The Moral Compass Of The Financial Advice Profession Is Being Reset, As Fee-Only Advisors Are Tarnished Again By Scandal

Tuesday, October 18, 2011 18:21
The Moral Compass Of The Financial Advice Profession Is Being Reset, As Fee-Only Advisors Are Tarnished Again By Scandal

Tags: competitors | fiduciaries | NAPFA | practice management | registered investment advisors | RIAs


For consumers seeking professional financial advice, the world used to be so simple. Crooks took commissions, while fee-only financial advisors were good guys. The National Association For Financial Planning, the organization for fee-only planners, were good guys. Ah, but those days ended long ago.

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Last week, we reported on a sworn affidavit by an FBI agent that contained fraud allegations against fee-only financial advisor Mark Spangler of Seattle. Spangler thus became the second ex-president of NAPFA in three years to be accused of defrauding clients.


In May 2009,James Putman, owner of an Appleton, Wisconsin RIA and who served as NAPFA president immediately before Spangler, was charged by the U.S. Securities And Exchange Commission with accepting $1.24 million in kickbacks.

For the fee-only advisor movement, allegations of fraud against two former NAPFA presidents are so sad. Apart from the human tragedy for Putman and Spangler as well as clients they allegedly defrauded, corruption charges against two former luminaries in the fee-only movement shatter any illusion that one mode of advisor compensation is morally superior to another.

It’s not the mode of compensation that determines whether an advisor is honest.  It’s the advisor.

NAPFA, which was founded in the early 1980s, has always been regarded as a beacon in the financial advice industry. In the consumer press, reporters routinely cite NAPFA as a source for consumers looking for a financial planner. NAPFA has been a lead-generation machine for its members, outflanking the Financial Planning Association with this key member benefit.

At the New York Daily News and Worth from 1986 to 1996, I was one of many reporters in the consumer press who mentioned NAPFA in stories frequently. I used NAPFA’s membership directory to find sources fast. It was like a Rolodex. Like the rest of the financial press, I bought the notion that fee-only advisors are morally superior. 

From 1996 through 1998, when Mark Spangler led NAPFA, I was transitioning from the consumer press to the trade press, and I launched a client newsletter business. Initially, I only sold my client newsletters to fee-only advisors because I was worried that a commission-taking advisor might use my words to rip off an investor. That’s how much I believed in the moral superiority of fee-only advisors.

And that’s why I am so deeply saddened by allegations of fraud against Spangler. Fee-only advisors portrayed themselves as more ethical than other advisors. They were supposed to be better than this.

Over the last decade, however, I suspected the day was coming, when being fee-only was no longer a legitimate differentiator among advisors. It's happened in slow motion, but it is still so upsetting. People get corrupted. They make compromises and lose their integrity. Fee-only advisors are ultimately about as dishonest as the next guy.

Where does this leave the financial advice profession?


I believe the moral compass of the profession is being reset.

To be sure, scandals involving the leaders of the fee-only only advice movement forever end the right of fee-only planners to claim moral superiority. They deal a deal a fatal blow to the notion that advisors working on a fee-only basis are more ethical than those who accept commissions.

NAPFA members for years have looked down on advisors who accept commissions, saying it was an inherent conflict of interest.  Meanwhile, many advisors who accept commissions have said NAPFA members display an unwarranted "holier than thou" attitude.

If reason were to prevail, both sides would coalesce around mutually beneficial professional standards. Now that it is clear that mode of compensation is not the determining factor in defining standards in the financial advice profession, other approaches can become the focus.  That could be good.


NAPFA should issue publicly address the integrity issue. Serious soul-searching is needed.



Comments (12)

Mr. Gluck,

I don't think he was a NAPRA Registered Advisor which means he was not practicing on the fee only principles. I believe he renounced his status long ago to pursue this non-fiduciary line of business. How is it relevant that he WAS a fee only advisor?

cvanslyk , October 19, 2011
The reality is Andy has a point. Being a fiduciary is about process, meaning does an advisor's process in making decisions on behalf of his clients pass outside scrutiny? Not that the result must be perfect, it needs to be well made.

This is why in my opinion, the SRO for advisors need to be the same as what the DoL is doing for plan sponsors. If regulator had ever said to the above guy or those firms who invested in Madoff 'show me your work,' this would be avoidable to a large degree.

brentb843 , October 19, 2011

It is discouraging to see that you are feeling betrayed by these two rogues, but your conclusion is off base.

