If
you were looking for
a trustworthy investment
advisor, Julie Jarvis
seemed like a safe bet.
Founder and principal
of Crossroads Financial
Planning, Jarvishad 20
years' experienceproviding
financial planning and
investment management
services. By 2009, she
was managing more than
$22 million in assets
for more than 250 clients.
Her professional peers
respected her enough
to make her president
of the Financial Planning
Association of Central
Ohio.
But Jarvis was keeping
a terrible secret. From
2000 to early 2009, she
had stolen nearly $2.7
million from a pair of
elderly clients, Barbara
Stradley and Joanne Rainey,
both in their late 80s.
Jarvis forged signatures,
switched funds from client
accounts to her own,
created phony financial
statements and lied repeatedly
about what she was doing
and why she was doing
it.
Jarvis used stolen money
to buy real estate in
the Caribbean and Ohio,
pay off credit card balances
and pay down her mortgage.
By the time FBI investigators
caught on to the thefts
in March 2009, most of
the money was gone. Facing
a possible sentence of
20 years in federal prison,
Jarvis chose to take
a plea bargain. In May,
she pleaded guilty to
one count of mail fraud.
In October, U.S. District
Court Judge Gregory Frost
sentenced her to 66 months
in prison; Jarvis also
agreed to make restitution
of $2.66 million to her
victims, partly by forfeiting
virtually everything
she owned, right down
to the Yamaha grand piano.
Terry Sherman, the criminal
defense attorney who
represented Jarvis at
trial, says the sentence
was fair. "She's
lost everything," he
says. "She lost
her career, she lost
her life. She comes out
of prison with zero.
Nothing of her past life
will be around."
Jarvis has "some
mental health issues," Sherman
adds, stemming in part
from an incident in which
she was kidnapped and
assaulted. "She's
been suffering from untreated
post-traumatic stress
disorder, and she believed
she had to win people
over by buying things," he
says. "She thought
she had to buy love both
from her kids and her
boyfriend." At one
point, Sherman says,
Jarvis told her children
that she had cancer,
a falsehood that came
to light during her prosecution.
Dale Williams, assistant
U.S. attorney for the
Southern District of
Ohio, says Jarvis "went
to great lengths to present
herself as a trustworthy
person." By all
accounts, her fa�ade
was convincing. "Those
of us who knew her were
in shock," says
financial planner Peggy
Ruhlin, a principal at
Budros, Ruhlin & Roe,
where Jarvis worked before
launching her own firm. "There
was nothing that would
have made me believe
she was capable of doing
something like that.
It's just unbelievable."
Jarvis wasn't the only
Columbus-area financial
advisor to be caught
on the wrong side of
the law in recent months.
In March, Lawrence Nallie
pleaded guilty to six
felony charges: three
counts of investment
advisor fund mishandling
involving more than $187,000,
and three of acting as
an unlicensed investment
advisor ("The Affinity
Scammer," August
2009).
Coming just as the multibillion-dollar
Ponzi scheme of New York
investment manager Bernie
Madoff was making headlines,
the crimes of Jarvis
and Nallie got the attention
of investors and financial
pros around Central Ohio.
Should financial planners
and investment managers
be more tightly regulated?
Should clients require
financial advisors to
obtain approval before
every transaction? Can
anyone be trusted these
days?
Legislating Integrity
It's by no means clear
that more extensive laws
or regulations would
have dissuaded Madoff,
Jarvis or Nallie from
stealing. Still, federal
officials are pushing
for stricter oversight
and tougher standards
of conduct for those
who invest other people's
money, or advise others
on how to invest their
own money.
In June, President Barack
Obama's administration
proposed holding investment
broker-dealers to the
same fiduciary stan-dards
that already apply to
financial advisors. As
it stands,advisors have
a fiduciary duty to put
their clients' interests
before their own. For
example, an advisor can't
ethically recommend a
mutual fund that carries
a hefty front-end "load"-that's
financial-speak for commission-if
there's a no-load fund
that's just as suitable
for the client and likely
will produce a better
total return.
A broker isn't subject
to the same fiduciary
standard, which explains
why you'll almost never
hear a broker recommend
a no-load fund. Even
bottom-feeding penny
stock brokers are free
to peddle their high-risk,
high-commission dreck
with impunity, as long
as they don't tell outright
lies about what they're
selling.
Advisory firms that manage
at least $25 million
are regulated by the
U.S. Securities and Exchange
Commission (SEC). Those
that manage smaller amounts
are regulated by the
states. Brokers and other
registered securities
salespeople fall under
the purview of the Financial
Industry Regulatory Authority
(FINRA).
