August 9, 2013

Best Reader Comments: BrightScope Brouhaha; Goldfarb Fracas

A collection of some of the recent — and most thought-provoking — comments made by readers on ThinkAdvisor

More On Legal & Compliance

from The Advisor's Professional Library
  • Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
  • Advertising Advisor Services and Credentials Section 206 of the Investment Advisers Act contains the anti-fraud provision of the statute and ensures that RIAs’ advertising and marketing practices are consistent with the fiduciary duty owed to clients and prospective clients.   

The comments section on any site can be engaging, annoying, puzzling, insulting — likely many more adjectives could apply.

But the best comments can help continue the conversation of any story or blog for our readers — and for us — beyond the article’s own words. So ThinkAdvisor will be regularly highlighting some of the better comments that are posted to keep the conversation alive. The comments weren’t highlighted because they were long or short, just, hopefully, thought-provoking.

ThinkAdvisor will adhere to basic Web commenting ground rules about identity, where only screen names of the commenters will be used — no one will be “outed.” When you do see a commenter’s name added next to “By Anonymous,” it is only when the commenter has put their name in their posted comment or linked to their not-anonymous blog or website. The main reason for this is, whenever possible, we want to help readers, and us, differentiate between multiple anonymous postings. We have also done very minor cleanup editing of comments and links for clarity.

BrightScope Defends a Business Model Modeled After Morningstar

This story on July 30 by Joyce Hanson of ThinkAdvisor was about the frustrations of one rep, David Sterling, of being unable to correct his information on BrightScope’s site, particularly the posting of FINRA-related red marks, without having paid the $1,000 membership fee. BrightScope CEO Mike Alfred and some other members, including Michael Kitces, rigorously defended BrightScope’s business model. One of four comments here was posted by Sterling.

Submitted by Robert Cochran — July 31

While all advisors should be aware of and work to have incorrect information from FINRA, SEC, etc. corrected, the truth is that BrightScope's information is not always what FINRA and the SEC actually show. We have had more than a few instances of these kinds of problems, and it seems to take an act of God to have them corrected by BrightScope. While I would like to believe that corrections would be made much faster if we were paying $1,000 per month, which we are not, my hunch is that our requests are put at the bottom of the pile, behind the folks who ARE paying. And just who ARE paying? A quick look tells me that, for the most part, they are wirehouse and large broker/dealer firms. Since there are many folks from each office, perhaps their firm is paying the fee to get them registered with BrightScope, perhaps not. But there were hardly any fee-only advisors who are paying members in our geographic area the last time we checked. Perhaps the big BDs are using this as a somewhat-free advertising opportunity, so that their commission reps can post articles and answer questions? Add to this the fact that none of these people is likely to have their own web site.

We have chosen to not participate because of the above demographics, because of still incorrect information related to our office and advisors, and because we have chosen to target our marketing dollars in a more effective manner.

Yes, there may be instances where someone in our target market might check out BrightScope, and we may lose because our information there is outdated or simply incorrect, despite having done everything we could to clear up the errors. Is it worth $12,000 per year to participate? The jury is clearly still out.

Submitted by David Sterling—July 31

Re: Authenticity

Let's get right to it. I am always humored by comments that can only be based on speculation and/or motivated by the "pitch." For example, Mr. Kitces comments; "Nobody had ever noticed that David Sterling had a regulatory infraction, not even David Sterling, until he saw it on BrightScope." Mr. Kitces is incorrect about my prior knowledge, which I find troubling.

The nature of the falsehood is at the least a careless assumption. If one has knowledge about the securities industry, this individual would know that it is very difficult for registered representative to avoid notice or awareness of such a "mark." However, there is more to it.

I consider the statement to be somewhat arrogant and a misrepresentation of BrightScope's value proposition. Of course, I understand that "all bets are off" when the "bottom line and promotion" are in play. Moving along.

