The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney

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Protecting Yourself from Financial Fraud
Jim Lange, CPA/Attorney
Special Guest: Blaine Aiken, CFP, President & CEO of Fiduciary 360
Episode 14

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TOPICS COVERED:

  1. Three Types of Fiduciary Responsibility
  2. Fiduciary Responsibilities for Those Managing Retirement Plans
  3. Fee-Based Financial Planning - The Wave of the Future
  4. A Closer Look at the Bernie Madoff Scandal
  5. Red Flags When Choosing an Investment Advisor
  6. Steps to Take if You Sense Unethical Advisory Practices 
  7. Doing Your Homework When Choosing an Advisor
  8. More About Blain Aiken

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.

Beth Bershok: Thank you for joining us this evening we are talking smart money. I’m Beth Bershok along with Jim Lange, CPA, attorney, author of two best-selling editions of the book Retire Secure! Pay Taxes Later. And our guest in the studio tonight, Blaine Aiken, who is President and CEO of Bridgeville-based Fiduciary 360. Blaine, thank you so much for joining us in studio tonight. Blaine is also the author of the monthly Fiduciary Corner column in Investment News Magazine. We’re going to be getting to a little bit later in the hour some of the recent scandals, some of the recent financial scandals that have happened, what happened, how it happened, how you can avoid having it happen to you. Before we do that Blaine can you explain exactly what Fiduciary 360 does?

Blaine Aiken: Sure and thank you very much for having me here this evening. We’re an organization whose mission is to promote a culture of fiduciary responsibility and help those who manage money on behalf of others improve their decision making overall.


1. Three Types of Fiduciary Responsibility

Beth Bershok: So who comes under that umbrella, who exactly is a fiduciary?

Blaine Aiken: A fiduciary is basically anyone who manages money on behalf of others and therefore stands in a special relationship of trust or legal of ethical responsibility. There’s basically three categories you could say there’s the investment steward and that’s typically somebody like a plan sponsor for a retirement program or an investment committee member or trustee. The second category is an investment advisor, somebody who is engaged to provide comprehensive and continuous advice. Then the third category would be an investment manager who actually makes the buy and sell decisions for security selection.

Beth Bershok: And as we speak all of these groups come under different levels of responsibility.

Blaine Aiken: They do.

Beth Bershok: So can you go through some of those levels of responsibility with us because I think the average investor doesn’t even realize that.

Jim Lange: Actually before you do that if you could even go one step more basic, can you even say what a fiduciary is in case somebody says what the heck is a fiduciary and just explain the special relationship and the obligation of a fiduciary.

Blaine Aiken: Sure, yeah, I’d be happy to. A fiduciary is anyone who is given the responsibility to manage money. And so they are working in a position, a relationship of trust, and the very nature of that trust relationship establishes certain obligations. And there’s really five that are probably most noteworthy in your obligations. The first is that a fiduciary has a singular duty of loyalty. So in other words they must place the investor’s best interest first. And I’ll contrast that too with others if you’d like.

Jim Lange: Alright and by the way that would also be consistent with other fiduciaries that might not be investing money per se, for example an executor of an estate or even a trustee of a trust who isn’t perhaps investing money directly, but they have an obligation to fulfill the terms of the will for example, or to follow the terms of the trust. Now, what you’re saying is we’re going to take it one step further and say let’s look specifically for people who are investing money for others.

Blaine Aiken: That’s right. At fiduciary 360 we concentrate on the investment fiduciary and provide the training and web based tools and ongoing support for those folks. But you’re absolutely right you can think of a fiduciary in the same context you would the classic professions like a CPA or an attorney or a doctor.

Beth Bershok: Oh, so, Jim would be falling under that category?

Blaine Aiken: Absolutely.  That’s right.  As a CPA and as an attorney you would have those fiduciary responsibilities as well.

Jim Lange: Which basically means that let’s just say forgetting about investing money let’s say either giving tax advice or giving estate planning advice that I have to keep the client’s best interest in mind for any advice that I might give. Now we’ll get to the investments in a minute I just want to be more basic and just make it clear to people that, and I think that people actually kind of expect that if you go to a CPA and you pay them X dollars an hour that you can expect the advice that you’re going to get is going to be geared towards what would be best for you not what would be best for the CPA. And the same thing going to a lawyer, a lawyer has both a moral as well as a legal and professional obligation to say what is best for the client and not what is best for the lawyer.

Blaine Aiken: Right.

Jim Lange: Alright I just wanted to be very basic and what your organization apparently is most involved in is a fiduciary obligation of somebody who actually manages money.

Blaine Aiken: Right. That’s exactly right, and we term that an investment fiduciary to try to specify further that we’re concentrating on that aspect. But that singular duty or loyalty is really the central duty that we talk about. There are other aspects of this due care which is essentially a higher obligation to be a prudent expert. So you have a higher level of knowledge and skill and judgment then what you might have other standards, and you have an obligation to make full and fair disclosure as well as avoiding conflicts of interest. Those are other major categories of duties.

