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Former NAPFA President Faces SEC Fraud Charges

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)

What Would FINRA Do?
More On RIA Regulation Changing




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