Even the best-intentioned planners can run afoul o

Illustration by Lou Brooks

Former Securities and Exchange Commissioner Arthur Levitt, loath to mince words during his eight-year stint as the nation's top securities regulator, warned in his parting speech this past December of widespread hype and deception in a number of investment areas, such as mutual-fund performance and get-rich-quick Internet schemes. He stressed also that investors have a right to a broker who works in the client's best interest and to financial advice not "tainted by salesmanship."

Levitt wasn't blowing hot air. The SEC's Office of Investor Education and Assistance received in fiscal 2000 some 27,600 complaints, a record high. Most, in the wake of the market slide, took to task brokerage and online trading outfits for their alleged shoddy or deceptive service. But the SEC isn't the only guard dog in the financial services yard (advisors managing less than $25 million in client assets don't register with the SEC), and brokers aren't the only ones to watch.

Financial advisors from the high and mighty to the small and obscure can exhibit professional misconduct. For example, the media spotlight has shown brightly on "investment advisor to the stars" Dana Giacchetto. Giacchetto, of the Casandra Group in New York, was charged with stealing nearly $10 million from his once-devoted clients. Giacchetto pleaded guilty to fraud last summer and is awaiting sentencing pending the result of his cooperation with investigators trying to track down missing client funds. While most advisors who've gotten themselves into trouble are not quite as famous, it doesn't mean their crimes are less egregious.

Last June, for example, the CFP Board of Standards permanently revoked Birmingham, Alabama, advisor Randall Hancock's right to use the CFP mark after an investigation into his disclosure of a 1998 IRS professional suspension and an August 1997 federal felony conviction for tax evasion. In his plea agreement, the CFP Board states that Hancock admitted that he knowingly falsely represented a client's debts and assets. Calls to Hancock for comment were not returned.

The Problem Defined

Advisors of various ilk (rooted in insurance, banking, brokerage, accounting, or planners practicing as commission or fee-only independents) can, and do, get into hot water, deservedly or not, and in myriad ways. It happens regardless of whether they broker (or have brokered for them) securities on their clients' behalf; dole out rotten advice; or compromise their fiduciary responsibility through blatant, self-serving salesmanship. Despite Levitt's concerns, efforts to root out offending advisors are hampered by a regulatory system that is fragmented and inconsistent. While many wrongdoers are dealt with severely, some get away with a slap on the wrist; or, like Hancock, have their CFP Certificate lifted (which doesn't put the advisor out of business); while still others emerge unscathed.

The problem is this: At present, there is no federal umbrella under which all of financial planning is governed. This leaves the field wide open, and to say that advisors walk a narrow path through it is an understatement. Depending on their credentials and their affiliations, advisors are beholden to the rules of the SEC, the National Association of Securities Dealers (NASD), their own compliance departments, and state accounting boards and securities regulators. They are open to disciplinary action from a variety of industry associations for failure to adhere to their ethical standards, as well. The Council of Better Business Bureaus, based in Arlington, Virginia, which nationwide tracks complaints relating to 1,000 different types of businesses, keeps data on errant advisors. In 1999, for example, CBBB received 124 complaints in its financial planning/management consultant category. Advisors are also sitting ducks for lawsuits from clients, actions that can come out of the blue, blind to innocence and good intent.

"Sometimes clients will file frivolous suits," says Ted Turner, a long-time NASD-appointed mediator and arbitrator who is also a registered rep with Nathan and Lewis Securities, working out of offices in Cape Cod and Fort Lauderdale, Florida. "They won't necessarily tell advisors what their objectives are; or they'll change objectives; or some, as they become older, will suffer from memory loss."

Where's the Beef?

Data from the CFP Board of Standards, which governs the actions of its approximately 36,000 members and whose strongest disciplinary measure for wrongdoing is the revocation of an advisor's right to use the CFP mark, shows that 64% of the 1,477 complaint cases completed from 1987 through November 2000 were dismissed at some stage during the process.

