Executive Summary
"It wasn't a Madoff thing, but the effect was just the same."
Words forever etched in my mind and words that haunt me daily.
In what feels like another lifetime, I worked at a well-respected fee-only financial planning practice. This practice gave me the opportunity to find my calling and my passion. I learned what it meant to be deeply committed to working in the interest of others and to taking ownership of my responsibilities to others.
Unfortunately, those things were not enough to protect clients from irreparable and devastating harm. Unfortunately, none of those things taught me the most important lesson. Unfortunately, none of my learning including an understanding of the heavy burden each of us in the financial planning world carries.
Hopefully, this piece can reach a few of you and help you understand the burden well, and help you better serve and protect the clients you work for.
Wealth Management LLC
The employment I refer to was provided by Wealth Management LLC. The story of its demise was quite publicly and widely reported, sometimes very fairly and other times with outright sensationalism. A few links to the more balanced reporting below as well as to the Wealth Management LLC site with public receivership details:
http://www.jsonline.com/business/45728897.html
https://www.nyccriminallawyer.com/sec-charges-former-napfa-president-with-kickback-scheme/
http://www.wealthmgmt.com/receiver-appointed-by-court.html
To recap the story very quickly (and without treading into the legal matters of ongoing litigation), by trying to create a means to help clients live a more predictable and balanced financial life, Wealth Management LLC in reality ruined clients financially.
Over the course of several years, Wealth Management LLC created a series of private placement funds (generically hedge funds.) My understanding - an understanding that was limited - was that most of these funds had one purpose: to provide clients a steady, relatively predictable income stream with lower volatility than in public stock and bond markets. And for several years, the funds seemed to work very well.
Then in mid 2008 as credit markets came to a screeching halt and liquidity simply disappeared, the funds effectively froze and then fell apart. Cash was unavailable to make distributions to clients. Later the value of assets came into question. Everything became hazy and uncertain at this point.
Too much was happening. Lehman Brothers collapsed, then other financial giants began their apparent decent into bankruptcy. Markets began to crash. The rank-and-file Wealth Management LLC employees and clients were informed of a compliance breach that had been reported to the SEC, but without any details. Clients were fearful. Employees were bewildered. The world was spinning.
In May 2009, 5 months after my employment at Wealth Management LLC ended, the SEC shut the practice down and placed it in the receivership of a law firm. The SEC alleged several indiscretions on Wealth Management LLC and its two largest owners. The most important of these in my mind were allegations of a breach of fiduciary duty and nondisclosure of large amounts of income. I don’t dare tread too deep into my opinions on these allegations, but will offer the following.
In my opinion, the indiscretions noted in the allegations were not the causes of the harm that came to clients. The allegations and fall-out from SEC action may have sped up the process, but well-intentioned decisions made much earlier were the primary causes of harm. These are decisions I was not privy to, but decisions I am confident were made to help clients.
With this article, I want to address an important lesson I learned and one that I feel compelled to share with other financial planners. To set the stage, I need to provide you a bit of insight into the culture of Wealth Management LLC.
Fiduciaries To The Last Drop
Without a doubt in my mind, everyone (including the partners listed in SEC litigation,) was deeply committed to working in a client's best interest and to improving the financial well-being of clients. Virtually every recommendation was probed and prodded. Time was set aside weekly to review outstanding client to-do's, paperwork and upcoming meetings in a large group format. The culture to its core was one of a fiduciary duty to clients, a culture that was instilled in new employees very quickly.
The firm culture also was one of intellectual curiosity and of a commitment to continuing education. Employees were encouraged and financially supported to seek financial education and certifications that would further the knowledge brought to the table for clients. Professional and personal development was appreciated and rewarded. Space was given for the rank-and-file to ask difficult questions and understand the inner mechanics of the practice.
Finally, there was a deep culture of compliance. Regular staff-wide compliance discussions were held, procedures were reviewed and processes were audited. Compliance was vital to the operation of the practice.
This was a practice focused on clients, dedicated to doing what was right and passionate about personal ownership of each project and duty. This was a firm doing things 95% right and the 5% left over was attributable to simple human error, misjudgment and irrationality.
