Avoiding Financial Fraud

April 18, 2009
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Ron Lieber’s New York Times column Even Vigilant Investors May Fall Victim to Fraud was quite disturbing and not a little worrying. It recounts how Matthew Weitzman, a founder and principal at AFW Wealth Advisors, a Registered Investment Advisor, and a fee-only firm, is no longer with AFW. The firm informed its clients of “certain irregularities in a limited number of client accounts.”

You can read Lieber’s article for the details. What is not clear, though, is how much money was involved nor how quickly the irregularities were discovered. Though, from my point of view, they are not the most worrying aspects. What concerns me most is that Mr. Weitzman was a member of the National Association of Personal Financial Advisors (NAPFA).

When a member of the advisory community violates the trust that clients place in him, all clients and advisors suffer. What this country does not need right now is any further deterioration in what little confidence we have left in the banking system, the federal government or our financial advisors.

I have been a fee-only planner since 2003, and whenever possible, I recommend that investors seek out financial planners who are compensated directly by their clients, rather than by commissions. In this way, you will avoid obvious conflicts of interest.

Members of NAPFA all practice a fee-only method of compensation and sign a Fiduciary Oath, which means that they swear to act only in their clients’ best interest. So it is with great discomfort that I heard that not one, but two, former members of NAPFA have been accused of bilking their clients.

What to do? As Ronald Reagan once said, “Trust but verify.” And of course, you should never write checks directly to your advisor, but only to an independent custodian. It is the independent custodian who should be providing you with confirmations of all transactions and trades, and a monthly statement. These are sensible precautions in the age of Madoff.

As Lieber says, “Open your mail. Confirm the accuracy of your trades and fund transfers. Read your account statements. Every month. Every number. Every single word.” I am not sure about reading every number, every word, but I get his drift.

Lieber further recommends that you handle all of your stock transactions yourself. I believe most investors will find this “solution” impracticable, inconvenient and unnecessary. I believe a better solution is for you to sign a limited power of attorney, allowing your advisor to enter transactions on your behalf, but which does not allow him to withdraw your funds. Only you should have the ability to withdraw funds from your account. I am not an attorney, but I believe that this provides adequate protection. (Attorneys, please weigh in.)

My mother always said “A promise is a promise.” Unfortunately, there are always people who will promise one thing and do another. It’s disappointing to have your expectations dashed.

I don’t know about you, but I expect firefighters to be brave, judges to be moral and rabbis and priests to comfort the troubled. Yet, there have been judges who, instead of upholding the law, bend it out of shape for personal gain. And there have been priests and rabbis who have preyed upon our young and betrayed our trust.

Lieber says, “I’ve always believed that advisers in the (NAPFA) association were plenty smart and morally upright, but it’s hard to recommend them now without at least including an asterisk.”

In my experience, NAPFA members have the highest standards in the profession. But like every profession, there may be individuals who choose to violate the trust of clients they serve.

It’s not easy to protect yourself against out and out theft, but you can take some small comfort from the fact that if financial advisors break the law, they are subject to prosecution by the regulatory authorities.

In my opinion, a great majority of investors will lose countless dollars because of the continuance of “Standard Operating Procedures” at Wall Street investment firms. Every day these firms peddle ill-conceived, hard-to-understand, expensive investments, because it is profitable for them to do so. Investors will lose more money in the ordinary course of business than they will ever lose due to outright fraud.

Unfortunately, what is legal on Wall Street is bad enough.

And so, I will continue to heartily recommend NAPFA members, because the fiduciary standard is the right way to do business.

And yes, monitor your accounts. Remember, “Trust but verify.”

Comments

8 Responses to “Avoiding Financial Fraud”

  1. Ron A. Rhoades on April 18th, 2009 8:13 am

    Roger,

    Your blog post on these unfortunate incidents involving two NAPFA members is right on point. Permit me to add to your insightful commentary.

    WHO WILL “VERIFY”? At a Congressional hearing in January 2009, Professor Tamar Frankel testified that the role of the U.S. Securities and Exchange Commission, and state securities regulators, is to “verify” holdings in client’s accounts. If they had done so, the damage Bernie Madoff caused would have been limited. While I would like to think that our federal and state securities regulators will adopt this responsibility, and indeed much of their inspection activities are directed at detecting fraudulent activities, the fact is that both federal and state governments are resource-limited.

    So, the result (at least for the near term), is that clients of all financial organizations – brokerage firms, registered investment advisers, etc. – must themselves VERIFY what is going on in their own accounts. Roger, your advice to your clients is a good one – to review statements (from independent custodians of investment advisers – such as Schwab, Fidelity, TD Ameritrade, etc.) – each and every month, with a focus on transactions which have occurred.