Referring to my "regulatory red mark" earned for a contractor's dispute that was settled for nominal value, Mr. Kitces offers this sage advice. If his complaint is that FINRA's Broker Check shows an infraction that he doesn't like, he should take up with the regulator."

I dare say that many would agree that this is "much easier" said than done. Words do come easy. However, I cannot help but be intrigued by another possible lurking consideration. This may or may not fall under the category of creative "lawyering."

BrightScope is a private company that is using a public access channel to report on information that has been filtered through a securities industry sanctioned process. What I find intriguing in this "age of fast and furious" digitized posting of research information is the accountability that should attach to those firms which demonstrate an inclination to reconfigure otherwise regulatory sanctioned information to create an impression or representation, which could have ramifications for someone's livelihood. If I am not mistaken, Mr. Cochran (below) had something to say about accuracy.

Finally, I suppose I should be grateful for BrightScope's presence because its disclosure of my "record" will force me to have a discussion with my client regarding those matters of concern to me. It just keeps getting better when there those who can look out for everyone's well-being from saddles much too high for them to reach without an "ego" boost. More to likely follow as I currently fear looking back on earlier pages without losing perspective and these comments.  David F. Sterling, Esq., Consultant

Submitted by Robert Cochran—Aug. 1

While I am aware that some investors search for RIAs based on historical performance, there are many fee-only RIAs who are not a fit for that client. Number one, those RIAs usually do not advertise historical performance. Number two, higher-end RIAs tend to use more customized portfolios, thus eliminating historical performance numbers. And number three (and perhaps most important), RIAs who are truly wealth managers often do not want clients who are focused only on comparing investment returns. These clients inevitably chase performance without regard to the risk and returns they actually need to take to achieve their lifetime goals.

So how will BrightScope handle this issue? I would hope they realize the disclosures required to publish historical performance data will make it extremely arduous at best, most likely impossible.

I am all for transparency and full disclosure. Let's all agree that is a goal. But accuracy in reporting information should also be high priority. My experience is that getting data errors and wrong items fixed at BrightScope is not easily done, even when the error is not from their information sources. But, again for us, at this point it is heavily dominated by wirehouse and other broker-dealer companies. We target people who are searching for a truly independent RIA firm, so our marketing dollars need to be focused somewhere else.

Submitted by Simon Napper—Aug. 1

I was talking to somebody who remarked that his problem with finding an RIA is that there is no information about their historical performance. His selection of funds was based on historical data and he was frustrated by the lack of information available to compare advisory firms.

Brightscope is a partial solution to this and I think we should assume that there will be some mistakes and some people who are treated unfairly and, hopefully, Brightscope will rectify this situation.

Just like Yelp has helped with supposedly unbiased opinions but has had to deal with people gaming the system and some abuse from within, I think that this is the start of increased transparency which is a good thing.

In the long run, I think that potential investors want even more transparency and I think it is reasonable to assume that this will lead to more people actually engaging advisors rather than the current winner which is leaving things alone and doing nothing

Michael KitcesCFP’s Goldfarb Case Illustrates Need for Clear Compliance Lines

In this second part of his blog for ThinkAdvisor on July 31, Michael Kitces (left) wrote about Alan Goldfarb, the former chairman of the board of directors of the CFP Board, who had resigned last fall and then was found to have violated the CFP Board’s Rules of Conduct. The first part of Kitces’ blog post explained the details of the case, for this part he turned the discussion to what needed to happen, particularly in the area of compensation disclosure. This blog post seemed to have poked a nerve because it provoked six commenters—all, unfortunately, signed in as Anonymous—to weigh in on the same day the article was published.

Submitted by Anonymous—July 31

A very thorough article although you do gloss over the fact that Mr. Goldfarb had a direct ownership interest in a firm from which received commissions. Furthermore, with your reference to Ron Rhoades, you indicate some clients when I think that the facts are that nearly all his clients were in Florida. The fact that he may have refunded the clients money inappropriately charged is not the issue. II actually think that in terms of the financial world, his offense is more serious than Mr Goldfarb's and wonder why the CFPBOS did not see fit to address that infraction, despite receiving complaints.

