated regular intervals. Advisory firms must proactively adjust their behavior and business processes to succeed in this fearful new world.”
  
  
  


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  On March 12, a post entitled, “Your House Is On Fire,” chastised advisors for a lack of care in performing due diligence on alternative investments.
  
  
  


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  On March 19, a post entitled, The Elephant Wrecking Your Revenues said it plainly: “If you are not moving toward a more transparent relationship with clients, then you are not changing with the times and will be left behind. You will be crushed by the elephant.”
  
  
  

While this blog now has hundreds of readers every day, not a single advisor commented on any of these posts. It’s as if advisors don’t want to deal with the trust issue.



In my view, transparency through technology is the best hope for assuring clients they can continue trust you with their money and for convincing prospective clients that your firm can be trusted with their money.



I was fortunate enough to begin researching Web 2.0 technology three years ago and saw the beginning of the age of transparency unfold right before my eyes back then. That spurred the reinvention of my company, Advisor Products.



Advisor Products recently implemented a system that automatically records phone calls and automatically deposits audio files in each advisory firm’s folder in our CRM system. Every staff person here knows what he says to our clients is easily retrieved, encouraging outstanding service. I’m hoping to add even more transparency by allowing advisors to rate our performance for every service call we handle.



My research into Web 2.0 also caused Advisor Products to develop a technology platform enabling advisory firms to practice with greater transparency to their clients. The platform extends CRM systems used by advisory firms beyond managing your staff to manage your clients. It integrates a CRM with personal client portals. It also interfaces with performance management software systems, enabling clients to see every transaction posted to their accounts.



We now live in an era of Google Earth, a twittersphere, a place where sophisticated investors will no longer be satisfied with mere promises about your honesty, integrity, and fidelity. They want proof. Either advisory firms reinvent themselves and figure out how to survive in this untrusting, fearful new world or online discount brokers will gain at your expense.



This information is, of course, self-serving. But that does not diminish its value or validity. I’ve aligned my business with my beliefs and values, and my strong desire to be honest. I encourage you to do the same. It also happens to be good for business.

While the economy has escaped the most frightening doomsday scenario, the financial crisis is far from done with us. Department stores and malls remain practically empty in Long Island most weekdays. Getting into fine restaurants on a Saturday night no longer requires reservations weeks in advance. Workers at my local Home Depot are so fearful of losing their jobs that they're actually friendly and service-oriented now. Meanwhile, in our corner of the economy, many advisors worry that over the next couple of years clients who have been disappointed by their portoflio's performance will fire them.

However, the setback suffered by clients in their retirement portfolios and the rampant distrust of financial advisors unleashed by the Madoff scandal are likely to cause advisors to rethink the way they practice. Advisors will reinvent the financial advice business. As with earlier financial crises, change will follow. Progress will come inevitably. And a winner when this crisis ends is likely to be Life Planning.

Pat Allen's question about my previous post about RIA regulation touches on an important issue. She wrote:

“I've been thinking that the reason Investment Advisors are more communicative on the Web is that they are not regulated by FINRA. Is that right--would you expect that a different advertising standard will be applied? One consequence of which would be that IAs will be discouraged from blogging, tweeting, etc.?”

A former president of the National Association of Personal Financial Advisors (NAPFA) was charged by the U.S. Securities And Exchange Commission yesterday with accepting $1.24 million in kickbacks, dealing a highly embarrassing public relations blow to NAPFA, a champion of consumer rights, advisor integrity, and applying the fiduciary standard to advisors.



The SEC complaint alleges that James Putman, founder, majority owner, and CEO of Wealth Management LLC of Appleton, Wisconsin, accepted $1.24 million in undisclosed payments derived from investments made by the unregistered investment pools. Simone Fevola, the firm's former President and Chief Investment Officer, was charged along with Putman for taking undisclosed payments from the unregistered investment pools.



The SEC also alleges that Wealth Management, Putman and Fevola misrepresented the safety and stability of the two largest investment pools and placed clients into these investments even though they were inconsistent with some clients' objectives.



According the SEC litigation release, the agency filed an emergency civil action in U.S. District Court of the Eastern District of Wisconsin to obtain an order to freeze the RIA’s assets.



The SEC alleged Putman and Fevola sold clients the private deals from May 2003 through August 2008. In 2006 and 2007, the SEC says, Putman and Fevola each accepted at least $1.24 million in undisclosed payments derived from certain investments made by the pools.



According to the SEC, Wealth Management claims currently to have approximately $102 million of its clients’ assets invested in the pools. However, the SEC says that the pools have “limited remaining assets and that it appears likely that the reported values of the pools are substantially overstated.” The SEC's complaint alleges that the pools' assets are largely illiquid, and Putman has provided redemptions to investors based on what the agency believes to be overstated valuations.



"As we allege in our complaint, Putman and Fevola put their own financial greed ahead of the safety and stability of their clients' investments," said Merri Jo Gillette, Director of the SEC's Chicago Regional Office. "They abused the trust that their clients placed in them, and emergency enforcement action was necessary to prevent further harm to those clients."



The SEC's complaint charges Putman, Fevola and the RIA with fraud. In addition to seeking emergency relief, the SEC's complaint seeks permanent injunctions barring future violations of the charged provisions of the federal securities laws, disgorgement of the defendants' ill-gotten gains plus pre-judgment interest, and financial penalties.



According to Putman’s biography on his firm’s website, Putman was co-founder and the first President of the Northeast Wisconsin Chapter of the International Association for Financial Planning (IAFP), now the Financial Planning Association. He served on NAPFA’s Board of Directors in 1995 and 1996 before being elected as President of NAPFA and serving his term in 1996 and 1997.



