More Industry Black Eyes

The SEC believes it’s uncovered another case of wrongdoing, this time at a firm headed by a “prominent member” of the National Association of Financial Planners, or NAPFA. The bitter irony for NAPFA members is that the organization is very vocal about working in clients’ best interests, rather than following Wall Street business-as-usual.

Here’s an interesting editorial take on the story and what it means for the industry:

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…

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.

Gluck concludes by calling the financial media to task:

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 [sic] or finance.

Our editorial slant: Unfortunately, these kinds of episodes seem likely to increase the probability of excessive and/or poorly designed regulations, which will limit consumers’ choice and industry dynamism over the long run. We do accept that regulations can and should be improved when appropriate, but we don’t see how regulations will ever prevent human beings from being human beings (consider that despite the rule of law, societies still need prisons), however badly we want to reduce the risk of malfeasance in financial services to zero. There appear to be some common threads to most of the fraud cases brought by securities regulators, which leads us to believe that one of the most powerful tools for creating a better regulated industry is education. Not the kind of financial education we’re used to, like consumer pamphlets from public agencies and glossy marketing pieces from private organizations, but actual education, starting sometime in the K-12 years. There are few aspects of life more important or more prevalent than finance, and while almost everyone has the opportunity to use financial technologies (and potentially bring ruin upon themselves), far fewer have the opportunity to learn what it’s all about.

Fortunately, American civil life is still alive and well, despite occasional hysteria about its demise. We know of charter schools in our area dedicated to finance, business, and entrepreneurship, and other organizations have sprung up to fill the gap. We just came across this one in Colorado (thanks Google), which offers some some statistical data in support of its mission and our editorial above.

URLs:

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090608/REG/906079995/1094/INDaily01

http://www.napfa.org/

http://gluck.advisorblogcentral.com/post/2009/05/Former-NAPFA-President-Faces-SEC-Fraud-Charges.aspx

http://www.yacenter.org/index.cfm?fuseAction=financialLiteracyStatistics.financialLiteracyStatistics