Beth Bershok: I want to give the phone number too just in case anybody has a question in the next hour, 412-333-9385 if you’d like to toss out a question here to Blaine Aiken President and CEO of Fiduciary 360, 412-333-9385. Now can we go through what you’re talking about the investment category. Why are there different levels of responsibility for some of these different investment groups?

Blaine Aiken: Well, classically there have been two categories, one would be the traditional broker who is more involved on the transactional side. So if you know that you want to buy a security of shares in IBM or whatever the case may be you may go to a classic broker and in that sense those individuals are subject to what’s known as the suitability standard where they have an obligation to know some fundamental facts about you and be fair dealing involve fair dealing with just like any other type of a commercial transaction. Well that’s contrasted with somebody who you are going to for a relationship of advice and a relationship advice goes more to the same concept of the CPA and the attorney where the expectation is it’s not a focus on the transaction it’s a focus on the quality of the advisor and the relationship that’s likely to be established. So there’s a very different standard of obligations.

Jim Lange: But aren’t there a lot of stock brokers out there who are in effect the principal financial advisor for clients and I would imagine either whether they have a legal fiduciary duty or not that I would at least hope that at least some of them would do what is in the best interest of the client. So for example not turn accounts, have a well diversified portfolio, do some things that perhaps somebody that is held to a higher legal standard.

Blaine Aiken: Right in many instances the broker-dealer community we have individuals who have a high ethical standard and they follow many of the same principals that a fiduciary would, but in reality the regulatory structure is very different. So if you go back to the differential those that are on the brokerage side or the suitability side of the equation they’re actually governed in this instance of investments by FINRA which used to be the NESD. So it’s a self-regulatory organization and it’s very much commercial transaction fear deal oriented. Those who are investment advisors are regulated by the SEC under those principals of fiduciary responsibility. On the suitability side we have for example the big distinction is it’s not a singular duty of loyalty, but you’re able to have multiple loyalties and among those being to your company. So you have an obligation to produce in a sales capacity on behalf of the company.

Jim Lange: Well let’s say you’re part of a big brokerage company and the big brokerage company just bought a million shares of XYZ stock and they obviously want to peddle it and they might encourage some of their brokers to say hey go out and peddle this in fact if you do we’ll give you some extra compensation.

Blaine Aiken: Right and that’s permissible under the rules of the commercial standard, under the suitability standard today. Now you pointed out the fact that things have evolved over time and originally there was an exemption for incidental advice given by those on the broker-dealer side of the world. Usually what that meant was that you could say things like I would prefer Dell versus IBM so it’s transactionally oriented. Well as time has gone on there’s a lot more advice being given and a big part of regulatory reform right now is to extend that fiduciary status over onto the side of anyone who gives advice, any level of advice.

Jim Lange: Well, one of the problems I have and I do training to different financial advisors all over the country and most of my training is IRA and retirement plan and specifically Roth IRA training and it’s not necessarily investment advice, but it’s more tax strategies and then a lot of them come back and say well the problem is I’m not allowed to give tax advice, and I don’t have an answer for them because to me I don’t know how you could be an advisor and not give somebody tax advice.

Blaine Aiken: And that’s the dilemma. When you are working with someone if you are an individual investor or someone who’s offering a pension program by and large you’re seeking advice and those who are providing services, investment services, whether they’re a broker or whether they’re an advisor are inclined to give that advice because there isn’t the same volume of transactional activity that there once was, and between online trading and discount brokerage where it’s purely transactional that’s not as much the norm anymore with a lot of the full service brokerage.

2. Fiduciary Responsibilities for Those Managing Retirement Plans

Jim Lange: Well, one of the things that gets me let’s talk about the pension fiduciary obligation of somebody who is managing a retirement plan for example. Most of the retirement plans in this country do not offer a Roth 401(k) or in the non-profit world a Roth 403(d), and I’m thinking why not this is a great opportunity for people to put in $22,500 of money that can grow income tax free. How can the person who is offering these investments as a service and is making money when you make a contribution to your retirement plan not proactively saying hey you should really consider a Roth 401(k) not just a traditional 401(k). And to me I almost think that they should have a fiduciary duty to do what is in the best interest of their client.

Blaine Aiken: They do have a fiduciary duty to do what’s in the best interest of their client. Now the question is how far does that duty extend into the more sophisticated strategies, but you’re absolutely right the plan sponsor is under the obligation to look at the participant pool that they’re serving and determine what is the right structure and what’s the right composition of the investments of the portfolio that they’re offering.