It's not just clients who file complaints. Action may be brought by one advisor against another for a real or perceived infraction. Dale Brown, Financial Planning Association Associate Executive Director and staff liaison to the organization's Ethics Committee, cites an infrequent instance wherein a member might market himself to the public in a community shared by another advisor who feels his peer is not touting his virtues in an ethical manner.

Doug Nogami, manager of media relations at the CFP Board of Standards, notes that most complaints filed with his organization center around issues of "suitability" and "misrepresentation." The former occurs when an advisor recommends something that the client feels was not suitable for his particular situation--using funds from a client's retirement account to buy a hot tech stock that unexpectedly plunges south, for example, when conservative bonds would have been a more prudent buy. The latter: When the client maintains that what he was told by the advisor about a particular situation was ultimately false.

E&O, Anyone?
To guard against your errors and unrealistic client expectations, don't forget errors and omissions insurance

Errors and omissions insurance is generally provided as coverage for the services advisors render for a fee, explains Steve Gudlielmo, head of financial services at The Hartford. He adds that occasionally ancillary services that don't warrant a fee also are provided. In other words, even though an advisor is not necessarily compensated for a service he provides, there still might be the chance of a legal action brought against him because of that service.

Most of the claims Gudlielmo sees relate to beefs over investments. Typically, they center on alleged misrepresentations or omissions of material facts regarding either the objectives or the policies of a fund as it relates to the investments within that fund. But there are also claims paid out regarding matters of advice: For example, an advisor breaks down a client's portfolio into 65% equities, 30% bonds, and 5% cash in a hot market where the client wanted to risk 100% in equities, and now the client feels he lost out. Barring proven unlawful intent or fraud, even though the advisor may have exposed himself to complaints and charges from his client, the advisor's E&O insurance would likely have him well covered in the event of a lawsuit or arbitration hearing.

Given the various ways an advisor can get into trouble, warranted or not, it would seem all advisors would have E&O insurance. They don't. The Hartford deals primarily with institutional clients--about 500 in the financial services business, most of whom peddle advice. Gudlielmo says that most advisors who handle institutional money are required to have E&O coverage. "If you're taking $10 million to $100 million of a company's pension plan money and investing it on the [plan's] behalf, they're going to require that you as their advisor carry at least $10 million in coverage." In terms of cost, The Hartford's ballpark figures on a per-million-dollar coverage basis run a minimum of $5,000 to $7,000. "But frankly, it goes up substantially on the amount of money they have under management," Gudlielmo says.

What about the thousands of smaller independent advisors? There are programs out there for them that may go as low as $500 to $1,000 per million of coverage, Gudlielmo says. "If an independent planner is dealing with $1 million or $10 million of a client's money, and he's astute enough to get E&O, that's great, but it's not always the case. An investment advisor isn't going to spend money he doesn't have to spend." An advisor knowingly exposing himself to risk may consider his own personal umbrella coverage enough to protect him from litigation. "I don't know if that's necessarily true," says Gudlielmo.

E&O insurance is not a membership requirement of any of the financial planning trade organizations, such as NAPFA or FPA, or even the CFP Board of Standards. "It's up to the individual," says CFP spokesperson Doug Nogami, whose organization's records do not indicate whether or not a CFP certificant has an E&O policy. The same holds true for the FPA and NAPFA. Paula Hogan, who chairs the latter association's Ethics Committee, reports that part of NAPFA's continuing education efforts include encouraging members to purchase E&O, though it's uncertain how many actually do.--Cort Smith

Paula Hogan, a member of the National Association of Personal Financial Advisors' National Board of Directors and vice chair of NAPFA's Ethics Committee, says the near-700 member association doesn't receive enough complaints each year--"a scant handful"--for any pattern to emerge, but that all share one element. "It is the complainant saying, 'But I was expecting and I didn't get . . .' coupled with an inadequate response on the part of the advisor. Processing of the complaint will go forward because at the time there appears to be merit." Barring willful, malicious intent, she explains, it is a mistake on the part of the advisor in this situation not to say to the client, 'I understand what you're saying, and here's my point of view, and can we meet in the middle?'" A lot of the problems with clients are with expectations, Hogan says, adding that there is always the question as to whether those expectations are realistic and reasonable.

