Advisor Blog

Changes In My Blog

Those of you who regularly read this blog know that I cover a mix of news for independent advisors—technology, compliance, marketing and a wide range of other topics. I also write about what's new at my company, Advisor Products, which makes websites, newsletters, and brochures for about 1,800 advisory firms.

Apropos of my schizophrenic role as reporter and service provider to advisors, I am splitting this blog in two.

This blog will now only cover what's new at Advisor Products. Articles I write about industry issues will now be posted in my blog at

advisorsforadvisors is a new practice management website. It's in beta, but you can sign up now for a 30-day free trial. (Advisor Products clients will receive an email next week about how to sign up for a free one-year subscription.)

Two veteran financial journalists have teamed up with me to create advisorsforadvisors. Mary Rowland is a former columnist at The New York Times who now writes a monthly column for Financial Advisor, and Bob Casey started up and ran Bloomberg Wealth Manager and is now a managing director of the Family Wealth Alliance.

advisorsforadvisors has strong social networking and provides crucial information to run an advisory business, including:

· Links to all important market and economic news stories by 8:30 a.m. EDT every business day

· A way to objectively compare advisor software applications feature-by-feature, side-by-side

· Social networking features that connect advisors who practice the same way as each other

· Advisor reviews of software applications

· User groups for software applications

· Daily analysis of industry and financial news by veteran reporters and industry experts

· Free access to weekly webinars with CE credit for many sessions and replays of all webinars 24/7

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5015 Hits

Jon Stewart’s Double Play

In a hilarious double-play, comedian Jon Stewart last night hammered Lenny “Nails” Dykstra, a former Mets centerfielder turned financial-advisor-in-bankruptcy, and then tagged TV financial personality Jim Cramer with a jarring comedic blast.

Stewart began a segment on last night’s show by focusing on the irony of the bankruptcy filing by Dykstra, who touted himself in recent years as a successful investment advisor and was profiled in 2008 as a “financial whiz kid” on the HBO program Real Sports. Dykstra, who told a Real Sports reporter that he did not read books because it was bad for his eyes, reportedly was sued by 20 creditors by the time he filed for bankruptcy on July 7.

Stewart revived his public humiliation of Cramer by playing an interview of Cramer on the HBO show in which he hails former Mets hero Dykstra’s as a brilliant financial advisor, “one of the great ones in this business.”

The irony of the baseball legend turned stock-guru’s misfortune provided Stewart with great material. Dykstra, 46, became a New York Mets hero for hitting a walk-off home run in Game 3 of the 1986 World Series, when the Mets defeated the Boston Red Sox in seven games to win one of baseball’s most memorable World Championship Series.

Cramer, the extremely energetic host of CNBC’s “Mad Money” and founder of, is a former hedge fund manager. Prone to hyperbolic rants, Cramer was the subject on March 4 and March 9 of scathingly funny blasts by Stewart. Stewart, the popular host of Comedy Central’s “The Daily Show,” assembled a string of video clips in which the self-proclaimed “infotainer” of finance made glaringly wrong investment predictions. Stewart wrecked any credibility Cramer might have had in the financial media by showing Cramer urging stock investors to “be buying things and accept that they’re overvalued, but accept that they’re going to keep going higher” a few months before the global financial crisis caused a stock market collapse. Stewart and Cramer’s public showdown became famous and then faded—until last night.

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Financial Planning Coalition Gets It Right

The Financial Planning Coalition (FPC) released a statement this morning clarifying its position on the Obama Administration regulatory reform proposal.

The FPC applauded the Obama Administration proposal to require a fiduciary standard of care to brokers, repeating a position first articulated in its release of June 18, the day after the Obama Administration’s white paper on regulatory reform was released. However, the FPC now also expressed concern that the fiduciary standard would be “watered down” by the proposal.

The FPC is a recently created group comprised of the Financial Planning Association, National Association of Personal Financial Advisors, and the CFP Board of Standards. Please note that my blog of June 18 swiped at FPC for not mentioning that the fiduciary standard could be watered down by the Obama proposal.

Apart from qualifying its support for the Obama Administration proposal, today’s FPC statement, which I’ve highlighted for quick scanning, clears up an important part of the Obama Administration’s June 17 white paper. The 88-page white paper called for establishment of a Consumer Financial Protection Agency (CFPA) to help protect consumers from bad financial advice. Some observers interpreted this to mean an entirely new regulatory regime would replace the current regulatory framework. Not so.

FPC explained that the CFPA’s jurisdiction “would cover consumer financial products such as credit cards, savings accounts, and mortgages, and possibly insurance, but notably leaving securities transactions and investment advice to the SEC.”

This makes a lot of sense. While coverage in the trade press would have led you to believe that the CFPA was taking over responsibility for regulation and enforcement of advisors, it’s clearly not. Point is, wrangling over regulatory reform is going on behind closed doors and we know little about the structure of what’s to come, much less who the winners and losers will be.

With that qualification, I’ll speculate that our government bodies and existing institutions are likely to be relied on more heavily as reform is implemented. My guess is FINRA will gain power to regulate RIAs advising consumers.

FPC’s effort to prevent the watering down of the fiduciary standard of care for clients is important. If brokers are fiduciaries but can continue to be compensated on commissions, then the fiduciary standard of care has no teeth. And if the U.S. government bans commission compensation of independent financial advisors, as was done last week by Great Britain’s Financial Services Authority, an extremely unlikely reform, then telling the difference between fiduciaries will be difficult.

