It is hard to describe the sinking feeling I had last week upon learning that the FBI raided Mark Spangler's home in Seattle. No charges have been filed against Spangler, though having one's home raided by the FBI doesn't look very good. One of the more damning pieces of information in the affidavit filed in conjunction with the search warrant request is the claim that Spangler had planned to travel to Ecuador on September 25.

This may have heightened the FBI's sense of urgency about requesting the search warrant on September 22. That Ecuador trip reportedly has been postponed.

I wouldn't call Mark a friend, but he certainly was a friendly acquaintance. In the late 1990s, he would come to New York City once or twice a year, stay in a French hotel one block from my office and we'd often have breakfast. French breakfasts are better than Irish or Scottish breakfasts, which might as well be concocted by Lipitor salesmen.

What is most striking to me about the allegations is that an FBI agent seeking a search warrant maintains that Spangler failed to disclose to clients that he was investing their assets in high-risk private companies. Apparently, that is what the special FBI agent and some former clients believe.

But as long ago as the late 1990s, Spangler certainly let many others in the business besides me know that he was doing exactly that. At Napfa's annual conference in Minneapolis in 2000, he talked about his firm, which worked with high-net-worth clients, many of whom had earned sizable fortunes at entrepreneurial Seattle-based companies such as Microsoft and Starbucks, and discussed in limited detail its venture capital activities. He described his firm as being structured like something "of a co-op" and said he thought one day some clients might buy the firm from him.

While these venture capital deals were outside the financial planning mainstream, it sounded perfectly plausible that clients who earned their wealth in successful VC-type companies could get easily comfortable with more of the same. He described one female client to me as a former Microsoft employee pre-IPO who then went on to become Employee No. 3 at Starbucks. Though I don't recall the specifics, I always assumed that a handful of his clients who made their money in technology companies were principals in some of these start-ups. One of his companies, Tamarac, is a generally respected portfolio rebalancing software company and a going concern.

The more problematic investment was now-defunct TeraHop Networks, which shut its doors in Georgia earlier this year. According to The Seattle Post-Intelligencer, Spangler and his clients invested about $51 million in TeraHop. At best, Spangler may be guilty of little more than failed client communication and making some lousy investments. But the FBI is investigating fraud and money laundering, while the SEC is looking into violations of securities law, and lawsuits are flying. The affidavit cites one particular client, M.V., as a former Microsoft employee who specifically indicated he did not want to invest in small, high-risk private companies and discovered otherwise when TeraHop was on the skids.

Even if the actual outcome is legally favorable to Spangler, the whole affair raises a series of questions. Spangler is the second former president of Napfa to run into trouble with risky, illiquid investments in the last three years. It's unfair to tar a 2,000 member organization for the alleged behavior of two former presidents, but there are lessons here for all advisors.

In 2009, Jim Putman of Wealth Management LLC in Appleton, Wisc., was charged by the SEC with taking kickbacks from unregistered investment pools in which his firm had invested $102 million in client assets. Putman not only invested in private equity deals but also in life settlements that ultimately couldn't pay the premiums. One victim of Putman, who is well-known in this business, told me last year that whatever funds can be recovered will go to the lawyers. He retired from a successful mutual fund company five years ago and now, with his life savings lost, is out looking for work again. So here are a few of my questions.

1. How many financial advisors are really qualified to make individual venture capital investments?

2. Is a client who has attained financial independence at one high-growth company necessarily qualified to make more VC investments?

3. Does a client who is set for life need to make high-risk investments?

Moreover, Spangler's direct involvement in these companies-at various junctures he served as chairman of both Tamarac and TeraHop-raises obvious conflicts of interest. The FBI agent claims that at numerous times, funds were transferred out of mutual funds such as Longleaf and Pimco into the two concerns-he cites e-mails transferring funds to help Tamarac make its payroll-and that disclosure to investors about these transfers was either non-existent or fuzzy.

Beyond that, advisors I respect who invest in private equity or hedge funds of funds for clients have no or very little direct involvement in the actual investment selection process, much less the management of the underlying companies themselves. They have full-time jobs and don't have the time. At some of the bigger RIA firms, the research departments will often have one associate or principal who evaluates hedge funds, another for mutual funds and a third for private equity. For one or two people to try to perform these tasks, manage actual companies and serve as an advisor to clients is overwhelming.