The correct conclusion is that rogues and thieves can be found in every group of people: profession, company, occupation, social network, friends, family, religious group, political party, you name it and you can find them.

I think its also the case that the most ingenious cheats tend to hide in plain site- like these two, and like Madoff who had been the chairman of NASDAQ.

While the mode of compensation may not determine whether an advisor is honest, fee only is clearly superior because of the reduced conflicts of interest.

It is simply easier for an advisor to act as a fiduciary.

While fee only clearly can't prevent a crook from stealing (just like any other compensation method can't), it does reduce systemic problems. In fact, George Lowenstein points out in the linked article below that having conflicts of interest that are addressed through disclosure actually makes the systemic outcome worse for the consumer!

As he put it: " our research we find that people giving advice do respond to having disclosed: They tend to be more vehement about their advice because they're worried it will be discounted."

bramsay , October 19, 2011
I'm not surprised to read this article. Below are excerpts from an article that I published many years ago on this subject:

Fee-Only, Fee-Based or Commissions:
How Should You Pay Your Financial Advisor

...The right answer may not be one or the other, but which one is better for each individual client. ...According to the Securities Exchange Commission1, each compensation method has potential benefits and possible drawbacks, depending on the client’s individual needs. Thus, advisors using either method exclusively may not be working in their client's best interests. ...In some cases, paying commissions is considerably less than paying on-going fees.

...Investors should be wary of Fee-Only and Fee-Based Advisors that recommend mutual funds. Their marketing rhetoric usually centers on their “superior” compensation method. This is very misleading because these advisors, knowingly or unknowingly, may be doing financial harm to their unsuspecting clients.

In my 25 years in the financial services industry, I have seen or heard about some very interesting, albeit deceptive, marketing conducted by advisors regarding their compensation. An example would be the Fee-Based advisor who boasted very low advisory fees. However, after closer examination, it was discovered that the fees were based on a client’s total net worth. Imagine how you would feel if you were paying annual advisory fees on your car or lawn mower. Or the Fee-Only advisor that used “institutional” mutual funds that had lower internal fees than the average “retail” mutual fund. Unfortunately for this advisor’s clients, their “lower” annual internal mutual fund fees were still over 2%. Or the advisor who referred insurance business to an “outside” insurance agent. The advisor stated that he didn’t receive any of the insurance commissions. However, the commissions were actually paid into a holding company, and the advisor and the insurance agent were the only shareholders of the company. The insurance “commissions” were then paid to both shareholders equally as “cash dividends” of the company.

Some advisors also have financial or referral based arrangements with other financial services providers, such as mortgage brokers, tax advisors, etc., in an effort to obtain information on potential clients. By agreeing to use the services of both, the investor could receive a reduction in fees. Passing on the questionable ethics of such an arrangement, it is questionable if the client would receive the best investment products or services.

In the ideal world, to be free of conflicts-of-interest, Financial Planners should be paid only for constructing a financial plan along with future follow-ups. Investment Advisors should be paid for executing and monitoring the investment plan. Regardless of the compensation method utilized, this is a potential conflict-of-interest. After all, wouldn’t you question the recommendations of a cardiologist who was also the heart surgeon?

It is obvious that all three methods of compensation can be abused. The Fee-Only, the Fee-Based and the Compensation advisors are all paid only if the recommended business is done through them. An ethical advisor will utilize whichever method is best for their clients. Using only one method eliminates choices. Much like hiring a carpenter that only has a hammer!

Therefore, the most important elements in the advisor-client relationship are integrity and trust. So, as a starting point, when looking for an investment advisor or financial planner it would be wise to:
•Work with an acknowledged fiduciary. Fiduciaries have a legal duty to always act in their clients’ best interest.
•Adhere to the “Trust with Verification” rule and always verify what you are told by the advisor, regardless of their experience, credentials, referral source or firm status.
•Do not put much emphasis on advisors that promote client referrals or blind referral programs as any unhappy client is usually an ex-client and is not in the referral database.
•Always us the services of a 3rd party custodian, make deposits directly to the custodian, and obtain statements directly from the custodian.

The bottom line, put some time into finding the right planner or advisor. And don’t fall prey to all the marketing hype.

teamw702 , October 19, 2011
"Over the last decade, however, I suspected the day was coming, when being fee-only was no longer a legitimate differentiator among advisors." -- Andrew Gluck

"The legitimate differentiator" - never has - never will be. The differentiator is - choice and disclosure. Fee and commission dollars are the clients dollars. Disclose to the client everything, give them choice of all their options and document; etc. The advisor that does both, commission and fee, and discloses all and lets the client decide - that is the differentiator.