Clearly, once the fiduciary standard of care is defined under a new regulatory regime, it could be watered down as to be almost meaningless. The reform measures may not make it easier for a consumer to know the difference between an advisor who puts a client’s interest above his own and one who does not.

The FPC’s release today is laudable for pointing this out and for giving advisors tools to speak out. The bottom of the FPC release contains “message points” advisors can borrow to write letters to legislators.

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Building Client Loyalty

We’ve made it very easy for you to remind clients why they need you.

All the tasks you’ve completed for a client over the past 12 months are now conspicuosuly displayed on each client’s home page.

This important new feature in the Advisor Products Client Portal is integrated with Redtail Technology’s CRM. So when you input an Activity in Redtail, it shows up automatically in a client’s portal.

With advisory firms under financial pressure because asset values have plunged in the past year, showing each client a list of tasks you’ve completed is a way of building loyalty. In light of the bear market and advisor Ponzi-scheme scandals, it is critical to regularly include this information in client communciations.

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4535 Hits

Feds Want All FAs To Be Fiduciaries

Way back on page 72 of the regulatory reform white paper released yesterday by the U.S. Treasury is some pretty big news for financial advisors.

“We propose the following initiatives to empower the SEC to increase fairness for investors,” says the Treasury white paper. “
Establish a fiduciary duty for broker-dealers offering investment advice and harmonize the regulation of investment advisers and broker-dealers.”

Entitled, Financial Regulatory Reform: A New Foundation, the white paper makes official the Obama Administration’s intention to put registered reps and advisors at RIAs under the same set of regulatory rules. That’s not a surprise to anyone.

“Retail investors are often confused about the differences between investment advisers and broker-dealers,” according to the white paper. “Meanwhile, the distinction is no longer meaningful between a disinterested investment advisor and a broker who acts as an agent for an investor; the current laws and regulations are based on antiquated distinctions between the two types of financial professionals that date back to the early 20th century. “

What is a surprise is that the Administration is asking to impose a fiduciary obligation on brokers. Of course, only advisors at RIAs are now fiduciaries, and thus obliged always to do what is in a client’s best interest. That is a much higher standard of care for clients than is imposed on registered reps, who must only ensure they are giving advice suitable for their clients.

The Treasury says in the 89-page paper that RIAs and Registered Reps are the same to retail investors. “In the retail context, the legal distinction between the two is no longer meaningful,” says the Treasury white paper. “Retail customers repose the same degree of trust in their brokers as they do in investment advisers, but the legal responsibilities of the intermediaries may not be the same. The SEC should be permitted to align duties for intermediaries across financial products. “

“Standards of care for all broker-dealers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers,” according to the Treasury Department. “In addition, the SEC should be empowered to examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors’ best interest.”

The Administration is calling for new legislation:

requiring that broker-dealers who provide investment advice about securities to investors have the same fiduciary obligations as registered investment advisers

providing simple and clear disclosure to investors regarding the scope of the terms of their relationships with investment professionals

prohibiting certain conflict of interests and sales practices that are contrary to the interests of investors.

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4535 Hits

CE Credit On Webinar Replays

When the U.S. economy seemed like it might collapse last October, Advisor Products hosted a webinar for advisors in an effort to help to help them cope.

Attendees were so grateful, we did it the following week.

Pretty soon, it became clear that advisors wanted us to bring them this information regularly. Thus was born the Financial Crisis Webinar Series, which brings advisors leading thinkers from the financial advisory profession every Friday at 4 p.m. EDT

We’ve now hosted 32 webinars , replays are always available, and since January we have offered continuing edcuation credit for Certified Financial Planner
® licensees.

Last week, we upgraded our registration platform. As a result, you are now be able to receive continuing education credit when viewing webinar replays.

With the new registration system, you register just once. We’ll drop a “cookie” into your browser—
a short line of texton your computer's hard drive—and you’ll be recognized without registering the next time you return. If you use a different computer, you’ll need to log in again, however. Before this upgrade, you had register your information each time you wanted to view a webinar replay.

The new registration system also allows you to access videos and request more information about our services from the Advisor Products website. Videos explain our client portal system, newsletters, AdvisorVault, and Online Reporting for Advent Axys or PortfolioCenter.

Advisor Products clients will continue to use their existing log-in credentials for accessing the BackOffice for managing your website, email newsletter, and newsletter. That is unaffected by these changes.

It is our privilege to be able to bring you The Financial Crisis Webinar Series. Join us this week to hear Mark Tibergien, CEO of Pershing Advisor Solutions, speak about the link between operational efficiency and human capital.

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Redtail Technology Integrates With Advisor Products

How would you like to be able to show clients a list of all of the things you’ve done for them lately?

What if you could automatically feed that list of achieved tasks from your CRM system to a secure personal website for each client?

Or how would you like to be able to assign clients tasks from your firm’s CRM system, and feed these To-Dos automatically to each client’s secure personal website?

This is all totally doable right now.

In fact, these are just a couple of the many powerful features in the new Advisor Products integration with Redtail Technology.

Integration between Advisor Products and Redtail extends one of the advisory profession's most powerful customer relationship management (CRM) software applications to a client-facing application.

Redtail’s easy-to-use web-based CRM system helps you manage your internal staff; Advisor Products' secure Client Portal system helps you communicate with clients effectively.

Redtail CRM tracks and organizes all your client activities. Featuring online calendaring as well as task management, Redtail is easy to use and offers a low cost of ownership.

The Advisor Products Client Portal lets you provide each of your clients with a secure financial home page. Information is fed from your firm's applications for performance management, financial planning, and client relationship management. Client Portals also feature a vault and newsletters written by Advisor Products that are personalized to each client’s profile, making a great presentation of all the information clients need from you.

