(Dow Jones) The arrest of a "financial advisor to the celebs" on fraud charges is once again putting the issue of establishing and maintaining client trust front and center.
For advisors, the headline-making case against Kenneth Starr is the latest signal that investors will be less prone to simply rely on a friend's or relative's suggestion when picking a financial counselor. And for investors, it's a stern reminder, especially on the heels of the Madoff scandal, that no matter how many famous or wealthy clients an advisor has, such a fact alone hardly qualifies as due diligence.
Either way, this much is clear: The advisory community continues to have its work cut out for it when it comes to restoring its reputation.
"I think we all get painted with the same brush when something like this happens," said Jane King, president of Fairfield Financial Advisors in Wellesley, Mass.
To some degree, advisors bemoan that generating word-of-mouth to win business--the prospecting cornerstone of most advisory firms--is becoming that much harder because of financial scandals.
At the same time, they say that clients who come to them after a thorough vetting are all the better to have. That is, they have an appreciation for the complexities of financial planning and don't fall prey to get-rich-quick schemes.
"It's really good when investors have a buyer-beware mentality," said Mark Matson, founder of Matson Money, a Cincinnati advisory firm.
So why do so many investors lack such a degree of savvy when it comes to picking their advisors? To read a list of Starr's clients is to read a "Who's Who" of the worlds of entertainment [Martin Scorsese, Uma Thurman], politics [Henry Kissinger, Caroline Kennedy] and media [Steven Brill]. Wouldn't they be the type of people to keep very close tabs on an advisor's activities?
Not necessarily, say some industry veterans. For starters, many clients--by one industry estimate, 30%--prefer to take a hands-off approach to their money. "They're what we call delegators...They don't have a passion for money management," said Stacey Haefele, president of HNW, a New York company that advises financial firms on the high net-worth market.
Also, signing on with a high-profile advisor like Madoff or Starr is in some ways a status symbol, signifying that you've become a part of an elite club. Who wouldn't want to boast that they go to the same advisor as Uma Thurman?