Wealth Management’s website features the cover of Financial Advisor, the trade magazine for which I write, which wrote a story quiting him a year ago. (A previous version of this post incorreclty characterized the FA story as "flattering.") It also features a cover story from Bloomberg Wealth Manager Magazine, entitled “Pooled Assets: Why Some RIAs Are Creating Customized Investment Vehicles,” in which Putman is quoted extensively. The site also features a Worth Magazine (my former employer) cover story from July 2002 in which Putman was selected as one of the “Top 250 Financial Advisors In America,” and the cover from Medical Economics’ November 2006 list of the “Top 150 Best Advisor For Doctors.”



The allegations of wrongdoing against a former NAPFA president could not have come at a worse time for the group, which is part of a troika with FPA and the Certified Financial Planner^® Board of Standards lobbying Congress for creation of a new Self Regulatory Organization to oversee financial planners. Last month, another NAPFA member, Matthew Weitzman of AFW Wealth Advisors in New York City, was caught up in scandal and was reportedly the target of an SEC probe, according to a story by New York Times personal finance columnist Ron Lieber, who was one of Weitzman’s clients.



In a post here just yesterday, I mentioned that the continuing string of scandals involving RIAs make it unlikely that any effort to further regulate RIAs could be thwarted by NAPFA, FPA and the CFP Board. But revelations about Putman are particularly sad because he held himself out as a leader of NAPFA, an organization that is dominated by members with great integrity, advisors who have always been at the forefront in campaigning for issues in the interest of consumers. To see NAPFA’s reputation stained by a few bad members is heartbreaking.



For years the "fee-only" brand and NAPFA's brand itself were slowly compromised.The fee-only brand starting about 10 years ago was embraced and then abused by advisors who take hidden sales fees and behave unscrupulously. (NAPFA did try saving it by trademarking the term "fee-only," but was met by harsh criticism and gave up the fight.) Now, however, the NAPFA brand itself has been abused, which will inpsire a new skepticism from the press and cause confusion among consumers.



While NAPFA has remained a beacon of light in the sometimes shrouded world of financial advisors by supporting a fiduciary standard, it also increasingly became a marketing machine for advisors who used the referral network and favorable press garnered by NAPFA to grow their businesses and who were little interested in the high ideals of many the group’s members. Perhaps the news about Putman’s troubles will cause an introspective discussion among NAPFA members and help the group reclaim its high moral ground.



One other good thing that may come of this is that maybe—just maybe—a reporter in the consumer press will write about the idiocy of these “top financial advisor” lists, which sell magazines but stink at figuring out which advisors are really the best. There is no substitute for real research, which these magazine stories always fail to do. While the articles in Worth and Medical Economics were great marketing for Putman’s firm, these publications can’t possibly research all of the nation’s advisors and find the best ones without a massive effort, an undertaking they are unlikely to know how to effecutate or finance.



There ought to be rule prohibiting advisors from using the “top advisor” lists as the centerpiece of their marketing effort when the list is old. Worth has done several new lists since 2002, but Putman’s website does not mention this. It just has the cover from Worth’s 2002 issue on the home page. The same true of the Medical Economics list from 2006 on Putman’s site, which makes no mention of the more recent lists by the magazine, which presumably left out Putman.

Putman-SECComplaint.pdf (1.10 mb)

Beta testing of the Advisor Products Inc.'s (API) application for Online Reporting For PortfolioCenter has been a great success and we are now focused on improving web reporting for advisory firms using PortfolioCenter.

Beta testers gave API Online Reporting For PortfolioCenter rave reviews and some great suggestions for improving the application. Seven advisory firms participated in the beta test by uploading their client reports to our server, which successfully parsed client reports and deposited them into secure folders accessible to clients.

While the economy and stock market has been tanking, we have been experiencing one of the strongest growth spurts in our 12-year history. Much of the increased demand for our products can be traced to AdvisorVault 2.0, our new secure online vault platform that allows advisors to share documents with clients.

AdvisorVault is pretty much a no-brainer for advisors. AdvisorVault is less expensive than standalone online vault platforms marketed to advisory firms. Such standalone vaults are not integrated with a marketing website, website content, email newsletters system, and other features that we offer to help advisors market and communicate. Some standalone vault systems do offer many features that are valuable to advisors, but they don't provide the same value as AdvisorVault. They cost about the same or more than what we charge for a website packaged with AdvisorVault, and AdvisorVault offers all the same features or more than the standalone vault systems. Point is, even though other companies may specialize and sell nothing but an online vault, AdvisorVault works as well or better.

Everyone knows that TV and the Web are melding. Videos are increasingly being used on the Web. comScore.com yesterday reported that U.S. Internet users viewed 12.7 billion online videos in November 2008, a 34% increase over the same time a year earlier. On YouTube this past November, 5.1 billion videos were viewed; more than 146 million U.S. Internet users watched an average of 87 videos each, and the average online video viewer watched 273 minutes of video.

What’s really scary is that in my lifetime, we’ll probably be able to click on the couch that Oprah sits on and see its manufacturer and lowest price vendor. (My wife will bankrupt me!)

A Hamilton County Indiana Superior Court judge froze financial advisor Marcus Schrenker's assets and those of his wife late yesterday, after Schrenker reportedly parachuted out of his company-owned plane over Alabama Sunday while the plane continued flying on autopilot before crashing into Florida swampland two hours later. A manhunt is under way, according to reports.

Click here for the latest news about this strange incident.  

If you’ve been yearning for a way to use the Internet more effectively with clients, check out our new Personal Client Portal platform. It fills a gap between your firm’s existing software applications and your clients. This is a new type of application, and there is nothing else like it.

Your financial planning, performance reporting, and customer relationship management applications are disconnected from your clients right now. Our new portal system bridges the gap between your applications and your clients.