Utilizing eXtensible Markup Language (XML) feeds, data flows automatically from Redtail to Client Portals and vice versa. The XML feeds save you time and money because you don’t need to re-key data from one application to another.

Using the Advisor Products-Redtail integration is simple. In Redtail, which is a web-based CRM, there’s a page where you fill in details about an Activity your firm is performing for a client.

At the bottom of every Activity page is a checkbox to “Share with Advisor Products.” Checking that box automatically sends that activity to your clients' portals.

Whenever your firm completes an activity for a client, you can insert a note about the completed task in the Activity page in Redtail and it will flow automatically into the corresponding client's portal.

Clients, thus, can see all of the work you do on their behalf. That's important since most of the work advisors do is unknown to clients.

The Advisor Products Client Portal system features a “To Do Manager.” The To Do Manager is where all Achieved Tasks are displayed to your clients.

When you click the “Share With Advisor Products” checkbox in Redtail, that activity is displayed in your client’s secure personal portal as an “Achieved Task.”

In addition to showing clients all of the work your firm does for them, you can also assign clients tasks in Redtail that will automatically be fed for display in To Do Manager.

From the Activity page in Redtail, just pull down the Category menu and choose “Portal Client To-Do.”

That Activity in Redtail, as well as any updates to it, will be fed into the client’s portal.

The integration of these two applications means nothing falls through the cracks with clients anymore.

The integration of Advisor Products with Redtail also makes it easy to provision new client portals, as the demographic information from Redtail can be automatically fed into the Client Portal Platform.

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4938 Hits

Reducing The Rate Of Client Failure

Why do some advisors annually get fired by 10% of their clients or more while other advisors consistently lose just 2% or 3%?

With the impact of the financial crisis hitting advisory firms and clients alike, the answer to this question is critical and may not be that complex.

Clients fire you because they feel disconnected from you and your firm. They leave when you lose credibility, when you fail to touch them in meaningful ways, when you fail to confront their crucial financial issues with them.

Clients don’t fire you because of investment performance. They fire you because they feel you let them down and do not provide enough value.

When a client fires you, it’s not just you who loses. They, too, often lose. Clients that fire you may hire an advisor who is not as devoted or competent. Or they may try to manage their money on their own, which may lead to failure. When a client fires you, it’s often not just you who has failed. They also fail.

What can you do about it? How can you stem your attrition rate and help more people by giving them good financial advice?

The answer doesn’t lie in a new financial product; we have enough products. The answer is not in a new market-timing strategy; we all know diversification is the wise course because no one can predict the future.

The answer is in your communication with clients. It’s in your ability to draw people out, to make it safe for them to share with you their greatest fears, and your desire to actively listen and then meet their demons head-on with reason and intelligent solutions. The way to retain clients is to be deeply engaged in ongoing financial conversation with them about their greatest fears and dreams.

So I asked one of the world’s foremost experts on crucial conversations for help—the authors of The New York Times bestseller, Crucial Conversations: Tools For Talking When The Stakes Are High. To my amazement, the authors were intrigued and have designed a way for financial advisors to better understand how to conduct crucial financial conversations with clients.

Published in 2002, Crucial Conversations, has influenced millions of business leaders. “This is a breakthrough book,” said Stephen R. Covey, author, The 7 Habits of Highly Effective People. “I found myself being deeply influenced, motivated, and even inspired.”

The authors of Crucial Conversations, Kerry Patterson, Joseph Grenny, Ron McMillan, and Al Switzler, established a consulting firm, VitalSmarts, which has developed dozens of corporate training programs for dozens of Fortune 500 companies.

David Maxfield, a respected academic, was named head of research at VitalSmarts. Maxfield has taught at Stanford University and the Marriott School of Management at Brigham Young University. He is the recipient of Motorola University’s Distinguished Teaching Award and Stanford University’s Dean’s Award for Innovative Industrial Education. Maxfield is also the author of the 2007, Influencer: The Power To Change Anything.

Maxfield has been working with me to research how well financial advisors handle crucial conversations with clients. On July 10, at what promises to be a special session, Maxfield will lead a presentation at The Financial Crisis Webinar Series in which he will teach advisors the basic skills needed to conduct crucial conversations with clients.
You can reserve a place at this free webinar now by taking a 10-minute survey designed to measure financial advisors’ ability to conduct crucial conversations with clients.

The full impact of the financial crisis has not yet been felt by advisors. Investors have been paralyzed by fear. Many advisors are likely to be fired in coming months as the shock of the crisis subsides. Please take the survey and join us as we all heal the wounds of the meltdown and try to learn from it.

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12467 Hits

Password Management And Form Filling

At a recent webinar I conducted, I briefly showed attendess a program I use for password management. An advisor today emailed me a question asking me about that program.

Incidentally, if you have questions for me, please post them as comments on my blog. Don't email them to me. A lot of other advisors who read the blog regularly can probably benefit by seeing your question or may be able to answer it. I'm trying to create a community here and would genuinely appreciate your help by posting your comments and questions. About 1,000 unique visitors come to my blog every day and it would be great if you were all more visible and kept me in line.I've seen a nice increase in the last week or two in comments and appreciate that.

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4530 Hits

Schwab Tech Honcho Skiles Resigns

Dan Skiles, the face of advisor technology to 5,500 RIAs clearing through Schwab Institutional, resigned his post several weeks ago and started a new job today at Shareholders Service Group (SSG).