Jim Lange: Well, even just on this limited issue of Roth 401(k) versus traditional 401(k) and let’s assume that the group is at least 10 people. There almost inevitably is going to be at least one or two or eight or nine people that a Roth 401(k) is more appropriate than a traditional 401(k). I can’t understand why people aren’t given this choice routinely and why only some companies are offering Roth 401(k)s, even some of the larger companies have not caught on yet

Blaine Aiken: When you go to someone and you are seeking advice in an investment capacity that you have the right to a fiduciary level of care, and what that essentially means is that advisor must place your best interest first. So you can’t have the divided interest, the decisions that have to be made have to be done exclusively in the interest of the client that’s critical.

Jim Lange: So that sounds like the traditional stock broker or insurance agent would be held to a higher level than they are right now.

Blaine Aiken: That’s the intent and the big question in our minds is to whether, well let me throw out a term there for you, there’s a lot of talk about harmonization of the two regulatory structures that suitability standard versus the fiduciary standard. And it makes good sense to harmonize, when we talk about the scandals we’ll see some of the impact of being in disharmony if you will, but the idea is to harmonize those standards. Well what we want to see happen is lift the standard as you described it to the fiduciary level rather than try to find some middle ground that at the same time disadvantages those who are getting a fiduciary level of care today even as it raises the standard on the other side, so I think it’s a critical thing to watch.

Jim Lange: So let me ask you this, it’s easy for me as a high brow CPA, attorney, and registered investment advisor who is held to both a legal and moral high ground if you will to say oh yes everybody should be at that same fiduciary duty, which frankly would help my business, but aren’t the stock brokers and insurance people going to scream bloody murder if all of a sudden they have to have their primary loyalty to the client and not split? And if they have to I would imagine disclosure is also a big item here.

Blaine Aiken: It is big,  but you’ve referenced the fact earlier that there’s a lot of stock brokers that are out there today doing a high quality ethical job and I think that’s absolutely true. So those folks I think they’re going to be on the front line of cheerleaders for change because right now they’re caught in a very difficult situation. They’re operating to a fiduciary ethic in a suitability world which exists over on the broker dealer side, and that’s a very difficult role to play whenever you have your regulatory structure out of sync with what your behavior is. And then there’s other stock brokers who don’t want to give advice, they are just assisting transactions and those folks are rightly on the suitability side, there’s no reason to raise the standard there to a fiduciary level if all they’re seeking, if all the investor is seeking is transactional assistance.


3. Fee-Based Financial Planning - The Wave of the Future

Jim Lange: But realistically I can’t imagine going to a financial advisor and not wanting to know certain things like asset allocation, Roth IRA conversion advice, and I guess you know one of my concerns would be and I know that there’s ethical stock brokers who do the right thing but just by the nature of the way they get paid, which is they get paid when somebody buys or sells a stock, to me is really not in harmony with the client’s best interest which would be a fee to look at the big picture and provide ongoing advice.

Blaine Aiken: You’re right and again if it’s in the instance of advice then I think really a fee basis for the relationship level compensation where there aren’t the conflicts of interest of being incentivized to recommend one thing over another, that’s where we have to go and that’s what the fiduciary standard requires.

Beth Bershok: And so do you think that fee structure would change if some of these proposals actually happen?

Blaine Aiken: I think it’s going to make a huge difference because not only will investors understand that whenever they go to somebody for advice they can be sure that the person that they’re talking to is accountable to a fiduciary level. But if that fiduciary requirement is extended across the board products have to change because essentially today on the suitability side of the world whenever you design a product for the sales distribution side then you look at how much does it pay and so consequently you are building in products that have commission structure, that have non-level compensation, all that’s going to have to change.

Beth Bershok: It actually sounds like a major upheaval.

Blaine Aiken: It does. It will be and it will spill down to the design a products, I think it will drive down costs, it will make the overall awareness higher of investment advice as being more professional at its core much like the CPA attorney and so forth.

Beth Bershok: What do you think would be the end result the main difference, let’s just say you’re listening to the show tonight you’re just the average investor, what would it mean to you if those changes actually happened?

Blaine Aiken: In all likelihood a couple of things are going to happen. You’re going to have greater accessibility of advisors who are held to that standard of care. It will drive down the price of a lot of investment products because what will happen is that the internal expenses that go to fund commissions and what they call revenue sharing, those things will have to come out of the picture because in that case we’re going to have investments compete on their investment merit and then the advisors are paid on a fee basis overall. So you’re going to see some big changes.

Jim Lange: Well, as I understand it a lot of these financial products have commissions of 10% or even higher.

Blaine Aiken: They can, yeah.

