Stern Advice: Even fiduciaries can give bad advice

WASHINGTON Wed Nov 2, 2011 2:16pm EDT

WASHINGTON Nov 2 (Reuters) - The Madoffs are back in the news -- this time flogging books instead of scam investments.

Still, just seeing Ruth Madoff and her husband, Bernie, on television are reminders to already-nervous investors that it can be very hard to know whom to trust with their money.

Madoff, after all, put himself forward as a fee-only fiduciary, but was convicted of swindling investors out of some $65 billion in a gigantic Ponzi scheme.

More recently, a Seattle financial adviser, Mark Spangler, has become the target of a Federal Bureau of Investigation probe for securities fraud. He allegedly put clients into risky and ultimately money-losing private investments to which he was connected and failed to disclose those connections.

The Spangler case is also newsworthy because back in the 1990s, he was president and then chairman of the National Association of Personal Financial Advisors, a group that has sought and received a lot of press for being the good guys of the financial planning industry. To be a full member of NAPFA, an adviser has to (1) eschew all commissions and other payments that could be construed as conflicts of interest; (2) have three years of comprehensive financial planning experience; and (3) sign a fiduciary oath, swearing that he or she will put their clients' interest ahead of their own.

That's inconsistent with the kind of self-dealing the FBI has accused Spangler of doing.

Furthermore, he was the second former NAPFA honcho to get into trouble: In 2009, James Putman of Appleton, Wisconsin, who had been a NAPFA president in the mid-1990s, was charged by the Securities and Exchange Commission with accepting kickbacks. That case is still in litigation, although his firm has since gone into receivership, according to Investment News.

Advocates of NAPFA, like Chris Van Slyke, an Austin money manager, say that advisers who stick with the fee-only, fiduciary principles of his organization will protect investors, and when they don't, it is usually because an advisor has gone awry and abandoned those principles.

NAPFA issued a statement that seemed to agree. "We will not allow the alleged actions of one individual to taint the good name of NAPFA and those professionals who comprise our membership," the organization said in a statement after the Spangler news hit.

Maybe not, but investors who are looking for competent and honest investment advice are learning that they have to dig deeper than any single resume line or affiliation. A bad actor could claim to be a fiduciary, but not really act in your best interest.

Here's how to do your own due diligence.

-- Look for a brand name on your statements. Reputable independent financial advisers use brokerage companies like Charles Schwab and TD Ameritrade to hold and trade your securities. If your money is managed by a major bank or brokerage firm like Bank of America's Merrill Lynch or Wells Fargo, you should receive statements with that name at the top.

That's where investors might have caught Madoff -- he had his own side firm that was supposedly doing the trading, and clients were receiving individualized statements that he and his representatives were creating.

Your money and securities should be held in a bona-fide brokerage firm and your statements should reflect that. There may still be problems -- read up on this week's bankruptcy filing by brokerage MF Global Holdings Ltd, if you don't believe me. But when a bona fide brokerage runs into trouble, those accounts are protected by the Securities Investor Protection Corp (SIPC). SIPC has started looking into whether investors lost money in MF Global brokerage accounts.

-- Look for a brand name on your investments. There are plenty of widely held mutual funds, exchange-traded funds, individual stocks and rated bonds for most typical investors. They may still diminish in value, but they won't disappear overnight into someone else's bank account. You really don't need to be doing private investing in closely held businesses, unless you are very wealthy and a sophisticated investor. The Spangler investments that are being investigated were private placements in individual companies and didn't involve public securities trading. If you're being pitched a fat deal that's private, you should be well-heeled enough to afford a second opinion from a professional who can dig into the deal and make sure it's legit.

-- The fiduciary standard is still a superior one. If your adviser is a fiduciary, she is legally bound to put your interests above her own. Registered Investment Advisors (RIAs) are fiduciaries. Brokers who accept commissions are not held to the same standard; they are held to a standard of "suitability." That means they have a legal requirement to suggest investments that "suit" your risk profile, but aren't necessarily the least expensive or best investments for you. An increasing number of brokerage firms are affiliating with advisory firms that use fiduciaries, and the Securities and Exchange Commission (SEC) is considering a rule change that would create a fiduciary designation for brokers, too.

-- Check references. Ask for referrals and check the adviser's disclosure form (called Form ADV) on the SEC's web site atand make sure there haven't been disciplinary problems in the past.

-- Seek competence. Of course, being honest doesn't mean an adviser is very good at what he or she does. A certified financial planner (CFP) designation means your adviser has been through some tough coursework, passed a very difficult test, and had at least three years of experience as a financial adviser.

--Reevaluate if something changes. Some advisers start out with one model of doing business and then switch to another. If your adviser changes firms or group affiliations, or dramatically alters his investment philosophy, check him out as if he were a new adviser under consideration. He may not be the same guy who originally signed that fiduciary pledge.

(The Personal Finance column appears regularly on Wednesdays and on an irregular basis in addition to that. Linda Stern can be reached at linda.stern(at)thomsonreuters.com)

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