Instead of a fiduciary
duty, FINRA imposes a "suitability
standard," which
allows brokers to recommend
investments that generate
greater commissions for
themselves-and may not
perform as well as others-as
long as they fit a client's
goals and risk tolerance.
Regulatory reform bills
under consideration in
both the U.S. House of
Representatives and U.S.
Senate would subject
everyone providing investment
advice-broker-dealers
as well as financial
planners and investment
managers-to the stricter
fiduciary duty of care.
The changes have gained
support from the National
Association of Personal
Finance Advisors (NAPFA),
the Financial Planning
Association (FPA), the
Certified Financial Planner
(CFP) Board of Stan-dards,
and several other groups.
In a July 14 letter to
senior members of the
House Financial Services
Committee, the organizations
said they "share
the view that the highest
legal standard-a fiduciary
duty-should apply to
all who give financial
advice to clients. Over
the years, we have looked
on in dismay as brokers
have been allowed to
offer extensive advisory
services, and market
their services based
on the advice offered,
all without having to
comply with the Investment
Advisers Act of 1940
(Advisers Act)."
NAPFA, the FPA and the
CFP have formed the Financial
Planning Coalition, which
advocates a professional
oversight board for financial
planners and advisors. "The
financial planning industry
has always fought to
establish standards," says
NAPFA Chairman Bill Baldwin. "It's
important to the credibility
of the industry. We're
selling trust and confidence
as well as advice."
"Critical at the
core of our ability to
serve the customer is
the need to put their
interest above everyone
else," says FPA
board member Karin Maloney
Stifler, a CFP and founder
of Huron-based True Wealth
Advisors. "Our goal
is to create a world
where everyone thrives
and prospers, and we
can't feel good about
having anything less
than a fiduciary standard."
The Senate Banking Committee
is considering legislation
that would extend the
fiduciary standard to
broker-dealers by removing
a section of the Investment
Advisers Act of 1940
that exempts brokers
who provide advice that
is "solely incidental" to
their brokerage activities.
In late October, the
House Financial Services
Committee voted to approve
the Investor Protection
Act, which would require
any financial service
professional providing
investment advice to
act as a fiduciary. The
House bill would require
the SEC to write new
regulations defining
the fiduciary standard
for advisors.
Kristina Fausti, a blogger
for fi360, the fiduciary
blog of InvestmentNews,
wrote that the House
bill "keeps two
separate sets of rules
in place for brokers
and investment advisors,
making the ultimate goal
of Ôharmonizing'
investor protection rules
for financial professionals
harder to achieve."
A consolidated bill may
be ready for Obama's
signature early in 2010.
Whatever its final form,
it seems clear that the
legislation will produce
sweeping changes throughout
the industry. "Our
financial system in general
is going to be vastly
different several years
from now," says
Matt Stewart, chairman
of the Central Ohio chapter
of the FPA and an investment
advisor for KeyBank.
Self-Protection
If there's an upside
to recent national and
local scandals, it may
be heightened awareness
among investors of their
own responsibility to
exercise care when choosing
an advisor, says Richard
Caw, CFP and vice president
of the Sherrington Group,
a Columbus-based, fee-only
financial planning and
investment consulting
firm. Caw urges investors
to take several steps
that will minimize the
risk of being ripped
off:
Hold assets in accounts
with an independent third-party
custodian. Ruhlin says
the only check an advisory
firm should receive is
for its fee; all other
funds should be made
payable to the brokerage
firm or custodian holding
the account. Budros,
Ruhlin & Roe, for
example, uses Charles
Schwab as custodian. "The
worst thing that can
happen is if your advisor
is also your custodian,
like in the Madoff case,
because you're having
information reported
back to you by the person
who's stealing the money," says
Baldwin.
Even a third-party custodian
isn't a guarantee against
fraud. In April, Ron
Lieber, a financial columnist
for the New York Times,
reported that the SEC
had charged his own financial
planner, Matthew Weitzman,
with siphoning at least
$6 million from clients'
accounts (not including
Lieber's), even though
Weitzman's firm used
Schwab as its custodian.
In the end, it's the
client's responsibility
to examine monthly account
statements and red-flag
transactions that don't
look right.
Vet the advisor. Referrals
are a great way to find
an advisor, but don't
stop with the endorsement
of a friend or family
member. Flipping President
Ronald Reagan's oft-quoted
enjoinder, "trust,
but verify," Stifler
urges investors to "verify,
then trust." Treat
choosing an advisor as "one
of the most important
hiring decisions they'll
ever make," she
advises. "We need
to take the process very
seriously."
Clients can check advisors'
backgrounds with such
agencies as the SEC,
the Ohio Department of
Commerce Division of
Securities, the Ohio
Department of Insurance,
FINRA and the Better
Business Bureau.