You cannot be fee only when you receive even a dollar in commissions, you can be fee based. The word only implies that fees are your only source of compensation. The meaning of the word salary can be argued but is usually reported on a W2, not on a partnership form. If there are other CFP certificants who are misstating their source of income then they should receive the same sanctions as befell Mr Goldfarb.

Submitted by Anonymous—July 31

Let me start off by saying I am a CFP. I also don't believe it is rocket science to know if you should call yourself fee only, commission only, or fees and commissions. From what Goldfarb and the CFP Board said, Goldfarb indicated he was fee only in advertising on an FPA website. The CFP Board did not think that was appropriate for someone who has securities licenses and is an owner and President of a broker dealer. That seems straight forward to me. Whether Goldfarb was paid commissions directly or even earned a commission is irrelevant in my mind. If he wanted to call himself fee ony why did he hold licenses to earn commissions. Nobody forces me to hold securities or insurance licenses.

Was Goldfarb trying to project himself as better or more pure advisor as compared to me? Perhaps there are other advisors out there misleading the public on how they charge clients and that should be dealt with. I applaud the CFP Board for its honesty and straight forwardness in disciplining its Chairman. If we cannot hold those at the top accountable for doing the right thing then there will be unethical advisors who do the same thing Goldfarb did. Again this isn't rocket science. If you are an advisor doing what Goldfarb did just fix it today and lets all be move down the road and not be ashamed of charging clients fees and/or commissions.

Submitted by Anonymous—July 31

There are a couple of issues here that need to be separated. As I understand the FPA website has a section "How Planners Charge". Planners don't charge clients salaries and bonus. Salaries and bonus apparently was an option under the "How Planners Charge" section but that doesn't make sense. From what I understand Goldfarb and the CFP board said Goldfarb chose fee only and only changed it after the board caught him. I agree with a previous writer that this isn't rocket science. If there are many other Goldfarb's out there misrepresenting the public then the CFP Board and regulators should crack down. My suspicion is it isn't as big an issue as some writers are leading readers to believe. There are other Goldfarb's out there no doubt but hopefully no current or former CFP Board members let alone chairpersons are misleading the public like Goldfarb. Hopefully those who have read this and have issues will fix their own situations. And we can thank the CFP Board for taking the high road here in doing the right thing rather than sweeping another issue under the rug for someone in a high position.

Submitted by Anonymous—July 31

What was Goldfarb's motive in claiming he was fee only when he held securities licenses to earn commissions? For all we know he may have also held licenses to sell insurance for commissions. The financial services business needs good characters as their leaders. Perhaps he made a mistake in checking fee only. It sounds like he had a chance to make it right by checking fees and commissions or even just taking down his advertising on the FPA website. Don't know if that would have made a difference to the CFP Board but Goldfarb's insistence he did nothing wrong seems misplaced to me.

Submitted by Anonymous—July 31

The FPA website should just modify their member profile section to not include salaries and bonus as an option under How Planners Charge. It doesn't make sense to me either. Goldfarb didn't get into trouble choosing salary and bonus. He got into trouble saying fee only.

Submitted by Anonymous—July 31

This whole notion that the Goldfarb matter is about salary and bonus is a ruse. It is about how planners charge. They charge fees and/or commissions. Clients deserve to know how an advisor/planner charges. Disclosing that as salary and bonus doesn't make any sense with respect to how a planner charges. Come on. If I work for a wirehouse firm and am a CFP and I hold no securities or insurance licenses to sell commission product then I would think I could say I am fee only with respect to how I charge my clients. And I could say I receive a salary and bonus but again that isn't how I charge clients.

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Check out Best Comments: Goldfarb, Fiduciary, Referrals on June 18 at ThinkAdvisor.

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