Jim Lange: And boy I kind of wish I sold those because you can make some money. And by the way I’m licensed to sell them, I’m licensed to sell life insurance and if in Pennsylvania if you’re licensed to sell life insurance you’re licensed to sell some of these annuity products and I’ve never sold one to anybody because I just don’t think it’s appropriate. But it seems to me that if right now you’re making a living selling these relatively high-commissioned type products, and the legislation that you’re talking about passes that you’re going to have to change the way you do business. And then some of these products that are cloaked and I talk to people who buy these products very frequently and they can’t tell me how the advisor is paid they just say well the advisors paid by the company and I’m not paying the advisor. What do you mean paid by the company? The companies paying the advisor to be nice and the advisor is giving you the best advice that he knows when the reality is he’s making a 10% commission on what he’s selling you? So I actually think that there might be some profound differences.

Blaine Aiken: I agree with you there’s definitely going to be some very significant changes overall. The insurance side of the equation is still very much in question. Most of the concentration of conversation is on the investment side but you’re absolutely right the same issues arise on the insurance side.

Jim Lange: On some of the simple insurance type policies and those are the ones I tend to favor, things like term life or even guaranteed universal life, I think that they’re relatively straightforward products and I think that the commissions are more or less level or even. Are you talking about some of the more let’s say harder to understand type products like even just like a whole life policy or policies that have different bells and whistles in them?

Blaine Aiken: Yes, I mean the insurance products generally are today handled on a commission basis. If fiduciary responsibility is extended across the board then I think you’ll see what they call no load insurance products where the commission is brought out of the product and rather it’s handled on a fee basis much like investments.

Beth Bershok: Blaine and Jim we are going to take a quick break. When we come back too we’re going to talk about some of the recent scandals. What happened, what went wrong, how you can keep it from happening to you in the future. It is the Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking smart money and thank you for joining us this evening I’m Beth Bershok along with Jim Lange and Blaine Aiken is our guest tonight President and CEO of Bridgeville based fiduciary 360. Busy summer because so many things have happened after the big financial scandals. If you have a question in this next half an hour feel free to call at 412-333-9385. Blaine the main question is and the number one guy when you say financial scandal Bernie Madoff is the first person that pops into your mind even though there have been many since then.

Blaine Aiken: There have unfortunately.


4. A Closer Look at the Bernie Madoff Scandal

Beth Bershok: Unfortunately but the main question is how did he get away with that for so long, and how did he get away with that?

Blaine Aiken: Well, there’s a lot of angles to that question, but fundamentally I mean first of all he was a crook, he was a smart, arrogant individual who commanded a certain air of responsibility and so people tended to trust him. Unfortunately, I think among those who are most trusting are the most ethical people. So the most ethical people are the most vulnerable to people who have no ethics. So consequently for example he focused a lot of his intention on charities and foundations and endowments and he duped a lot of people and there were regulatory failures. In this case the SEC is well known that back in 2005 a gentleman by the name Harry McCroplis sent a letter to the SEC of what he believed to be transpiring with Mr. Madoff. And due to the questions about who had jurisdiction and due to gross under staffing and frankly a level of incompetence that it slipped through the crack.

Beth Bershok: Do you think that’s going to change at the SEC because right now people are going what were they doing for the past decade.

Blaine Aiken: Yes, I think it is going to change in two respects. One is that the financial crisis overall has demonstrated the weaknesses in the regulatory system. So I think we’re going to see much greater role clarity and I think the SEC is going to end up with more responsibility but far more resources, they are just way under staffed.

Beth Bershok: You know just in case any one is unclear exactly with the Madoff situation which was a ponzi scheme explain exactly how it was working.

Blaine Aiken: Yes, his was the most simple of all scandals if you will. He did it in a way that he took people’s money and basically stuck it in his pocket, it was not elaborate in a lot of ways he was just able to accomplish that. And one of the big ways he was able to accomplish it is he was wearing multiple hats. He served in a capacity of being an advisor to these folks, he also was what’s known as the executing broker so he made the trades. He was the money manager and he was the custodian. Well in a day and age where you can do almost anything with a personal computer he essentially manufactured records, he would be able to take the money in, never actually deposit it but create records that were fictional.

Beth Bershok: I was going to ask that is that what was happening people were getting fictional accounts?

Blaine Aiken: That’s right they were getting fictional accounts and that was the major way that this was perpetrated. Now I mentioned the regulatory breakdowns but there were fiduciary breakdowns. People that invested with Mr. Madoff had fiduciary responsibility to do due diligence and a lot of that wasn’t done.

Jim Lange: So in other words there were money managers who would place their clients’ money with Bernie Madoff and what you’re saying is they should have actually checked out his operation, they probably were duped in good faith themselves, it wasn’t like they were terrible people but they didn’t fulfill their obligation of checking on him and saying how the heck does a guy make 10% every year in every market please explain to me your strategy Bernie where does it say that in your prospectus?

Blaine Aiken: You must ask the difficult questions because a fiduciaries obligation if you manage money for other people you have absolute obligation to do so in a responsible way and that means asking the tough questions. And if you ask enough of the tough questions you wouldn’t have ended up investing there.