    GUARD AGAINST UNDUE INFLUENCE / ABUSE OF THE ELDERLY. I advise clients who are either financially unsophisticated or elderly to permit a duplicate statement to be sent to a family member (son, daughter, niece, nephew, etc.) each month, of their brokerage statements, for purposes of review. It is far to easy for those who desire to commit fraud to seek to unduly influence the unsophisticated, or those who may not be as sharp as they used to be. This is just another means of “trust but verify.”

    MANDATE INDEPENDENT CUSTODIANS. Most fee-only financial advisors don’t accept “custody” – in other words, the ability to withdraw funds from client accounts. (A limited exception exists for withdrawals of an advisor’s fees, but all of the major custodians have procedures to watch these, to ensure that the level of fees requested to be withdrawn from client accounts is not out of the ordinary.)

    NEVER SIGN A “GENERAL” POWER OF ATTORNEY FOR AN ADVISOR. A general power of attorney is a very powerful document; never sign one without consulting an attorney about its implications. Yet, it is OK to sign a LIMITED power of attorney – such as one that permits: (A) the advisor to trade in a client’s account (often necessary to ensure transaction fees are kept low through electronic trading); and (B) the right to request fees to be withdrawn from client accounts (as the custodians used by investment advisers review such withdrawals for payment of fees, as should the clients).

    WORSE ABUSES EXIST? WHERE ARE ALL THE CUSTOMER’S YACHTS? For those who have lost money in Ponzi schemes (Madoff and others), or through undue influence, or through forged asset or cash transfer documents, the feeling of betrayal is certain to run deep, and leave the person bitter and angry (justifiably so). It is important that Congress, the SEC, and state securities regulators seek to address measures, in coordination with the securities industry as a whole, to better guard againts these instances.

    Yet, outright fraud and theft only affect a very small percentage of investors – perhaps less than 1%. The greater disappointment, and travesty, in my view, is the fact that HUNDREDS OF BILLIONS OF DOLLARS are diverted each and every year, unnecessarily, from the pockets of investors to Wall Street. How? Through often-hidden, or only “casually disclosed,” fees and costs. In fact, I estimate that 25% to 40% of the returns the capital markets produce are diverted to securities intermediaries.

    There will always be some cost to intermediation. It is a complex world out there, and most investors will need a trusted advisor to guide them. Hence, it is important for investors to employ a FIDUCIARY advisor – one who represents the client’s interest at all times, not the investment product manufacturer or wholesaler. Fiduciary advisors, such as NAPFA members (who all take a fiduciary oath), can use their knowledge and expertise to ensure that the total fees and costs paid by their clients are reasonable – and often 30% to 70% less than the total fees and costs paid by customers of the major Wall Street firms.

    Sadly, most new clients to our firm, when we provide them with an analysis of their existing investments they purchased from stockbrokers, are completely unaware of the high costs of the products they are paying. When we reveal to them that the product they purchased is costing them 2%, 3%, 4%, or even more a year, as a percentage of the amount invested – they get angy, and rightfully so.

    Additionally, most investment portfolios are not designed tax-efficiently. Taxes can consume the returns of an investor just as much as high costs can. A trained advisor can assist the client, through proper portfolio design, tax placement of assets, tax-efficient (not necessarily tax-deferred) investment prodcut selection, and tax management of the portfolio, to substantially reduce the tax drag on investment returns.

    Indeed, many NAPFA members report that their clients become concerned in the 2nd year after the client is advised by the NAPFA member, because their tax liability goes down so much. “Where did all that interest income go?” is the common question. When explained that the portfolio remains invested well, but that it is now designed tax-efficiently, to reduce taxable income (and tax drag) while being designed to achieve the long-term returns desired, clients are relieved – and HAPPY they are not paying so much in taxes anymore.

    While I don’t mean to diminsih the impact of outright fraud and theft on the very small percentage of investors affected by same, the fact is, this is just a fraction of the true scandal on Wall Street – sales of highly costly, complex investment products. Again, a true fiduciary advisor, such as NAPFA members, won’t permit their clients to purchase high-cost, tax-inefficient products.

    NAPFA MEMBERS – FIGHTING GREED. Long ago a story was related about a visitor to New York who, peering down from his broker’s office high above Wall Street in Manhatten, admired the yachts that the bankers and brokers had in the harbor. Naively, he then asked where the customers’ yachts were. Naturally, there were no customers’ yachts. Although this story is by some accounts 80 years old, or older, the culture of greed on Wall Street has not changed.