The Numbers

The American Institute of Certified Public Accounts has some 340,000 members, the majority of whom are in business and industry as opposed to public practice, but it does have its share of CPAs dispensing financial planning and/or investment advice. To encourage those advisory efforts, the AICPA created a Center for Investment Advisory Services, which offers information, education, and resources in the investment advisory services field, and bestows upon qualified AICPA members, the Personal Financial Services credential. There are presently some 8,000 members in the institute's Personal Financial Planning section, of whom approximately 3,000 hold the PFS credential. About 90,000 AICPA members "tell us they do personal financial planning on some level," says AICPA spokesperson Joel Allegretti. How many get in trouble dispensing advice?

According to Lisa Snyder, director of the Professional Ethics Division at AICPA, advisors per se are not segmented out of data regarding the number of overall complaints received by the division. In 1999, for example, 262 new cases were opened. AICPA accepts and reviews complaints from the general public, and is also "proactive" in searching out AICPA members who are in violation of prescribed codes of conduct by perusing the media and reports from government and state agencies.

FPA data, naturally, is more specific. In the association's first year of operation, following the merger of the International Association for Financial Planning and the Institute of Certified Financial Planners in January 2000, there were less than a half-dozen complaint cases up for review. FPA and NAPFA members who are CFP licensees are subject first to the CFP Board's code and review. Charges to be handled by the CFP, as well as those passed along to, or which originate at FPA or NAPFA, follow a similar course, starting with the organization's ethics committee.

Book 'em, Danno

At FPA the committee will open an ethics file and launch a review when it receives a written complaint from a consumer or member. Like the AICPA, it will also launch a review when it learns of alleged unethical conduct through a publicly available source, such as a news article or an announcement by a regulatory agency like the NASD or the SEC. Most FPA members are RIAs, who are either registered with the SEC or their home state's securities agency. All trade association members are by signed agreement obligated to disclose any action taken against them by any regulatory body, whether state or federal. In addition, anyone can check up on an advisor suspected of past wrongdoing by consulting an RIA's Form ADV, which is filed with the SEC. By the same token, as AICPA notes in its literature, Form ADV is "the best insurance policy an advisor can have. The disclosures made in Form ADV are an advisor's first line of defense against regulatory action and litigation."

Implementation of an SEC proposal to make the form available on the Internet, and a general beefing-up of its content, will result in vastly more disclosure data than is currently required. Newly-required information would include an advisor's method of compensation and investment philosophy, as well as full disclosure of any disciplinary actions taken due to a conviction of theft, fraud, or violations of securities laws.

A Signature Mistake...
How a self-professed good guy made one small mistake that came to haunt him

Steven Schippel always considered himself one of the good guys. As a financial planner with American Express for close to 15 years, he had not only tried to conduct himself with the utmost professional propriety but had also ascended high enough through the corporate ranks to advise others on the dos and don'ts of his vocation. "I've been a financial planner since 1984 and I was always very careful about what I did," says the former American Express vice president. "I was even pretty strict with the 100 or so planners that I had under me. I mean, there would be a lot of stuff going on."

But in the winter of 1997, Schippel made the slip that would eventually lead to problems for him and his career, including disciplinary action from NASD and the CFP Board of Standards. Here's what happened, as related by Schippel.

He wanted to get an insurance quote for a client, but the man--who had been a client for years--couldn't make it to the office to sign the requisite documents. "The guy had some things going on with his family and the insurance company wouldn't accept a faxed signature," Schippel says with a hint of remorse. "It wasn't even a big deal. I was trying to get a quote."

So Schippel put aside his scruples. "The guy told me just to sign the document for him and that it wouldn't be a big deal," Schippel recalls. "It's something that a lot of financial planners do from time to time."

The Other Shoe

The incident passed without further complication until several months later, when Schippel began preparing to make a long-anticipated move of striking out on his own. "I had always wanted to start my own independent practice, and I had told American Express I was leaving in July." His long-time employer had different plans. In what Schippel thinks was an attempt to preempt him from organizing his 300 or so clients to move along with him, they terminated his contract. Only it wasn't that easy. At the VP level, Schippel says the firm needed just cause to get rid of him. It was then that he found a protest being lodged against him for forging a client's signature.

