Don't lose sleep over the fate of W. Aubrey Morrow, president of Financial Designs in San Diego - he's doing just fine. Morrow leads a group of six certified financial planners and hosts a weekly radio show on investing. What's more, Morrow, who manages $86 million in assets for nearly 250 clients, has nearly tripled his assets under management since 2005.
That was the year the CFP Board of Standards issued a public letter admonishing him. He notes that the action still "pops up" on Google, but he says only one client has asked him about it.
Morrow is among thousands of advisors dealing with an industry sanction. CFP Board disciplinary inquiries have been on the rise. There were 1,472 investigations last year, a jump of 8% from 2009, and the number is expected to surpass 1,500 this year.
When portfolios lose value, as many did during the recession, clients tend to lodge more complaints. In addition, in a weak economy, planners run into more financial trouble themselves; a bankruptcy filing automatically sets off an investigation.
An investigation may also be triggered by any alleged violation of the CFP Board's Code of Ethics and Professional Responsibility, or Rules of Conduct, such as an inaccurate response on a financial planner's application for certification, another regulatory body's investigation or action, a client's complaint or court litigation.
After a review and sometimes a hearing, the CFP Board's Disciplinary and Ethics Commission typically dismisses the allegations. Last year, 92% of investigations concluded this way. But the commission can also choose from a range of sanctions. The mildest punishment is a private reprimand; the most severe is revocation of a planner's certification. Obviously, nobody wants to be subject to such a proceeding. But as Morrow's case shows, for some planners, life goes on and their firms may even thrive.
For planners facing an investigation, Edward Mora, chairman of the CFP Board's Disciplinary and Ethics Commission, offers this advice: "Cooperate. Meet the deadlines. Be forthright."
It helps to bring your own lawyer to a hearing, many say. Morrow brought counsel when he appeared before a three-member CFP panel composed of volunteer CFPs. Along with the cost of legal advice, planners have to pay $750 in fees for the initial hearing and another $750 if they seek an appeal.
At his hearing, Morrow says, he had the opportunity to tell his side regarding allegations about inaccuracies on the firm's website and in its retainer agreement made by a former employee, whom Morrow believes filed the complaint because he was denied equity in the firm.
The panel concluded that earlier versions of Morrow's firm's website and its retainer agreement didn't disclose that the firm received commissions and stated incorrectly that the CFP Board requires that all disputes be mediated. In fact, the CFP never has imposed mediation requirements for disputes. Morrow's appeal failed - the CFP Board not only upheld its decision, it reported its letter of admonition in a press release and on its website.
Morrow respects that the CFP Board adheres to high standards. But he argues that, in this instance, "a disgruntled former employee" filed the complaint, which came down to an office oversight when he failed to update forms and his website, and his own misunderstanding about the difference between "fee-only" and "fee-based" planning, all of which were corrected.
"I didn't steal anyone's money," Morrow says. "These things were not done purposely to mislead."
Financial planners often make the mistake of focusing exclusively on marketing and execution of clients' plans, Morrow says, but overlook their own industry's self-regulatory requirements, as he did in this instance. Since 2005, Morrow has had an attorney regularly review all of his disclosures on regulatory forms and in advertising.
Only once has a client - a very significant client, Morrow says - inquired about the issue. He notes that he told the client what happened, and his frank response preserved the relationship.
When planners file for bankruptcy, a hearing is inevitable. "In the case of bankruptcies, explain the situation so we totally understand it," Mora says. Should the CFP Board mete out punishment, he adds, "Understand part of the role is protecting and informing the public." That's small solace when the board suspends your certification.
In one example, Jesse L. Dietz, a planner in Baytown, Texas, who previously worked for Amegy Bank and for Zions Direct, applied for certification from the CFP Board, but also filed in 2007 for protection under Chapter 7 of federal bankruptcy laws. As a result, the CFP Board denied Dietz's application.
After Dietz filed a petition for reconsideration, the Board's Disciplinary and Ethics Commission in February 2010 "determined that his conduct did not reflect adversely on his fitness as a candidate for CFP certification." However, it noted that his "inability to manage his personal financial affairs warranted a one-year suspension of his right to use the CFP certification marks," and barred him from doing so until March 26 of this year. Dietz declined to comment for this article.
Some suspensions are linked to much graver offenses. In September 2010, the CFP Board issued an interim suspension order of the certification of Daniel J. Trolaro of Oakland, N.J., after it discovered he had been indicted for defrauding clients out of nearly $2 million.
Trolaro failed to respond to a CFP Board's order within 20 days, as required by the CFP's Board Disciplinary Rules and Procedures. Trolaro entered a guilty plea to second-degree theft in New Jersey Superior Court in July. Trolaro's lawyer did not respond to requests for comment.
Planners who received milder discipline have generally found that clients who ask them about it do not withdraw their business. In the case of a planner who was admonished for commingling money when he borrowed money from a client and put it in an account at his firm, only two clients have asked any questions and neither left, according to the planner. Since the public scolding in 2004, his firm's assets under management have soared to $100 million from $40 million.
The planner says he borrowed the money in 2003 because he thought he had found a good investment opportunity. He realized after depositing the money and talking to other planners that he might have breached CFP rules.
When he approached his broker-dealer, he says the firm declined to disclose the potential violation, so he told his lawyer that he thought it was necessary to do so and then reported the potential violation to the CFP as well as other professional organizations. He now regrets he did not have a lawyer representing him at his disciplinary hearing, where he agreed to the allegations of commingling even though he now says that isn't accurate.
Temporarily losing the right to use a CFP designation doesn't have to end a career. One planner says his assets have grown by 25% since 2007, when the CFP Board imposed a 30-day suspension before he could receive his CFP license. A novice planner at the time, he'd asked family and friends to invest with him in a venture selling a new type of auto insurance, without realizing, he says, that FINRA rules required that he get approval from his broker-dealer since the investments could be regarded as securities. In the years since, only one client has asked about the issue directly, he says, and she chose to stay with him.
"I'm glad it happened early in my career so I may go forward the next 20 years with the knowledge I gained," he says. In order to avoid future problems with the CFP Board, he's established procedures to keep clients fully informed. All six CFPs in his office require clients to sign a checklist when they open or close any account, acknowledging any associated risks. "I know that in the future I am not going to be doing anything to upset the CFP Board," he says. "The investigation has made me more diligent."
CLEARED, BUT SHAKEN
CFP Board sanctions are undoubtedly troubling, but even those ultimately exonerated can endure considerable stress. Sheryl Garrett, founder of the Garrett Planning Network, is among those whom the CFP Board has investigated and who've had allegations dismissed.
Five years ago, Garrett recalls "instantly stopping everything I was doing [with] my heart skipping a couple beats" when she opened "this really curt message" - a letter from the CFP Board informing Garrett that another planner had filed a complaint against her, triggering an investigation. The complaint alleged Garrett had put misleading information on her website.
In response, Garrett assembled "a one-inch stack of information" that she says demontrated her innocence. She sent it via certified mail to the CFP Board, meeting the 30-day deadline. Verification from the post office proved crucial since the board said it did not receive her response, according to Garrett. Had she not had proof of delivery, she might have faced discipline for missing the deadline.
Ultimately, the board dismissed the allegations. "The process was not painless, and it took months of my time," says Garrett, who has subsequently volunteered as a peer judge at disciplinary hearings. She stresses that the board's discipline process provides value to the whole profession. "You have to recognize that the board is not there to put good people out, and if we make mistakes, it is for the betterment of the profession that we are caught," she says.
Miriam Rozen is a staff reporter at Texas Lawyer in Dallas.