Papillion , October 19, 2011

I am offended by your assertion that NAPFA members are "as dishonest as the next guy". Certainly in my over 30 years of practice, I've never expressed to a client that I'm more ethical than the commission based salesman because I'm "Fee-Only" foolish.....integrity is never about compensation.......please direct me to the NAPFA literature that advertises this statement.

I'm proud to be a NAPFA member and what a few misguided and dishonest
Advisors do has less to do with their membership and more to do with their moral compass. NAPFA is primarily focused on "disclosure".
Commission Salesman, seldom if ever disclose compensation. In Fact, often just the many times have we heard, that you, the investor won't pay me, the company will?????
In addition, the "Fee-Only" platform is the most open, honest and investor centered platform that exist in the Financial Service Industry. You won't see NAPFA members "churning" securities for compensation reasons, nor exchanging Annuity contracts every 3-4 years to generate more income for themselves, or selling different
family of funds to qualify for the next "Island" trip sponsored by
the wholesalers or insurance companies.

As a leading member of the Financial Services Industry, I would have thought you discovered there was no "Santa Claus" a while ago and it's always, always, about the individual you're working with.
And finally, in every compensation platform, the investor should never ignore common sense and their responsibility as an investor is to monitor what the Advisor is doing and to meet with them regularly.
paulp603 , October 19, 2011
bramsay and paulp603– well said!

Andy – you messed-up in a major way on this one.

You are doing a tremendous disservice to the many fine men and women who work hard every day to uphold the principles of the fee-only profession. Any profession can have and does have crooks (except of course journalists), and to unequivocally state that these bad apples are representative of the entire profession is flat-out wrong.

The focus should be on helping consumers to understand the principles of fiduciary duty and transparency. In this regard, NAPFA members are far and away superior to other advisors and will continue to be. NAPFA may not be perfect, but it is far superior to any of the other choices available.
jk894 , October 19, 2011
Again, he is not a NAPFA Registered Advisor and has not been for over a decade. How is this relevant? He went rogue, abandoned our core principles, and got into trouble. Isn't that good news for NAPFA?
cvanslyk , October 19, 2011
teamw702 said "Using only one method eliminates choices. Much like hiring a carpenter that only has a hammer!"

Perhaps you should read the Lowenstein article. Giving a client "choice" cannot possibly be an objective exercise on a systemic basis. Clients who seek out advisors simply do not possess adequate experience or knowledge to be able to make an informed "choice". This is the very nature of a service/profession where a fiduciary relationship exists (whether it is actually called that or not). And as Lowenstein points out, the mere existence of disclosure of a conflict causes an advisor to be more adamant about the recommendation.
bramsay , October 19, 2011
Moral compass being reset, give me a break. Mr. Spangler has not been an active member of NAPFA for some 12-15 years. This situation is unfortunate but is frankly a non-issue regarding NAPFA. You may think it is so you can write about it, but I don't really care what some former member does or doesn't do. My only concern in cases of this sort is for any clients who might be impacted. Andrew you strike me as a bright guy until I read garbage like this from you.
rogerw847 , October 20, 2011
Roger: NAPFA was the moral compass of the financial advice profession for years. With two of the 15 or so ex-presidents of NAPFA now sullied by criminal investigation and the advice profession now dominated by fee-for-service compensation, NAPFA's moral authority is weakened dramatically.

This is happening as the financial advice profession grapples with the questions surrounding the establishment of a fiduciary standard. The moral compass of the profession is indeed being reset.

NAPFA remains a valuable group whose members are creative, intelligent, and usually well-meaning. But the days when NAPFA owned the voice of moral authority in the advice business are over.

As the advice business evolves and moves unevenly toward becoming a profession, advisors will to be judged on criteria other than their mode of compensation. That is a resetting of the moral compass from a time--perhaps more innocent in some ways--when advisor being fee-only was the litmus test for professionalism.

Let's please stick with facts and try not to engage in trash talk.
agluck , October 20, 2011
Its not about commission or fees, but process. I know a ton of NAFPA 'fee only' advisors who are not fiduciaries because they have no process that is documented and transparent.

The Dept of Labor relies on reviewing processes of plan sponsors, something no regulator does on the RIA or B/D side. The process is why in their opinion commissions cannot be justifiable.

Process, not payment....

brentb843 , October 21, 2011

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