"I never did such a thing," he told his superiors when the accusation was first leveled. And then they sprung it on him. "I had since had a falling out with the client for whom I was getting that insurance quote, and American Express was saying that the man was now claiming I forged his signature."

American Express would not return calls for comment.

It was a messy affair, which ended in Schippel agreeing to a one-month suspension and a $5,000 fine from the NASD after what was a very acrimonious parting with American Express. "I just wanted the whole situation to be over with," he says now.

Only it wasn't.

Several months later in the fall when he went for a routine renewal of his CFP license, he was told that there was going to be some trouble since he hadn't immediately alerted the CFP Board to the NASD suspension.

Frustrated and fatigued, Schippel decided to fight. He hired a lawyer to represent him at the CFP Board hearing, during which he admitted that he had made a mistake by signing his client's name, then asked for leniency. "I made a mistake, but I've done everything right for 18 years," he says. "The panel that heard the case was made up of CFPs as well, but they didn't want to hear anything. I thought they would have been more compassionate."

The result was a six-month suspension of his CFP license--which has since been reinstated. Schippel moved on and today has a growing practice in Frederick, Virginia. "I don't know," he says. "I just wish these guys would put themselves in your place when they are judging you, to think about what it would be like to have their professional character called into question."--Mike Jaccarino

FPA spokesperson Scott McDuffee says it's tough to pin down any single source for most cases opened at his organization. Some come from member disclosure of disciplinary action, some from member or consumer complaints, while others come via notification from the CFP Board or some other regulatory body for action that the regulator has already taken. The CFP Board's records show the source of the 1,676 cases opened there since 1987 to be the following: CFP Board-discovered, 611; self-disclosed by the CFP certificant, 559; general public, 311; professional or other CFP certificant, 191. The numbers reveal an upward trend from the 150 cases opened in 1995 to the 264 opened in 1999 (figures for 2000 have not been finalized).

Complaints filed at FPA or NAPFA or the CFP Board must be submitted in writing and cannot be anonymous; the AICPA will consider complaints regardless of origin. As FPA's Dale Brown says, accused advisors are afforded due process and a presumption of innocence. "Integral to the fairness of the process is being able to know who the accuser is," he says. The same could be said in regard to how the other organizations mentioned handle their complaints.

Once a complaint file is opened at FPA, the offending member will receive a letter with a copy of the complaint, along with a request for a detailed written response within 60 days. The ethics committee will then review the complaint and the member's response and, based on the standards of the FPA Code of Ethics, determine whether or not a code violation has occurred. If so determined, a sanction of the member is possible and a subcommittee of the ethics committee will conduct an informal, non-judicial fact-finding hearing via phone conference with the accused member and the complainant. Once the subcommittee has reported its findings to the full ethics committee, the latter will decide whether a sanction is appropriate.

Guilty as Charged

Sanctions generally include a private letter of reprimand, temporary suspension or permanent revocation of membership--or in the case of the CFP Board, revocation of the CFP certificate. The CFP Board, AICPA, and trade groups such as NAPFA and FPA do not have the clout to put an offending advisor out of business. They will, however, (especially in the event of a CFP certificate revocation) notify state securities licensing bodies, insurance commissioners' offices, bank commissioners' offices, accountancy boards, and various consumer groups, along with the NASD and SEC. This data will then be added to an advisor's Form ADV. The toughest actions the AICPA can take against a proven offender are suspension or expulsion from membership in the organization. For less egregious matters, explains Snyder, an individual may be required to take a continuing education course. AICPA and its Ethics Division do not have jurisdiction over a CPA's license, says Snyder of the group's Ethics Division. "Only the state Board of Accountancy can revoke or suspend the CPA's license, which would require a separate investigation," she says.