Why did the affable 38-year-old executive leave Schwab, by far the largest custodian serving independent advisors, for SSG, one of the smallest custodians? Partly, Skiles says, because SSG offered him a partnership stake and partly because SSG reunites him with former colleagues from his pre-Schwab days, but mostly because he wanted to see his two children more.

In March, when Skiles’ seven-year-old son, Luke, set the table for dinner for his wife and six-year-old daughter but set no place at the table for his father, who he assumed was travelling on business, Skiles says he decided his life was out of order.

“SSG is an opportunity to feel challenged and passionate about my work, which I was at Schwab, but also to still make it home for dinner every night,” says Skiles. “My dad went to Vietnam and was away from my brother for an extended period. He didn’t have a choice, but I do.”

Skiles is an expert on practice management and his role at Schwab landed him at the center of crucial advisor technology issues.

As vice president of Schwab Institutional advisor technology solutions, Skiles was responsible for running a department with 10 technology consultants who are stationed all over the country and charged with giving advisors free advice about implementing portfolio management software and other key systems. In addition, Skiles also oversaw Schwab Performance Technologies, a Schwab subsidiary that owns and distributes PortfolioCenter, a leading portfolio reporting software used by 3,400 RIAs.

A San Diego native, Skiles graduated from San Diego State University in 1993 with a bachelor's degree in recreation management and opened a rock climbing gym with several roommates. He worked in that business for only a few months before being introduced to Robert Reed, a senior executive at discount brokerage Jack White & Co., in 1994. At their first meeting, Reed, who was the No. 2 executive at White, asked Skiles to come back later that same day to meet Peter Mangan, who ran White’s mutual fund supermarket and fledgling RIA business. Mangan hired Skiles on the spot. (The rock clmbing business was sold within a couple of years sold but remains a successful company.)

Internet discount brokers like White grew wildly in the mid-1990s and Skiles handled everything from working on the phones with retail clients to manning the trading desk and helping define technology for advisors. In 1998, when TD Waterhouse purchased White, Skiles was tapped to explain the merged firm’s technology solutions to advisors, and he was instrumental in the design and implementation of VEO, a web-based interface for advisors to Waterhouse’s brokerage platform.

In September 2001, I invited Skiles to participate in a panel I was moderating at the FPA Retreat featuring technology chiefs from all three major custodians—Fidelity, Schwab, and Waterhouse. I invited all three executive to lunch, where Skiles met Rich Freyberg, who then headed advisor technology at Schwab. Freyberg told me after that meeting that Skiles was a “Boy Scout” (referring, presumably, to Skiles’ integrity and not his boyish, clean-cut looks). Several months later, Skiles went to work at Schwab Institutional.

Skiles had a tough job at Schwab because the giant brokerage competes with advisors for retail business and makes portfolio accounting software, a critical system in advisor businesses. Many RIAs for years were uneasy about allowing Schwab to provide their core technology system and custody services, a tension that came to a head in 2001 after Schwab announced it would stop selling its CenterPiece PMS system to advisors that did not use Schwab as a custodian. As Skiles rose in Schwab’s ranks and gained influence over decisions about the company's advisor technology, he was able to avoid hitting such hot-button issues, and relations between Schwab and its RIAs have in recent years been less controversial.

Working at SSG reunites Skiles with Reed, an executive VP and chief compliance officer at SSG as well as with Mangan, SSG’s CEO and majority owner. As I wrote in a
recent post, SSG is now a custodian to about 500 RIA firms and it is experiencing a boom amid the economic bust. While the $2 billion amount of assets SSG custodies for RIAs is dwarfed by the big-name custodians—Fidelity, Pershing, Schwab, and TD Ameritrade—SSG has built a profitable business around smaller RIAs that the larger custodians don’t value as much.

According to Mangan, SSG is making inroads with established RIAs with an average of about $30 million of assets under management and who run portfolios of funds, ETFs, and stocks. It’s also gaining traction, he says, with advisors leaving regional and wirehouse brokerages who typically bring no assets initially but garner an average of $15 million in assets from clients within a year of transitioning to SSG. While SSG uses Pershing to clear, and Pershing has its own RIA custody business, Mangan says SSG has differentiated itself by providing diligent service to its advisors and putting together a unique technology platform.

Skiles, who is the 13th employee on the SSG staff, will work on improving internal technology systems used by SSG to service advisors and to help build a technology platform used by its RIA clients. With the broad but undefined title of executive vice president, Skiles' likable personality and natural skills in marketing, communication, and sales as well as his knowledge of advisor technology is likely to help SSG gain a higher profile with advisors even as it is dwarfed by
Fidelity, Pershing, Schwab, TD Ameritrade.

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What Would FINRA Do?

Investment advisors who have reflexively blasted SEC Chairman Mary Schapiro for saying the government should further regulate RIAs ought to look upon the civil fraud complaint filed against former NAPFA President James Putman as a cautionary tale.

I’m no big fan of FINRA. The Self-Regulatory Organization’s rules often get in the way of communicating with clients and running an honest advisory business. But the SEC’s allegations against Putman are so terribly damning.

Inarguably, additional rules are needed to better protect investors from unscrupulous RIAs. Far less clear, however, is whether being regulated by FINRA would have prevented the fraud Putman is accused of carrying out.

While the case against Putman is but one of a string of SEC enforcement actions targeting RIAs in recent weeks, it’s notable because Putman was a prominent member of the fee-only advisor community and at the moment this once-priestly segment of the advisor world benefits by confronting some ugly realities about the erosion of fidelity within its ranks. With RIAs vociferously protesting SEC Commissioner Schapiro’s stated intention to “harmonize” rules faced by RIAs with those faced by securities salespeople, reps of RIA may be more mindful that something must be done to protect the public’s trust in investment professionals if they understand the facts of the case against Putman.

