I recently had an interesting email exchange with a reader (who prefers to remain anonymous) about the relative severity of three recent cases involving financial planners. While this may seem to some like a purely academic debate, to me, it raises serious issues about how the CFP Board oversees financial planners, and how planners should be—and want to be—disciplined.
The three cases that came up in our virtual discussion are: Ron Rhoades, who misunderstood the timing of the investment advisor requirement in Florida and took on new clients prematurely; Jeff and Kim Camarda, who represented their RIA firm as “fee-only,” while they also owned an insurance brokerage; and the hundreds of wirehouse brokers who listed themselves as “fee-only” on the CFP Board’s “find a financial planner” website.
I’ve written in this blog about all three cases, stating my opinion about each (for example, on the Camardas, see Has the CFP Board Overplayed Its Hand With the Camardas?. On ‘fee-ony’ wirehouse brokers, see A Commission-Only Crackdown? Really?).
My opinions? The Camardas were treated unfairly by the CFP Board; the Board’s virtual non-action against the brokers was inconsistent with its treatment of the Camardas; and Ron Rhoades committed a minor infraction (for which I’ve taken considerable criticism).
This discussion began with the advisor asking: “A few years ago, Ron Rhoades violated Florida state law. I understand that when Ron was made aware of his breach, he took corrective action, including repaying the clients for their fees. From what I understand, the Camardas’ contracts and ADV were correct representations, and they were willing to take the corrective action of removing the ‘fee-only’ tag from the website. Effectively, the same remedy.
I think that the former is a more serious offense. You simply do not represent yourself as something that you are not and take their money! There is no doubt that one directly solicited clients when they were not allowed to, while representing themselves as being allowed to. The other case involved general advertising without solicitation. Which is the more egregious? And why has the Board taken action against the Camardas, and ignored the Rhoades case?”
Me: My gauge of the severity of a violation of the law, and therefore the punishment warranted, is the harm caused or the potential to cause harm. (While driving 50 mph through a school zone at 8:00 A.M. may not result in any harm, the potential is so great as to warrant serious punishment).
In the Rhoades case, he was already an RIA in a different state, and was in the process of registering in Florida as well. The clients he signed up prematurely still received advice from an obviously competent advisor. The harm to those clients? None. No one has ever claimed that Ron used his unregistered status in Florida to act against the clients’ best interests. Consequently, to my mind, this falls into the category of much ado about not very much.
In my view, the Camardas also fall into this category. They thought they were in compliance, and when it was pointed out to them that they weren’t, they took appropriate remedial action. Because their insurance company did very little business, and none with their RIA clients, the harm was nonexistent.
Still, the potential for harm—clients might have received non-fiduciary advice when they expected fiduciary advice—is probably slightly greater than zero. Therefore, on balance, I’d have to say the Carmardas case is probably “slightly worse,” but neither is very serious. Still, the Board was wrong to pursue the Camardas the way it did, and would have been even more wrong (if that’s possible) if they’d taken action against Rhoades.
My anonymous advisor: “His academic or experiential qualifications have nothing to do with the issue. Florida says he violated the law. If we have advisors soliciting where they shouldn’t, and being unpunished, what state would the industry be in? If we apply your logic, no one got damaged by the CFP Board’s ‘fee-only’ broker fiasco. It is more likely that the clients of the wirehouse brokers who thought that they were dealing with a fee-only when they weren’t were damaged more than those who used Camardas’ firm. Yet they got the free pass.”
Me: About Ron Rhoades, as no one was hurt or ever in any danger of being hurt, I don’t see how punishing him more than the actions he took voluntarily would benefit the industry.
About the Board and the wirehouse brokers, I couldn’t agree more. My “logic” tells me that we don’t know if any clients were harmed by relying on “advice” they thought was fiduciary, but wasn’t: through investing in inferior products or those with high loads. To my mind, those were the cases with the most potential for harm, and therefore, should have received stiffer penalties than either Ron Rhoades or the Camardas.
And the fact that they didn’t raises questions about how the CFP Board metes out its brand of consumer protection.