NASDR, wielding far more power than the trade groups, handles things differently. The association and its independent regulatory subsidiary, NASD Regulation Inc., operate under the auspices of the SEC. But it is NASD Regulation, overseeing some 676,000 NASD members, that RIAs are more likely to deal with (that includes RIAs who have signed Uniform Submission agreements (regarding background disclosure) with broker-dealers, as well as bank trust officers who dispense advice). That is, unless their actions are deemed serious enough to warrant SEC involvement (usually in an investigatory capacity, often in conjunction with NASDR); the SEC, in turn, will generally forward criminal cases to the office of the U.S. Attorney General. In 1999 (the latest year for which comprehensive data is available) NASDR received 6,391 customer complaints. Nearly 480 individuals were barred (permanent expulsion of an individual from acting in any or all registered capacities); 268 were suspended; and 235 were referred to the SEC. Also during 1999 over 5,600 arbitration cases were filed.

Financial Forensics
Here's software to ease your arbitration pain

When investment advisors are called to arbitration by NASD, or called to task by other regulatory organizations and trade groups, they need to have their ducks in a row. At the very least, this means organized data and notes from client conversations and agreements relating to investment strategies pursued, and detailing of actions taken and the results. James Bushey, president of Secure Financial Services in Essex Junction, Vermont, took aim at the burgeoning securities arbitration market and developed a proprietary software product for the investment and legal communities. Portfolio Perspective enables users to put all P&L investment data, valuation theories, and what-if scenarios at their fingertips in order to concisely and forcefully plead their case at arbitrations hearings--what Bushey calls forensic financials.

Although the product is not specifically designed for investment advisors, it doesn't take much imagination to envision its application as a valuable tool for advisors--not just to keep advisors out of trouble, but as a value-added service to their clients.

SFS has about 200 clients nationwide. Most are attorneys representing brokers or individual investors, or, to a lesser degree, insurance companies that underwrite some of the brokerage firms and independent securities dealers with whom SFS works. The company also serves a growing list of advisors. "There seems to be a market out there for it," says Bushey, "and we're just scratching the surface in terms of what the tool and information can be used for."

While the program is free, it can only be populated with a data set provided by SFS, which is not free. "What we've said is, let's make this software available, and we can populate it with transaction data. At that point the financial advisor can run on his desktop all those what-if scenarios and do all those analyses, and if there are new things that need to be done of interest to their clients, they're easily programmed."--Cort Smith

Secure Financial Services can be reached at 802-879-2077, or on the Web at www.TradeAnalysis.com

For an SEC-licensed RIA, arbitration is not an option, but a requirement. "Remember, arbitration is alternate dispute resolution," says Ted Turner, the NASD mediator. "You're trying to make the problem go away at the cheapest cost." While for an advisor arbitration is preferable to going to court, it can get expensive and the fines can be steep. Arbitrators are not bound by any rules save manifest disregard of the law, explains Turner. "You can get rapped for whatever the arbitrators want to give. Any amount," he says. "If you get sued for $100,000, they can hit you for up to $300,000 if they want, and you really have no defense against it."

When Punishment Is Justified

Most of the disciplinary actions taken by NASD and the CFP Board and trade associations are no doubt justified. "People think these brokerage firms and some advisors are big fat ducks that they can rip the arms and legs off of," says Turner, who nevertheless adds, "there are some people who sue that should get the world." Some offenses, however, are simply not as serious. Take advisor Lois LaPadula of Mahwah, New Jersey, for example. LaPadula received from the CFP Board a public letter of admonition following the investigation of a 1999 grievance that a former client had filed with the board. Upon review, the board found that LaPadula had presented a financial plan to a client as "complete" when it was not, and that her subsequent demand of full payment for the incomplete plan was neither fair nor reasonable. The board also determined that the advisor gathered inadequate information to complete the stated scope of engagement and that she displayed a lack of due diligence in making investment recommendations. When contacted, LaPadula offered no comment regarding the actions taken against her.

Then there's San Diego advisor Tasos Hatzimichael, who was discovered by the CFP Board to have been barred and fined $88,000 by NASD in 1991 for having accepted client funds made payable to his company rather than to the intended investment. The advisor then deposited these funds into the bank account of a business in which he had a controlling interest, and utilized the funds to pay his company's expenses. In June 2000 the board permanently revoked his right to use the CFP mark. Hatzimichael could not be reached for comment.