In reading my summary of the facts stated in the 30-page, nine count SEC civil complaint filed against Putman, his RIA, and his former president and chief investment officer, please think about whether FINRA regulation would have better protected his clients. Leave a comment with your thoughts.


Putman, 57, started Wealth Management LLC, an Appleton, Wis. RIA, in 1985. He served as president of NAPFA in 1996 and 1997. Putman reportedly has not been active in NAPFA in recent years. However, as recently as September 2006, he participated as a panelist at a “NAPFA Cutting Edge Conference,” speaking at a session entitled, “The Search for the (NEW) Investment Paradigm.”

Putman is charged by the SEC with a litany of securities law violations, along with Simone Fevola, 49, who was president and CIO of Wealth Management (WM) from September 2002 to October 2008. The wrongdoing allegedly surrounds six unregistered private limited partnerships created in 2003 by Putman, which significantly changed his firm’s business model. In one of several similarities withthe Madoff fraud, WM took custody of client assets in the pools.

The pooled investments were structured like hedge funds and, as private vehicles, were unburdened by the need to register publicly. Each of the six funds had a specific objective, according to Part II of Wealth Management’s (WM’s) Form ADV ranging on the risk spectrum from capital appreciation to income producing. None was described as speculative. They were to invest in other private funds, funds of funds, debt, real estate partnerships and trusts, and asset-based loans.

As is often the case, the funds wese given an assortment of cryptic names, such as Gryphon, Quetzal, Pantera, and Watch Stone. Putman, who had discretion to invest on behalf of his clients, invested about 47% of his firm’s clients in Watch Stone and 40% of them in Gryphon.


According to the SEC complaint, offering documents for Watch Stone and Gryphon, the two largest of Putman’s pools, say their investment objective would be “to achieve a high level of income consistent with the preservation of capital” and the pools would primarily invest in “investment grade debt securities.” However, Putman and Fevola invested in “risky illiquid alternative investments,” the SEC says. It gets much worse.

An April 14, 2009 Form ADV filing by the federally regulated RIA claimed investments in the six pools were worth $102 million and that WM had another $29 million in separately managed accounts. The SEC says nearly 90% of the $102 million in client funds was invested in two of the partnerships, Watch Stone and Gryphon, which respectively had $50 million and $38 million. The SEC says now that the six WM funds “appear to have limited remaining assets.”

The SEC says Putman loaded up Watch Stone and Gryphons with investments in a life-insurance premium financing partnership that was managed by Joseph Aaron. Aaron in 1996 had been the subject of an SEC enforcement action alleging that Aron had committed fraud in selling promissory notes to investors. Moreover, the SEC says, Putman and Fevola knew about Aaron’s disciplinary history by 2004 but they still failed to verify that valuations Aaron placed on his funds were accurate.

Not only did Putman and Fevola fail to disclose Aaron’s shady past to WM’s clients, but the SEC says they also each accepted “undisclosed kickbacks” from him of $1.24 million in 2006.

Thus, even if you believe that Putman and Fevola were victims duped by Aaron, the SEC allegations paint a picture of Putman and Fevola falling in deeper with Aaron instead of blowing the whistle on him and admitting their mistakes to WM’s clients.

Meanwhile, in addition to the disastrous investments in Aaron’s life insurance investment scheme, other investments made by Stone Watch and Gryphon also went bad. Three of Stone Watch and Gryphon’s largest investments beyond Aaron’s partnerships are now in bankruptcy. Two are real estate funds, managed by California-based MKA Advisors, that went bankrupt in April 2009 and another investment is in fund called Sagecrest, a Connecticut partnership investing in asset backed loans that went bankrupt in the summer of 2008. While Putman in December 2008 wrote off 50% of the value of Sagecrest, the SEC says Putman has continued to value MKA’s investments at pre-bankruptcy levels in reports to clients.

The SEC alleges Putman had never fully disclosed the risks of the underlying funds invested in by Stone Watch and Gryphon, saying the funds were investing in investment grade securities when the offering documents for the underlying funds said investments were be risky and speculative, such as oil drilling deals. The SEC complaint cites a 70-year-old retiree with Alzheimer’s disease who had signed an investment policy statement targeting a fund with a 95% allocation to fixed income securities.

The Case Now

In the last 10 months, a majority of WM’s staff resigned or was terminated, the SEC says. To a reporter who has read many such SEC complaints over the last 25 years, it seems likely that WM staff, possibly Fevola, is actively cooperating with the SEC investigation and that the SEC is now targeting Putman.

As of December 30, 2008, the SEC says Putman valued Watch Stone at $47 million and Gryphon at $22 million. But according to notes taken by a staffer of the RIA during a recent client meeting, the SEC says, Putman admitted to the client that its investment in one of Aaron’s deals could be worthless.

One investor, whose statement cites an investment worth $1 million, was recently told by Putman that his investment could be worthless. Another investor, with a reported value of $670,000 on his 2008 year-end statement, told SEC investigators that he was recently informed by Putman that his investment could also be worth nothing. The SEC says Putman has continued to collect his 1.25% management fee on the funds based on the allegedly overstated valuations of the assets.

The government says that in February 2008 Putman wrote to clients saying that he was was limiting redemptions to 2% per quarter of the value of each client’s holdings for liquidity reasons. However, the SEC says he has arbitrarily honored full redemption of some investors.