Jim Lange: And I know myself because I am in a fiduciary capacity and I do recommended money managers to clients and I am compensated for it, I personally and this is just my own biases as a CPA, I like to see certified statements by a CPA yes this is the internal controls that this company has, yes this company really did do this performance level during these years . And we certify that, and when companies say well gee I didn’t want to pay the CPA or Gee we don’t really keep those kinds of records, then I lose interest in doing business with that kind of company.

Beth Bershock: For you that would be a red flag immediately?

Jim Lange: Yeah, it’s not necessarily a red flag, there are companies who don’t want to pay a CPA firm to audit their statement. For me I just think that’s part of the cost of doing business and if I’m going to tell a client here I think you should let this particular money manager manage $500,000 or $1 million whatever it might be, I think the least that that person should do and we’re doing that in part based on a historical performance, I want to know that those historical numbers that are given to the client are not made up. If there is a CPA firm that’s in the yellow pages that you could find.

Beth Bershok: It’s not in the Caiman Islands somewhere.

Jim Lange: By the way that’s very important and you can actually look at the in effect the disciplinary history of that CPA firm and to me that is just due diligence and apparently that isn’t what happened with a lot of Bernie Madoff’s money managers.

Blaine Aiken: You’re right and that specifically is one of the common threads in a lot of these scandals. If you ask that key question, and this is a very good point because you’re seeking third party verification of critical information and the financial reports are key pieces of information. In Mr. Madoff’s case he was using essentially a two man accounting shop that didn’t even list auditing as one of its responsibilities. In the Stanford case they actually were Caiman based auditors I believe.

Beth Bershok: Really?

Blaine Aiken: Yes they were Caribbean Island based auditors. Those are the types of things that come up, and likewise with performance report there is what’s known as the GIPS standards, these are global investment performance standards and it’s using a third party to evaluate whether in fact that performance really happened or not. Whenever people would talk to Mr. Madoff he would dismiss individuals who asked difficult questions and say either I don’t have time for that or you have no right of asking me in my position of authority, and people let him get away with that. If anybody treats you that way you have to walk away.

Jim Lange: And can you expound on the idea of the separation between holding the money and advising people regarding which stocks and bonds and appropriate investments would be in the client’s best interest.

Blaine Aiken: Right. There are checks and balances that are naturally built into a system and so typically what you’re going to want is to have the party that’s holding the assets actually has physical possession or custody that’s typically a bank or a brokerage firm or some recognizable name of a financial institution.

Jim Lange: Like Charles Schwab for example.

Blaine Aiken: Charles Schwab would be a good example, Bank of New York, something like that in terms of those who would serve in a custody capacity. And they issue your monthly statement. Now if you look at your monthly statements you receive that’s where you can really go through and see what’s happening. You see what transactions were taking place and all of that. And so that’s everybody as a piece of advice should be looking at those custodial statements and making sure it’s reflective of the reality you believe there to be. Now in the case of Bernie Madoff he made it up so the statements looked okay.

Beth Bershok: Oh they actually did look okay?

Blaine Aiken: They looked okay because he created them, but here’s where another piece of this would come into play. If one of the things that Harry Marcopolis, the fellow who wrote to the SEC and discovered the problem, he went back and started to check the actual strategy and said are these the prices at that point in time for these strategies. And they were not the accurate prices. And he looked at the strategies as much as Mr. Madoff would declare and said this is not feasible this could not have happened, in fact there were more volume just in Mr. Madoff’s clients then existed at the time, just from what he was reporting. So there were real discrepancies. Now and this is why we strongly recommend that you ask whoever you’re dealing with, your service providers, you say explain to me where the money is held, what your relationship to that party is and try and make sure that there’s independence across these various roles because any time someone is doing all the jobs that’s a formula for abuse.

Beth Bershok: You know the way you described it that he was manufacturing all of these false statements it sounds almost impossible for one guy to do by himself.

Blaine Aiken: I think you’re exactly right. I think it’s beyond comprehension that it was just Mr. Madoff.

Beth Bershok: And yet he’s the only taking the fall right now.

Blaine Aiken: He is the major one taking the fall. There’s more under investigation, more who have taken the fall to a certain extent but I don’t think there’s anyway in the world that everyone who has been responsible has actually been held accountable.


5. Red Flags When Choosing an Investment Advisor

Beth Bershok: Now if we could here’s another on your list of things to avoid and I cannot believe that anyone actually does this, but you were just touching on this that advisors should never take custody of a client’s assets. When you are the end consumer and you’re writing the check should it not be going to the people that are holding the money and not your advisor?

Blaine Aiken: Yes that’s correct.

Beth Bershok: That would be a sign to me if my advisor said, “Beth just write that check out to me”. I’d be a little concerned.

Blaine Aiken: You should be that should not happen.

Jim Lange: So the check should be made out to Charles Schwab for example not to be specific Lange Financial Group.