And yet, clients were deeply and forever harmed, no less so than if a surgeon accidentally paralyzed a patient. Life continues, but so dramatically altered as to be virtually unrecognizable to these clients.
"It wasn't a Madoff thing, but the effect was just the same."
- a former Wealth Management LLC client
This quote, which I happened to have the privilege (and I truly mean that) to hear directly, sums up the impact very well. I truly do not believe there was any intent to defraud clients nor even to cause them a bit of harm. I believe quite the contrary, as detailed above. A fiduciary duty was held in very high regard and trying to improve the financial well-being of clients was always the number one goal. But that pursuit lead to a path that ultimately cost many clients virtually everything.
The underlying investments in the private placement funds are today worth much less than when I left the practice at the end of 2008. Their values may be greater than $0, but possibly not by much. Clients, who had invested millions, may today have next to nothing left. Many of them were well beyond or late in their income-earning years and have little chance to rebuild comfortable financial lives. Others have time to rebuild, but will move forward with such deep financial scars that they will never truly recover.
So powerful was the impact, I would not be surprised to learn that some of these clients now rely on their children and extended families to survive. I would assume others have left retirement to salvage whatever earning ability remains with an outlook that does not offer an end to employment.
Lives have been forever changed. And a fiduciary duty, a strong culture of compliance and truly good intentions proved utterly useless in preventing any of this. As financial planners, we hold a much higher duty than a fiduciary one and a much heavier burden of care than most realize.
Many Lessons
I have taken uncountable lessons out of my time at Wealth Management LLC. Many of these lessons were taught through positive experiences e.g. being passionate about a profession, being dedicated to helping others, etc... But the lessons I want to share were learned through the failing of the firm and learned through negative experiences. These are the harsh lessons that can’t be intentionally taught and can’t be simulated.
For this piece, I want to focus on one lesson I learned. This one piece is, in my mind, the most critical to be shared with other financial planners as well as others in the financial services industry.
I have internalized this lesson so deeply in my professional being that when I initially sat to write this, I had intended to begin with an entirely different focus. The lesson had not been forgotten, but had slipped out of consciousness as it has simply become a part of who I am and how I approach the work I do.
The Burden We Shoulder
This one lesson had such an impact in my view of the financial planning profession that I nearly left the profession entirely, despite passion about the work. It is so critical for everyone who works with other's money to understand, yet I believe very few do.
Financial services professionals (whether they be financial planners, financial advisors, investment advisors, insurance salesmen, annuity producers, stockbrokers, and on and on...) carry an extremely heavy burden when they turn to a client or prospect and say “Trust me.”
The burden a trusted financial planner carries is nearly as heavy as the burden a surgeon carries when his scalpel first makes an incision during cardiac surgery.
It may sound fatalistic and you may argue that as financial professionals we do not have the burden of holding a person's life in our hands, but we hold an entirely different burden. We have the ability to end a person's financial life with one poor decision, one moment of weakness or one fault in judgment.
Handling others' money is not a game or competition. The stakes are exceptionally high, higher than most of us realize. The well-being of others lies in our hands.
The burden and responsibility we must be willing to accept is far higher than a fiduciary duty. We are charged with not only doing what's best for our clients, but protecting them from harm we might cause them ourselves while serving that fiduciary duty. In our pursuit to serve, we cannot lose sight of our own humanity and flaws and misjudgments.
The Mirror
I have had to live with the guilt and shame of having been a part of this disaster. I have questioned my involvement in the financial planning profession, have questioned the profession's reason for existence at all, and have struggled to come to terms with this ugly past.
I have also discovered that I welcome the burden and that I will do all I can to uphold that burden. It is my charge as a financial planner, and one I have to be willing to accept. I looked in the mirror and I saw a financial planner.
When you go home this evening, take a moment and look at yourself in the mirror. Ask yourself if you are prepared to shoulder the heavy burden your chosen career asks of you. Regardless of how you are compensated, or whether you are legally required to act as a fiduciary or not, answer the question.
Are you prepared to accept the responsibility for other peoples financial well-being? Are you ready to understand the tremendous positive and negative impact you can have on clients? Are you willing to give up the game, the competition, and simply do everything you can to help your clients make good financial decisions?
If you cannot answer yes to each of those questions, you better damn find your way out quick. Whether you like it or not, this burden is placed upon you once you look at a client and say "trust me."