Staying Out of Hot Water

Of course, the majority of advisors is scrupulously honest and adheres diligently to the ethical standards governing their practices. But as noted earlier, for even the most virtuous advisor, a client relationship can sour. Fortunately, there's much that can be done to prevent it, thus saving the thousands of dollars that can be incurred in arbitration and civil or criminal court, valuable time spent before various ethics committees, embarrassment, and the possible tarnishing of a hard-earned reputation.

Napfa's Paula Hogan gives two words of advice: "Good communication." She says it doesn't hurt to keep in mind the Golden Rule: "If you're treating clients the way you want to be treated, and if clients are treating advisors the way they would like to be treated, a lot goes better. It is a relationship. People shouldn't let situations fester."

Most of the complaints she has run across have been aggravated by failures of communication. She stresses the importance of understanding that if an advisor is acting as a fiduciary advisor, he or she is putting the clients first. "There is no situation where you can have absolutely no conflict of interest; but whenever an advisor is aware of even a potential for conflict of interest, then the duty to disclose arises." Hogan admits that while there isn't a lot of action at NAPFA in terms of complaints, when one comes in the door, "usually the first thing people say is, 'Wow! Why couldn't they have just solved this?' Often the problem isn't that hard, but once it gets going it forms a life of its own."

Dale Brown at FPA offers this advice: "I know it sounds trite, but tell the truth." He encourages advisors to be as detailed as possible and provide backup documentation. He says he would advise an advisor in the same way that somebody from a compliance standpoint would proactively advise them. "Do things up front--and on an ongoing basis--during the relationship with the client to try to prevent a bad situation from arising that would result in them filing a complaint. And if they do, you've built a good trail of documentation and facts to substantiate your side of the story."

Advice From the Field

NASD-registered RIAs would do well to heed the advice of arbitrator Turner, whose 40 years in the business make him more than qualified to offer it. He asks advisors to keep in mind that compliance departments are not anti-business. "You should listen to your compliance department; you should listen to your director of compliance, and it doesn't hurt to tell the truth. If something's wrong, let your firm or compliance people know immediately. That's the first line of defense." He says, too, that if somebody in a firm is "telling you to push product, tell 'em to go fly a kite, and find another firm. Do what you think is right, and stick by your guns."

Keep a file on all your clients, and make notes to the file when you speak to them, he urges. "Everybody the last two years wanted aggressive growth. Now the aggressive growth blows up in the investor's face, and what does he scream, 'I didn't want aggressive growth!'" The advisor, though required to have a signed document stating that both advisor and client reviewed issues of suitability and that the client acknowledged the existence of risk, should take time to fully explain all actual and potential ramifications of actions taken on the client's behalf. "A more informed client is a better client," he says.

If a complaint ends up in the lap of NASDR, and the advisor is being called to arbitration, Turner recommends strongly that unless the advisor has "blatantly screwed his client," the parties should first mediate. (The NASD mediation department is part of the arbitration division of the NASDR.) "Once you're into the mediation room and you've got a good mediator, the problem often can go away, and then you can go to sleep at night," says Turner. If the issue isn't resolved in mediation, arbitration is next.

As noted, arbitration can be costly. In addition to the fines that can be levied, arbitration can cost the advisor some $7,000 a day in expenses. On top of this, added costs can be incurred depending upon what is needed in terms of the discovery process, interrogatories, and depositions. "This can be a nightmare," says Turner. He encourages mediation for another reason: The initiation of a request for mediation on the part of the advisor may make mediators and arbitrators regard the advisor favorably, since he appears to be cooperative and bent on working out the problem as expeditiously as possible.

By logging detailed records and keeping the lines of communication wide open with clients, advisors can do much to avoid lawsuits or unwarranted charges and complaints. The damage from complaints of a non-serious nature, stemming from misunderstandings or circumstances beyond an advisor's control, can also be mitigated. But Heaven help the advisor who engages in the premeditated deception of the stereotypical 96-year-old great-grandmother. There are enough agencies and regulatory bodies out there to make sure he gets his just rewards.

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