Credentials are important,
too. To become a Certified
Financial Planner, for
instance, an advisor
must earn a four-year
college degree in a finance-related
field, pass a certification
examination, subscribe
to the CFP Board's Code
of Ethics, complete 30
hours of continuing education
every two years and acquire
three years of financial
planning-related experience. "Obviously,
not just anyone can call
themselves a Certified
Financial Planner, but
they can call themselves
a financial planner,
even if they're a dog
washer," says Ruhlin,
a CFP and a member of
the FPA, NAPFA, past
chairwoman and president
of the International
Association for Financial
Planning and member of
the American Institute
of Certified Public Accountants.
Stewart says he tells
people looking for a
financial planner "to
make sure they're credentialed
as a Certified Financial
Planner. That's the gold
standard." The FPA
has aligned its code
of ethics with that of
the CFP board, Stewart
says, and taking a fiduciary
oath is a NAPFA membership
requirement. "We
all pretty much feel
that our reputation is
all that we have, and
we have to put our clients'
interests first to uphold
our reputation. We feel
very strongly about that," he
says.
Of course, credentials
don't guarantee an advisor's
integrity. Jarvis was
an active member of NAPFA,
had earned a CFP and
worked as a fee-only
advisor. "If someone
has true criminal intent,
it's very difficult to
stop that," Caw
says.
Ask questions. Does your
prospective advisor accept
fiduciary responsibility?
Has he or she ever faced
disciplinary action?
Will he submit each investment
to you beforehand, or
does he want "discretion" to
trade your account without
advance approval? Can
she supply names of other
clients who are willing
to provide references?
Honest advisors will
be open to such questions,
Caw says: "People
who are trying to hide
something will be less
open."
Ruhlin agrees. "When
it comes to your money,
no self-respecting, competent
financial advisor will
ever be offended by questions," she
says. In fact, says Ruhlin,
she and her peers have
been surprised by how
little concern they've
heard from potential
clients. "When prospective
clients come in for an
interview, we try to
bring it up, just bring
it right there on the
table and see what questions
or concerns they might
have," she says.
But generally, clients
don't dig too deep. "Let's
face it. People in the
Columbus, Ohio, area
are in the Midwest. They're
nice. I think they think
the best of everything,
and it's just not in
their nature to bring
up negative things."
Be vigilant. Check accounts
regularly and reconcile
reports from the third-party
custodian with those
from the advisor.Never
sign blank or partially
completed documents to
be filled out by an advisor
later. If you're a senior
investor, ask an adult
child or someone else
you trust to look over
paperwork and meet with
your advisor.
"It's human nature
to think everyone has
your best interest at
heart, and unfortunately,
people get taken advantage
of sometimes because
of that," Caw says.
A client who's paying
attention is less likely
to be victimized, says
Baldwin: "Nobody
ever robs a house with
a barking dog in it."
No Quick Fix
Lawyers on both sides
agree that as long as
advisors, investment
managers and brokers
have access to other
people's money, a few
will steal. The industry
is "very, very unsupervised,
it's very unregulated," says
Sherman, Jarvis's attorney.
For financial advisors
who have been entrusted
with millions of dollars, "The
temptation is incredibly
compelling."
Williams, the federal
prosecutor, says recent
headlines about advisor
frauds aren't necessarily
indicative of an increase
in such crimes. Perhaps,
he says, the Ma-doff
case has stimulated more
publicity about frauds
at the local level. Or
perhaps clients and those
in law enforcement are
paying more attention.
After 24 years in the
U.S. Attorney's office,
Williams calls financial
advisor fraud "just
one more way people cheat
other people. Whether
someone is a financial
advisor [or] a banker,
our economic system works
on a basis of trust.
And when you trust people,
if people are going to
steal money, it really
doesn't matter what line
of work they're in."
Beyond the damage directly
inflicted on the people
victimized by a Bernie
Ma-doff, a Julie Jarvis
or a Lawrence Nallie
are the ripple effects
of their actions. "It
just makes doing business
difficult for the rest
of us," says Stewart.
High-profile misdeeds
inevitably lead to tougher
rules-such as the reforms
Congress is debating
now-and tougher rules
can be burdensome.
"Even though it's
just a small percentage
of advisors who do the
wrong thing, it's costly
for the American economy
as a whole, for the advisors
who have more paperwork
and perhaps have to hire
more staff to deal with
compliance changes," says
Stewart. "It's unfortunate,
but it is a reality,
and as a consumer, you
have to protect yourself
as best as you can."
Jennifer
Wray is a staff writer
for Columbus C.E.O. |