Blaine Aiken: Right and what’s happening now…

Beth Bershok: To be specific…yeah let’s toss that out there.

Jim Lange: I’ll just throw that out there.

Blaine Aiken: And there are some changes along the way too that today an advisor is allowed to have custody but that is there are certain rules wrapped around that going forward I think you’re either going to see that disallowed or that the proposal is to have those firms audited on a…

Jim Lange: Daily.

Blaine Aiken: Yeah should be maybe, on an unannounced basis.

Beth Bershok: And something that, this is so this is an old, old adage but I think in particular in the Bernie case this is absolutely true. Bert Blaine you say if something seems to good to be true it probably is. If you are sitting on a 10% return and then a 13% return year after year after year you have to be thinking in the back of your mind how could this be happening.

Blaine Aiken: Right the markets are very efficient overall, which is not to say that some major out performance I think is possible, but that’s extraordinarily rare and it’s almost unheard of to be able to do that with great consistency.

Jim Lange: And in particular to beat it by some many points.

Blaine Aiken: That’s right.

Jim Lange: If the market let’s say average 8 and you found a firm that might average 9 or even 9.5 that’s a great performance but if you get someone who’s averaging 14 then maybe something’s up.

Blaine Aiken: Something is up or they’re taking extraordinary risk, and if they’re taking extraordinary risk you could hit home runs, but you stand a good chance of striking out and worse.

Beth Bershok: Blaine something that we do at our office and something that Jim is absolutely huge on is educating, and educating he educates his own clients constantly. We hold seminars, we have one actually coming up on October 24th it’s about the Roth tax law change in 2010. But even in the office Jim is constantly educating people and do you think that’s also an important part of not getting burned by advisors?

Blaine Aiken: It is critical. I mean whenever you have so much riding on the future of your finances that you have to have at least a level of understanding to be able to recognize whenever something just is not feasible or doesn’t sound right or that you are at least getting a logical explanation of what’s being recommended to you. And I think that’s why you have to both be a little bit skeptical and you have to be inquisitive to learn a little bit more about your investments.


6. Steps to Take if You Sense an Unethical Advisory Practices

Beth Bershok: And if you think something is a little fishy how would you investigate that? I mean let’s say you’re my advisor, I’m beginning to think something is not right, what should I do?

Blaine Aiken: Well, there is several things you can do I mean certainly you can do background checks with the regulatory authorities, and one of the things that’s happening on the advisor front is that there is a disclosure document that is required of advisors called the ADV form, and that provides a great deal of information. You actually should read those disclosures it’s amazing that sometimes you’ll have people say yes I got that document but I didn’t read it. And if you actually read the document it has in there a list as long as your arm of regulatory violations.

Jim Lange: Unless you don’t have regulatory violations. Those are the kind of advisors that you want to go to.

Blaine Aiken: Absolutely and that’s the norm. The norm is that there are not a lot of regulatory violations but if there are that’s where they show up.

Jim Lange: Because most of the people haven’t been caught yet because the SEC is so under staffed.

Blaine Aiken: And the professional organizations too if you have an advisor who is a CPA, is an attorney, is someone who holds for example one of our designations is the credited invest fiduciary, or credit investment fiduciary analyst. You can go to the sponsoring organizations and find out their status. So for example with the AIF our credit investment fiduciary designation that’s recognized by FENRA, well if you go to our homepage you can actually click on the icon there to find out who is a member in good standing as an accredited investment fiduciary, and I’m sure the same thing is true with respect to going to the AIPCA for example or the bar.


7. Doing Your Homework When Choosing An Advisor

Beth Bershok: So almost as an investor you need to do a little due diligence yourself?

Blaine Aiken: Particularly I think you want to get resume information, you want to interview essentially the way you usually find a good advisor is much the same way as you find a good contractor, you’re typically going to interview a few people and find that you have your list of services that you’re looking for, you interview people find out what they are specializing in, what they charge, what their references are and so forth, and so you should do the same thing on the investment side.

Beth Bershok: Here’s another little piece that I think this helps and this helped in the Bernie case it helped him to scam people, but there have been a couple of local cases too where the key issue was that you went there on recommendation of somebody so you’re my relative and you say to me this guy is the best you have to see him he’s been getting me great returns and you do no homework, you just hand over your money because somebody else said you should do it. That’s what happened but there have been some local cases where that has happened.

Blaine Aiken: That’s right and I think there’s a couple things that we can say, number one is it’s good to get recommendations but then ask the person providing the recommendation how did you go about selecting them and what makes you confident that they are good because half the time you find out he’s just the nicest person or he serves on the…

Beth Bershok: He’s a great guy. Of course he’s a great guy.

Blaine Aiken: And boy can he golf. It’s those sorts of things where it comes up. Or in Mr. Madoff’s case he was active in the charities so here the recommendations came because oh he’s so committed to our cause.