“Absent immediate relief, it is likely WM and Putman will distribute the remaining assets of the WM Funds to a few investors who submitted redemption requests prior to September 3, 2008 and leave remaining investors with little or no recovery.”

What's It Mean?

The SEC complaint against Putman should serve as a cautionary tale to advisors. Those who knew Jim Putman say he was a straight shooter and cannot imagine what could have led him down such a tragic path. It's unlikely that Putman intended to defraud his clients when he started the partnerships in 2003.

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4824 Hits

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)

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5162 Hits

More On RIA Regulation Changing

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.?”

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Life Planning Will Be A Winner In The Financial Crisis

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.

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How Will RIA Regulation Change?

As the number of Ponzi schemes and investment frauds prosecuted by the U.S. Securities and Exchange Commission soared in recent months, so did the odds for change in the way small RIAs are regulated.

You don’t have to be a math genius to understand the calculus. In the last six weeks, the SEC issued press releases about prosecuting 18 fraud cases involving registered investment advisers, hedge funds, and Ponzi schemes. During the same period a year ago, the agency brought just six such cases. It prosecuted one such case during the same period in 2007.

Add to these grim statistics the Obama Administration’s vow to clean up Wall Street, massive mistrust in Wall Street, and the announced intention of the SEC chairwoman Mary Schaprio to “harmonize” RIA and broker regulations. The equation logically leads to one solution: RIAs are likely to be regulated by FINRA.

The coalition announced earlier this year of the Financial Planning Association, National Association of Personal Financial Advisors, and Certified Financial Planning Board of Standards is likely too little, too late. The coalition proposes creation of a new regulatory body to regulate financial planners. However, Congress is unlikely to complicate the regulatory framework further by supporting any effort to create yet another regulatory body that is new and has little history of regulating other than the 60,000 or so CFP designees.

I’m not an expert on Washington affairs but a proposal to create a new regulatory body to oversee financial planners would look wasteful, since a statutorily-empowered self-regulatory organization that regulates retail financial advisors already exists. While FINRA’s bureaucracy and history of being dominated by large Wall Street firms is likely to put RIAs in a bad position, it’s hard to imagine any entity other than FINRA taking the reins in regulating RIAs.

So it’s time to start wondering aloud about what it will mean if indeed FINRA becomes the regulator of RIAs. What will the new regulatory regime mean to RIAs and financial planning firms? Here are my guesses:

  • Compliance expenses for RIAs are likely to rise sharply once FINRA is in charge.

  • RIAs will be required to pay some additional fees to FINRA to help defray the cost of a FINRA examination program.

  • Instead of naming a junior-level employee your chief compliance officer (CCO), your CCO may have to pass an exam as is required by FINRA.

  • IA reps will have to pass a competency exam akin to the Series 7.

  • RIAs will be required to submit for review to FINRA client communications touching on certain subjects, such as limited partnerships, recommendations of stocks, mutual funds or derivatives, or that describe your performance history.

What do you think? Let the speculation begin.

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5237 Hits

Correction To My Twitter Webinar

My webinar, Twitter For Advisors, on Friday, May 8, contained an error.

In the presentation, I incorrectly said that if you keep your tweets private and approve all of your followers on Twitter, other Twitter users could not see your followers. That's incorrect.

While approving your followers allows only approved followers to see your updates, any other Twitter user can still see your followers.

It’s important for financial advisors to keep this in mind. I incorrectly advised in the presentation that, if you create a separate profile for clients only, other Twitter users could not see them. Even if you protect your updates using the checkbox in the “Settings” menu in Twitter, any other Twitter user can still see your profile and the list of your followers.

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Are You Too Sexy For Social Networking?

In the 1992 pop hit, “I’m Too Sexy,” by Right Said Fred, lead singer Fred Fairbrass insists he’s “too sexy for Milan, New York, and Japan.” It’s a silly statement.

Just as silly was a statement by one of New York’s most prominent estate planning attorney, who told me he’s too sexy for social networking. I won’t name him because he’s a close friend and he’ll never come to our house for dinner again.

But he only had a couple of glasses of wine when he said that all of the requests to connect that he’d received on LinkedIn were from people who wanted to sell him something, socio-economic climbers who’d benefit from knowing him. He wasn’t connecting with people from which he could learn, get referrals, or derive some other benefit from knowing virtually.

This was my first reaction, too, when I first started using LinkedIn and again when I first used twitter. But once you use these tools, you figure out how the privilege of giving away information benefits you as long as you target the right people.

My lawyer friend is actually right about one thing: LinkedIn connections that you want to connect with probably won’t seek you out. You have to seek them out.

If you wait for your target client to seek you out, you won’t see the value in social networking. You have to go to them. On LinkedIn, this means looking at other people’s connections to see who among them you want to know.

For instance, say you’re an estate planning attorney or financial advisor and corporate executives with stock options, deferred compensation plans, and restricted stock are your target clients. You want to connect with senior executives at numerous companies in your area or industry about which you’re an expert.

In LinkedIn, you could click the “Search” the pull-down menu next to the “Search Companies.” If you want information about executives at
Research In Motion, for instance, you click on “see more” in the “Current Employees” section at the top of the page and you’ll get a list of hundreds of executives. If you only want top executives from RIM, use Advanced Search to filter for “Senior Vice President.”

You can request a connection with top executives at just about all of the 1,000 largest companies in the country.

Is that like cold-calling? Not if you have information valued by these executives.

If you request connecting because you have a white paper about the latest tax court ruling on restricted stock sales, or offer a service that tracks insider stock trades by executives at his company every day, he may value that.