    Fortunately, there is an alternative. For 25 years NAPFA members have existed and they have eschewed commissions and other third-party compensation. They only get paid the fees their clients pay. They represent the client only. They remain independent, in order to maintain objectivity on behalf of their clients. Instead of the “arms-length relationship” a stockbroker (often called “financial consultant” by their firms) has with a customer, NAPFA members are in a “fiduciary relationship” with their clients. The fiduciary duty is the highest duty existing under the law – period.

    Long ago Franklin Roosevelt, shortly after he was elected, stated his desire that all those who provide investment advice should be fiduciaries. While the federal securities laws of the 1930′s went a long way to restore trust in Wall Street (they created the SEC, and many other regulatory schemes), President Roosevelt’s visions remains largely unfurfilled. While there are some advisors out there, such as NAPFA members, who voluntarily subscribe to NAPFA’s fiduciary oath, the fact is that most “financial consultants” are product salespersons – ill-trained in many cases to give financial advice, and restricted by their firms to selling often-proprietary and almost-always grossly expensive investment products.

    What can we do to change this? The National Association of Personal Financial Advisors (NAPFA) has advocated for the adoption of fiduciary principles, by the entire securities industry, for decades. Recently NAPFA was joined by the Certified FInancial Planner Board of Standards, Inc. and the Financial Planning Association, in a “Financial Planning Coalition,” which is actively lobbying Congress and the new Administration to adopt strict, high fiduciary standards of conduct for all who provide investment and financial advice. And to adopt greater educational (competency) and continuing educational requirements, similar to those NAPFA members already subscribe to.

    But getting Congress to adopt FDR’s vision, expressed over 75 years ago, won’t be easy. By many accounts, Wall Street firms have contributed over $1 billion dollars to the election campaigns of members of Congress, over the past decade. How can this be countered? By the strength of NAPFA’s position – because adopting fiduciary standards of conduct is right for Americans, and America. By joining with consumer and other organizations to influence Congress, to act quickly and resolutely to change a culture on Wall Street, still driven by Gordon Gekko’s famous line in the movie “Wall Street,” that “Greed is good.”

    Roger, thank you again for your blog post. With your continued advocacy of fiduciary duties, both in your practice, and nationally, and joined by many others, it is possible to make a real difference in the lives of Americans in the future.

    And, you advice to your readers – to “trust but verify” – is sound. As our federal and state securities regulators do not presently possess the resources to detect fraud and theft quickly, it remains important for all clients of financial advisors to read their statements each and every month, to question any irregularities, and when necessary or advisable to seek out the assistance of other family members to help them if they suspect that they are not as sharp as they used to be.

    Ron A. Rhoades, Chief Compliance Officer for a fee-only, fiduciary investment firm, and a member of the National Association of Personal Financial Advisors (NAPFA)

  2. Morris Armstrong on April 18th, 2009 10:57 am

    Roger

    Your article is very helpful and I hope as widely read as the NYT article. Ron Lieber did a disservice in my opinion by lumping together the act of trading and of moving money outside of an account.

    I think that every custodian (Fidelity, Schwab, TDAmeritrade, etc) has forms that will grant the advisor limited power of trading and that is simply to execute trades and to move money from one account to an outside account that is linked and had been approved by the client.

    The ability to trade without getting a client’s consent is important of you are using model trades or if there is something important occuring and your client is out of reach.

    Trading is often governed by the use of an Investment Policy Statement which may list the types of securities that you are allowed to utilize.

    I do not agree however that membership in any organization nor credentials will offer the public much protection. Each has their own agenda, and the agenda includes growth in power and income. Greed is not limited to Gordon Gecko types and often Power is the currency sought most often.

    I am a member of NAPFA and adhere to the Fiduciary Oath but know that I am also bound by the rules of the Investment Advisors Act.

    Adhering to a fiduciary standard does not make one a Saint. The role of a fiduciary has different legal standards than a broker and hence different remedies.

  3. Dylan Ross on April 18th, 2009 4:51 pm

    Roger, great stuff on the use of limited power of attorney. However; while I think there are a good many number of people would find handling their investment transactions themselves to be impracticable, inconvenient or unnecessary, I’m not sure if that actually amounts to most people.

    Because these types of thefts may involve fraud, a limited power of attorney still won’t stop a thieving advisor from pretending to be you on paper to request a funds transfer or distribution. So, for those that are willing and able to handling their investment transactions and don’t need the LPOA, they may further protect themselves by not sharing their account number with their advisor. They can black-it-out from statements or other documents they share with their advisor, same with Social Security numbers too. This makes fraudulent actions that much harder, and an advisor that does not go into your account doesn’t need it anyway.