Beth Bershok: He gives us a lot of money.

Blaine Aiken: That’s right but in reality those recommendations you can largely disregard because good people aren’t necessarily good. The people that you perceive as being good aren’t necessarily good. You want to go back and be able to explore in detail what is their specialty, what is their record, have they published, do they have the advanced education and those things you can check as well.

Jim Lange: I think that earlier you had mentioned third party endorsement if you will and now you’re saying have the people written articles and preferably are the articles peer reviewed.

Blaine Aiken: That’s right.

Jim Lange: And does the person have and audited or the investment company have an audited statement saying well here’s our historical record in the past and here is let’s say for example the benchmarks and here our auditors are willing to put it on the line, yes we are equal or even better than the benchmarks. I actually think that that is something that is fair for people to ask.

Blaine Aiken: Absolutely. I mean take for example in your book. I mean you demonstrate the level of knowledge that you have and you have the testimonials there that are meaningful with respect to the specifics of the techniques you’re talking about. I think that is the type of thing that builds assurance. What I’m saying you have to be careful of the recommendation, it really is not central to the matter at hand.

Jim Lange: And I don’t want to mention names, one of the gentleman is actually on talk radio and he says no Roth IRAs are no good and that Roth IRA conversions are no good and then he cites a book of somebody who says that retirement plans and 401(k)s are no good. Now this is a popular guy and I’m thinking oh my God he’s just giving this information out on the radio and then when people see him in person and they ask for recommendations people that in my mind are perfect candidates for Roth IRA conversions he’s saying oh no and then he cites somebody who has written books saying that 401(k) plans and retirement plans are no good instead you should by all these insurance products that frankly I am not a big fan of.

Blaine Aiken: It does come down to the test of collecting the information, doing the review, look at what makes sense and then even check with others. And I think that third party verification idea is still a good one across the board.

Beth Bershok: And Blaine and Jim we are going to take a quick break here we are talking smart money, it’s the Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Thank you for joining us this evening talking smart money with Jim Lange and Blaine Aiken our guest tonight president and CEO of Bridgeville based Fiduciary 360. We were talking about education just a few minutes ago and Jim and huge on education which is one of the reasons you wrote your books Retire Secure! Pay Taxes Later. Some great information in those books which by the way there’s a link on our website retiresecure.com if you’re interested in that. But we do have two fall seminars coming up and I want to point out the dates. One is October 14th and that’s at the Holiday Inn Moss Side Boulevard in Monroeville, and then we’re also going to have one on November 21st, we’re going to be at the Four Points By Sheridan in Mars. In either case you can call 1800-748-1571 to RSVP. 1800-748-1571. The topic is getting really, really hot, it’s about the tax law change coming January 1st, which is a tax law change involving Roth IRAs and we’re going to be covering that in detail in these workshops. So you can get more too by going to our website which is retiresecure.com. Now Blaine you have a big big week well it’s Friday you’re going to be in Washington DC, you’re going to be in front of the SEC and can you explain what you’re going to be doing?

8. More About Blaine Aiken

Blaine Aiken: Yes we have the opportunity to speak with the SEC chairman Mary Shapiro and we’ll be providing some suggestions regarding regulatory reform. I’ve been fortunate to be a part of a group called The Committee for the Fiduciary Standard. It’s a group of individuals who are active in the financial services arena who believe strongly in extending the fiduciary standard to all those who provide advice. So what we do is specifically promote those five core principals that I mentioned to you, the duty of loyalty and full and fair disclosure, and avoidance of conflicts of interest. So we will have the opportunity to meet with the SEC Chairman Shapiro, have a chance to meet with a couple of the other commissioners and we do want to express to them why believe these issues are so important.

Beth Bershok: Now what if you’re sitting here in Pittsburgh and you really want to make your voice heard, no matter what side of the argument you’re coming down on how would you do that?

Blaine Aiken: There’s a couple things you can do. One, if you would choose to become a part of the Committee for the Fiduciary Standard you can do so, this is an open organization of anyone who feels compelled to make their voice heard. And there is also a petition that can be signed and the way people can get involved in that, one of the ways is to go to our website and it will take you to some links.

Beth Bershok: And your website is?

Blaine Aiken: It’s FI360.com, so FI360.com. And there there is a section called resources and advocacy and it describes the committee and the petition. So people can go there and express their support.

Jim Lange: So let’s say you’re a listener and you say yes I want financial advisors to be held to a higher standard of fiduciary duty, they can go to www….

Blaine Aiken: FI360.com.

Jim Lange: FI360.com and then what should they be specifically looking for?

Blaine Aiken: There’s a tab there our services our training tools and resources and in there’s a tab called resources and that’s where we provide a lot of information about fiduciary responsibility overall, so there’s articles and all of that. But under resources there’s an area called advocacy and if you click on advocacy it will take you to information about the committee. From there it’s pretty self explanatory.