Or, better still, network with people you know. If you have a client or college buddy who is a top executive at RIM, for instance, why not connect? You can then ask that friend to introduce you to a colleague at RIM. If you know the SVP for handheld software development, you can look at his connections. You might find that the SVP for channel sales went to the same high school as you or previously worked with someone else that you know and you could ask for an introduction to that person.

The same rules apply to Twitter. A lot of the people who want to “follow” me want to sell me something—search engine optimization, social networking tools, financial planning software. And that’s okay. Sometimes they actually have valuable information for me.

But at the same time I’m actively reaching out to financial advisors on
Twitter and Linkedin and streaming news about personal finance, regulators, and marketing. I’m updating people I connect with about my latest blog posts about advanced marketing techniques and events in the economy.

To make social networking work for you, figure out who your target clients are and what information you could easily send them regularly for free to prove your value to them. Shortly after you do that, you’ll stop complaining that only product salespeople want to connect with you and realize that you’re not too sexy for social networking.

For more information about Twitter and social networking, please read
my latest column in Financial Advisor.

And please register for this week’s session of the Financial Crisis Webinar Series on Friday at 4 p.m., when I will speak about
Twitter for advisors.

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4878 Hits

Ways RIAs Can Reassure Clients

Five more advisory firm frauds made headlines in the past week. Meanwhile I received two hateful emails about my recent blog posts saying old ways of assuring clients of advisor integrity are no longer enough.

I’m sorry if I stepped on some toes or if you feel I was too harsh with my comments about NAPFA. But unless advisors communicate proactively, candidly, and in detail with clients right now about the trust issue, client assets could start moving away from advisors toward discount brokers.

I’m not predicting a huge stampede. But clients who have seen portfolios slashed in value and who see the string of frauds make headlines need reassurance.

During the last market pullback—the tech bubble of 2001-2002—discount brokers did not have the easy-to-use technology they do today, and only a fraction of the investors used the Internet. It’s different this time. Advisor clients are on the Web and the discount brokers have slick, easy-to-use interfaces.

The history of innovation should make advisors cautious. Disruptive technology systems (discount brokers) are always viewed as crude when introduced. This lulls established market leaders relying on existing technology (traditional financial advice outlets) to believe they will not lose business to the new competitor.

However, incremental improvements in once-crude innovative systems gradually overcome the established regime. This pattern of innovation adoption has been
documented extensively.

Advisors would be wise to watch the progress of the major discount brokers in coming months to see how much market share they pick up from the retail flight of assets from Wall Street brokers.

Ironically, advisors are more than ever in need of help from the big discount brokers. After all, these same firms are also the largest providers of custody services to RIA assets. And the custodians can provide advisors with crucial assistance in reassuring their clients of their fidelity and competence.

Perhaps the most important idea an RIA can communicate to assure clients fearful of fraud is that you have an independent custodian. This is a time to emphasize to clients that, unlike Bernard Madoff, you have an independent custodian.

Because of the important role an independent custodian plays in RIA client relationships, I emailed four major custodians a week ago—Fidelity, Pershing, Schwab, and TD Ameritrade. I asked them how RIAs can reassure their clients by emphasizing the role played by a custodian. Only two of the custodians responded.

To me this was surprising. Here’s a chance for the custodians to be on your side and play a valuable role. Your custodial firm can earn its fees by helping you communicate proactively right now. You’d think they would jump at that chance.

Mark Tibergien, who heads
Pershing Advisor Solutions, replied within minutes. Brian Stimpfl, a managing director at TD Ameritrade Institutional, responded a day later by spending an hour on the phone with me.

If Fidelity and Schwab contact me after seeing this post and have good ideas to add, I’ll post another entry. Keep in mind, Advisor Products is incorporating these messages into articles we write for RIA client newsletters and websites.

Tibergien says the simple fact that you have a custodian must be communicated to clients. Madoff’s firm was itself custodian of client assets. Almost all custodians mail statements monthly directly to clients. You want to mention to your clients that these statements provide independent verification of their account holdings, transactions, and values.

Stimpfl points out that only about 1,000 of the approximately 11,000 RIAs providing retail investment advice take custody of client assets. You may want to mention to clients that RIAs not holding their assets at custodians require far more due diligence on an ongoing basis.

Clients should understand that portfolio performance reports they get from an RIA can easily be compared against the independent custodian’s statement. This is also a good time to remind clients that custodians will send them notices of trade confirmations whenever a transaction occurs in their accounts. Mentioning that the custodian has its own website where account values are posted 24/7 would also reassure many clients.

You may also want to remind clients of the URL on the custodian’s website where they can sign up to receive the electronic trade confirmations directly from the custodian. Custodians years ago rolled out a feature allowing them to notify your clients of trade confirmations and they can send an email to your clients with the URL where they can download each trade confirmation. They also archive every confirmation for each client. Many clients will appreciate the reminder and your being proactive in disclosing how transparent your business is. It will instill confidence in your firm.

Incidentally, you may want to ask your custodian about its policy on ex-clients. If you move a client’s assets away or if the client fires you and moves to another clearing firm, how long will the custodian keep those old trade confirmations? Stimpfl says they’re archived for seven years at TD Ameritrade.

Stimpfl says several months ago TD Ameritrade produced and distributed a set of materials for RIAs to help them answer questions from nervous investors after the Madoff scandal and market break. The package of materials included a letter that could be copied, pasted, personalized, and mailed out under the RIA’s letterhead.

