WASHINGTON Nov 2 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
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
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
--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)