Beth Bershok: Have you noticed over the summer since all of this has happened and proposals have been in front of congress has it really picked up?

Blaine Aiken: It has there’s a great deal of interest in this area and people are getting much more informed. Another thing you can do is contact your legislators and express your support. There is a particularly SEC Commissioner who in my view is absolutely superb, it’s a gentleman by the name Louise Aguilar. Commissioner Aguilar is very articulate on the subject of fiduciary responsibility. So anyone who would go to the SEC website for example SEC.gov you can look up the commissioners and write Commissioner Aguilar and give him great support because there’s some strong moneyed interest there in opposition to this.

Beth Bershok: Well sure in fact there has to be huge opposition on the other side because it’s really going to be a major upheaval in the industry and it seems like it’s going to be so major that I can’t believe this would be happening in the next week or the next month, how long do you really think it will take?

Blaine Aiken: Well today as you know health care is front and center, and so it’s difficult to push the financial services back to the front but everything we’re hearing is that work is going to continue on the financial services side and I think if we’re luck we’ll see action by the end of the year.

Beth Aiken: Do you really?

Blaine Aiken: I think it’s possible that would be big news. The thing to watch out for as I mentioned early in the show that there would be attempts to redefine what fiduciary means. Fiduciary is very well defined in law it’s a long existing standard it goes back actually to the middle ages in English common law and it’s been further developed, most fully developed under retirement plan law here in the United States, and that’s the standard we want to see retained. Unfortunately even the industry lobby groups recognize that it’s hard to argue against putting the investors best interest first. So there’s a lot of vocalization from within the industry to say yeah what we need is a fiduciary standard, but it’s not a fiduciary standard we need it’s the fiduciary standard the one that’s defined in law.

Beth Bershok: Alright so you are heading to Washington DC and if anyone wants to check out your website it’s www.FI360.com. Any last quick tips for just the average investor?

Blaine Aiken: I think again it’s do your homework, be skeptical and yet take responsibility for truly doing your homework.

Beth Bershok: It takes a little bit of work.

Blaine Aiken: It takes work and the other thing I would say is ask your advisor if they do adhere to a fiduciary standard because they are required to do that.

Beth Bershok: Jim has anyone ever asked you that, has anyone ever come into the office and said that?

Jim Lange: I don’t think they have. I sometimes think that I bring that up. In fact, one of my advisors tells me that I should bring that up on a regular basis and tell people that I am held to a fiduciary standard which means I have to represent your best interest, and see this is a little bit unusual because I am a CPA and an attorney and they each have their own fiduciary standards. I’m different from a lot of the advisors because I am from the fee world where you work a certain amount of time or provide a certain service and you get a fee for it and that was not brought up if I sell you I make money if I don’t sell you I don’t make money.

Beth Bershok: Which is entirely different.

Jim Lange: Yeah.

Beth Bershok: Well Blaine thank you so much for joining us it has been wonderful information tonight. I do want to point out that the rebroadcast is going to be this Sunday, it’s going to be 9-10 in the morning and then it will be posted on our website retiresecure.com within a week or so. And again Blaine’s website is www.FI360.com. And again our website retiresecure.com will give you information on our upcoming workshops, we have one October 24th and one on November 21st. And we’ve been talking so much about education and just getting everything in one package and Jim is going to make an offer here for a free financial physical. Jim explain what’s involved because people will call me and say what happens when I come in. What will be happening if somebody calls the office and comes in for a free financial physical?

Jim Lange: Well I always like to ask people for a list of assets and a tax return, and I prefer to get that actually ahead of time and based on that information I will develop a list of things that I want to talk about and perhaps improvements that can be made. But the way I always start meetings is say what is your biggest concern.

Beth Bershok: Because for everybody it’s different.

Jim Lange: It is different and I have things you know you would think well providing for myself and providing for my wife or providing for my husband or providing for my kids or reducing taxes, and to me I just kind of take that as second nature but you know one person said my biggest concern is my no good son in law gets one red cent of my money.

Beth Bershok: Sometimes that’s a huge concern.

Jim Lange: We had to address that issue before we got to taxes or the spouse or anything else.

Beth Bershok: And if that’s an issue we can address that. So let me give the phone number it’s 412-521-2732. This is going to be a free financial physical which normally takes about an hour. 412-521-2732. Jim will address everything. Investments, your insurance needs, Roth analysis. My extension is 219. So if you call that number tonight and you dial my extension I will be giving you a call back tomorrow. 412-521-2732. We will back in two weeks with Jonathon Clements one of your favorites who used to write for the Wall Street Journal. Get more at retiresecure.com and it is the Lange Money Hour: Where Smart Money Talks.

 

James Lange, CPA/Attorney

Jim is a nationally-recognized tax, retirement and estate planning attorney with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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