The letter, Stimpfl says, reminded clients to check their client services agreement with their RIA firm to see exactly what their advisory firm can do with their money. Reminding clients that you have discretion to trade their accounts and how carefully you manage that responsibility would be reassuring. While the majority of RIAs do have discretion of their client accounts, those that do not may want to remind their clients of this fact.

“We live in a transparent society,” says Stimpfl. “And if you're holding back anything, you could unintentionally and unnecessarily put client relationships at risk.”

RIAs who invest in alternative investments should be proactive in communicating about the value of those assets. Advisors who recommend alternative investments should have Investment Policy Statements for each client who holds them. Reminding these clients of the details about holding alternative investments would be wise. Advisors who do not hold alternatives or who hold less than 5% of total client assets in them should consider reminding clients of these facts.

Tibergien says clients should be told about processes and protocols your firm has in place to review investment decisions. If your firm has conducted a “mock SEC audit,” showing clients a report from your compliance consulting firm would be another way to demonstrate your commitment to run your firm with integrity.

You can also remind clients that your custodian has its own responsibilities under the law to ensure client assets are protected. SIPC insurance covers investors in the event of the insolvency of the custodian for up to $500,000 of losses. In addition, a custodian is likely to have separate insurance coverage purchased privately. One custodian has coverage for losses in securities accounts of up $149.5 million and up to $900,000 in cash accounts.

And speaking of cash accounts, Stimpfl says TD Ameritrade has safeguards in place that prevent an RIA from moving cash from a client’s account into the firm account. RIAs can move cash from a client’s account to another account held by the same client, but TD Ameritrade must receive written approval via mail. Similarly, client address changes must be verified via mail.

Finally, both Pershing and TD Ameritrade said they have automated systems in place to monitor RIA client accounts. Software to ensure compliance with anti-money laundering laws and programmatically search for suspicious trading patterns in customer accounts are yet another protection for RIA clients.

By the way, the two hateful emails I received were more than offset by two uplifting messages. I appreciate the kindness and support.

One More Thing:

If you are interested receiving notification of the continuing drumbeat of advisor frauds being uncovered almost daily, I’ve been “tweeting” the headlines about them. Follow me on Twitter to receive these notifications. Here’s the recent crop of those tweets:

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8692 Hits

Online Portfolio Reporting Upgrade

Advisor Products just launched a streamlined interface for firms using AdvisorVault™ to upload portfolio reports from the two most widely-used portfolio reporting systems, Schwab’s PortfolioCenter® and Advent’s Axys®.

The way an advisory firm maps a report containing a client’s portfolio data to the client’s online vault is simple now. Mapping is a one-time procedure for setting up the Advisor Products Online Reporting Solution. It’s also used whenever a firms adds a new client to the system.

Until now, mapping a single client’s account data to the vault was a five-click process that typically took 30-seconds. Now, it’s a two-click,
two-second procedure.

Most clients have multiple accounts—five to 10 accounts per client is common—and advisory firms using the system typically have 200, 300, 1,000 or more clients. The streamlined workflow is a big time-saver for advisory firms—literally 10 times faster. While it previously took 16 hours to map 400 clients with five accounts each, it now takes about 90 minutes.

The Advisor Products
Online Portfolio Reporting Solution has also been enhanced to allow a client’s account to be mapped to different family members. A father and mother, for instance, can have different log-ins to view their own individual accounts, but they both are also able to see a child’s account.

Advisors can drag and drop files from their computer hard drive to any client’s online vault folder. Having the flexibility to drag a folder from your desktop or network drive to the online vault makes moving files in and out of the AdvisorVault™ fast and simple. Clients also can drag and drop files to the vault.

In addition, a client or an advisory firm can give outside professionals rights to access a specified folder in a client’s vault. For advisors working with estate planners or accountants, collaboration is much easier and totally transparent to clients.

With many clients seeking greater transparency from their advisor, online portfolio reporting is likely to grow in popularity. One of the HTML reports, for example, shows a client all transactions in his account. Since the system is so fast, advisory firms can provide clients a daily list of all transactions in their portfolio.

Advisor Products Online Reporting Solutions are fully-redundant and servers are behind dual redundant firewalls with web, authentication, and database servers in isolated subnets. Applications are monitored 24/7 and data are backed up daily and stored offsite weekly.

Web servers utilized by AdvisorVault™ utilize SSL 256-bit encryption for all activities, including the log-in screen and user interface as well as when uploading or downloading files. Uploaded files are stored encrypted and files are decrypted only when delivered to the end-user. Advisor Products staff can see partial file names residing in AdvisorVault™ but cannot view the contents of any client files.

AdvisorVault™ is hosted at a data center that’s achieved SAS 70 Type II compliance. SAS 70 is an internationally recognized auditing standard developed by the American Institute of Certified Public Accountants (AICPA), which means our hosting facility has had its control objectives and control activities examined by an independent accounting and auditing firm.

The hosting facility requires two-factor authentication, including biometric authentication, for anyone to enter, and all entrances and common areas are monitored 24x7 via closed-circuit cameras. Redundancy is built into the heating and cooling systems to maintain a consistent and optimal environment. The data center has on-site redundant power sources and redundant back-up generators, including a multiple-day fuel supply on-site, and it remained lit throughout the Northeast power outage of August 2003. Connections from Verizon, AT&T, Cablevision Lightpath, and Keyspan enter the building through separate trenches.

The Online Portfolio Reporting Solution represents just one of many applications
integrated by Advisor Products into advisory firm marketing websites and client portals.

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4630 Hits

The Trust Issue

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.

  • 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.”

  • 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.

  • 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.

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How and why does the Advisor Products system work?

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