If you can answer yes, welcome to the tribe, brother.
(Editor's Note: Stay tuned for Part 2 of Nathan's story, as he shares some further thoughts about what to do when "Fiduciary Just Isn't Enough" as a professional commitment.)
Thank you so much for offering me the space on your blog to start sharing this story. It is a story I have wanted to begin sharing for a long time, but needed the right set of circumstances to finally take on.
Also, thanks for challenging me to improve the piece and better flesh out what I was trying to convey. Your time and thoughts are greatly appreciated!
I hope your readers find the story interesting and share their thoughts and solutions. There is much learning out of this experience that I have not yet grasped!
Nathan,
Again very honest and a nice “check yourself” entry. To your point about my impressions. (These are my thoughts as they apply to my world view- don’t really know if it generalizes to others).
As I read this I thought that “man this could never happen to me,” “regardless of the strategy why did they have such over concentration!” “Culture of what…” “Holy crap” “Good intentions do not cut it…” and all those other second guessing, arm-chair quarterback thoughts that most people will have as they read this (although they may keep it to themselves).
It seems these thoughts are conveyed internally to protect one’s own “research methodology” or to simply avoid looking at the mirror and seeing that they are one recommendation away from this happening to them- even though they may state “yes, I accept the burden” at the end of your post.
It is a heavy weight and one that is never lost on me. Many of our clients simply give me the benefit of the doubt regarding our strategy and many times in McLean our response is that we have a moral obligation to do what is right. The SEC is just admin.
This involves putting aside personal investment/market proclivities, a healthy dose of humility, and maintaining a standard of empiricism that seeks to constantly reject the null. The scientific method is my Archimedes lever in carrying this burden.
I am willing to happily suffer from Type 1 error as Dan Wheeler said something to me that has stuck regarding client conversations, “Never put yourself in a situation where you may have to tell the client, I’m sorry.”
Although this is easily written in 30 seconds, it continues to be a lifelong struggle for me to maintain. But we must all carry that weight since this is the profession we chose.
There is, in fact, a road map for this. The fiduciary solution starting point is a two asset class portfolio. The market portfolio of equities combined with risk-free T Bills — in the proportions the client needs/desires/can tolerate to achieve her goals. (The hard work, of course, is trying to figure out what those proportions are.)As we depart from this, the fiduciary burden becomes greater and greater.
When we we think we are so smart that we (and our clients) don’t don’t face this simple dilemma is when we get into deep trouble.
“Never put yourself in a situation where you may have to tell the client, I’m sorry.”
We are all doomed to fail… at some point, and probably at several times in a long career.
2008 ring a bell? Unless you were in cash and Treasuries, you were “sorry”.
In my opinion, the defintion of “Prudent” is subjective. Who’s process, who’s research is best? Who is the arbiter? All of us have, in hindsight, a flaw in our process/practice. All of us will absolutely fail if 100% is the standard.
My clients are better off working with me than they are working with advisors who aren’t as “good” as I am, but I have to admit there are many advisors better than I am. If we truly are seeking the “best” outcome for our clients, we need to identify the “best” planner (also a very subjective process) and refer all our clients to that advisor. The rest of us, including Nathan “better damn find your way out quick.”
Doctors, lawyers, and CPA’s do not do this.
Anonymous,
There’s nothing about “best outcomes” – and certainly not in the fiduciary standard – that requires you to refer out every client to the best person you can find.
The way it’s evaluated – in other professions as well – is by practice standards. A set of guidelines about how any professional should practice in a prudent manner, that they can be judged against. Accordingly, a doctor is not guilty of malpractice if a patient dies, nor if another doctor “might” have hypothetically performed a procedure “better” – but instead is judged based on the standards of practice about when and how the procedure should be done, with reasonable guidelines about potential complications that can occur.
Falling outside of THOSE guidelines gets you in hot water as a doctor. I would expect a similar future for financial planners down the road, if we too want to be viewed as a profession. Notably, though, that may very well mean you do outsource/refer many services to other professionals; family practitioners performing brain surgery would justifiably get into serious trouble, and maybe some planners arguably provide a broader scope of services than they can really feasible be experts in.
– Michael