    Unfortunately, NAPFA has not yet figured out how to read the minds of its members in order to completely be sure stuff like this never happens. I don’t think any organizations has this power, so I hope Lieber does not actually feel the need to include his asterisk.

  4. HENRY WENDEL on April 18th, 2009 6:52 pm

    Being a fiduciary is a much greater than a responsibilty to your clients not to engage in fraud.

    Once you hold yourself out as a financial planner you take on the additional responsibilty of advising clients with their financial situation regardless of the fact that you have signed only an investment advisor contract.

    During your engagement as that investment advisor, financial situations come to your attention or should come to your attention that should force you to discuss the item with your client.

    No NAPFA member should be able to hide from that obligation because he has only signed an investment advisory contract. Do be a true fiduciary it is important that you advise your client in all situations that come to your attention or should have come to your attention during your engagement.

    I will not go into the detail of of every area, but anyone practicing for a short period is well aware of what I am talking about. Here are just a few examples:

    RETIREMENT PLANNING; ESTATE PLANNING; TAX PLANNING; CASH FLOW PLANNING; INSURANCE CASUALTY PLANNING.

    A constand review or updating during the engagement is required. If that is not the situation in no way are you a fiduicary.

    HENRY WENDEL, RETIRED
    NAPFA MEMBER SINCE 1984.

  5. Irene Leech on April 19th, 2009 11:52 am

    I am not a financial advisor; I am NAPFA”s current consumer representative on the board. I’m an active consumer advocate and educator.

    The advice given to trust but verify is on target, but honestly, I believe few consumers actually believe they are qualified to verify. Too many documents are written in language and length that “typical” Americans do not understand. We have a heritage of putting responsibility on the consumer, but making it virtually impossible for the consumer to carry out.

    NAPFA members are fantastic and I’m convinced that those I know would never take advantage of a consumer. Unfortunately, what we’re seeing is the current state of our world within our own circle. There are people out there who make mistakes and who take the path led by greed rather than right. I have found such people in a wide range of places.

    It is unfortunate that our New York Times reporter believes all NAPFA members are questionable because of a couple of folks failed to live up to our standards. NAPFA checked out the information and did it quickly, then took action to revoke membership. Our system worked as it should.

    The truth is that anymore consumers do not know who to trust. From Enron, to Madeoff, to our former members, bad things keep happening. Meanwhile, every American has increasing responsibility to provide for our own sunset years instead of being provided for by our former employers. Most individuals have neither the inclination nor the knowledge to spend ongoing countless hours managing and monitoring assets. Most consumers want to trust someone to help.

    We need to continue and expand our consumer education efforts and keep doing the right things – holding that fiduciary responsibility that’s so important to NAPFA members. We also need to take an active role in influencing decision makers to actually end the practices that keep direct, understandable information from consumers.

    Needed change will not occur quickly. Multiple strategies and efforts are required. Each of us needs to contribute in every way we can.

  6. Morris Armstrong on April 19th, 2009 2:44 pm

    I have to disagree very strongly with Henry’s remarks and think that they will only add to the confusion. A person has a fiduciary duty in their engagement, not in a person’s overall life. I am the Conservator of an Estate and that is the Fiduciary position. My authority and scope is quite limited. The Conserved Person, formerly known as a Ward, has a Conservator of the Person. That is a Fiduciary position with its own distinct responsibilities.

    To paint a picture that if you are retained to do investment management and that your fiduciary responsibilities then encompass every other aspect is simply wrong and the one thing that we do not need right now is to confuse the public.

  7. Stock Fraud Lawyer on April 20th, 2009 4:06 am

    Thank you very much for sharing this information. I read this complete article and come to know about Matthew Weitzman and now he is not with AFW. I also visited your given website and read this post. Overall it’s a good article.

  8. Morris Armstrong on April 21st, 2009 12:07 am

    Quote It is unfortunate that our New York Times reporter believes all NAPFA members are questionable because of a couple of folks failed to live up to our standards. NAPFA checked out the information and did it quickly, then took action to revoke membership. Our system worked as it should. End Quote

    It is interesting how Irene says that facts were checked out and the membership revoked quickly. No one seems to really have many facts and it is my understanding that no charges have been drawn yet.

    It would appear from the post Irene made that members were dumped based on allegations or perhaps she should share the information as to charges and pleas.

    Or pehaps membership is just at the pleasure of the powers that be and damn the process.

    Unless it has been more than allegations it doesn’t speak highly of the integrity of NAPFA to dump long time members based on?