Editor’s Note: Nathan Gehring, CFP, was a financial planning assistant at Wealth Management LLC from late 2005 through 2008. His role was to assist senior financial planners with analysis and implementation of financial planning advice for clients. What follows is his opinion of what went wrong at the firm that ultimately led to charges against James Putman and another firm principal.

Was a client about to walk in the front door with a gun locked and loaded? We didn’t know. We couldn’t be sure. We knew there was fear and anger. We knew client’s lives had been destroyed. We knew clients should be unimaginably furious. So we kept the building doors locked.

It’s every financial planner’s worst fear ... watching clients’ hopes and dreams, and security and future, slip away. You may have experienced this in 2001 and 2008 as clients’ portfolios plummeted. I lived it every day for months in 2008 while working at Wealth Management LLC of Appleton, Wis., where a series of events led to clients’ wealth being reduced to pennies on the dollar in a matter of a few months. The SEC placed the firm in receivership and accused two principals of a variety of improprieties, most notably that they received undisclosed compensation through a “kickback scheme” and breach of fiduciary duty.

It has taken years for me to really understand what went wrong at Wealth Management LLC. It has been difficult to come to grips with the fact that this series of events was not the result of evil people doing evil things. And after much time, exploration, introspection and study, I’ve learned that what happened at Wealth Management LLC is not all that different than what is happening at financial planning firms across the country. What happened was profoundly simple, yet incredibly damaging. What happened was that we simply had no idea what the real impact of our advice was.

At Wealth Management LLC, we didn’t really know what we were doing and we didn’t understand how our advice would impact clients’ lives. Sure, tons of internal research was performed. The financial planning staff was well-trained and followed practice standards and offered advice based on conventional professional wisdom. The investment team seemed (I say “seemed” because I did not work in this department, but observed from the outside) to be constantly performing due diligence work, was continuously researching new ideas and testing theories. But we didn’t understand how the tools and strategies we were suggesting would impact our clients.

This Was Not A Story Of Evil

Let’s get one misconception out of the way from the get-go. Jim Putman and Simone Fevola, the two principals who the SEC targeted and pursued, were not evil people. They did not sit in mahogany-lined, smoked filled rooms diabolically crafting a master plan to enrich themselves and ruin everyone around them. If you write these guys off as evil and different than the rest of us, all learning is out the window. After all, what’s there to learn about yourself and the way you practice by looking at what two evil people did? You’re not evil, right?

No, these were two humans, not so different than you or I, who made a poor decision or two. These were two humans who are flawed as each of us is. And much more frightening to me, these were two humans who I believe truly and deeply wanted to help their clients.

The reality of what happened at Wealth Management LLC that caused clients tremendous harm is far scarier than people choosing to do evil.

A Culture Of Fiduciary

At Wealth Management LLC, there was an extremely strong culture of fiduciary. Wealth Management LLC is where I first became aware of the concept of fiduciary and became indoctrinated with that way of thinking. Every element of what we did at the practice from financial planning advice to investment management services to client service to compliance revolved around doing what was in the best interest of the client. Everyone from CEO to receptionist was encouraged to respectfully call out any other staff member when something felt as if it might be straying away from the fiduciary culture.

Professional staff was engaged in all sorts of training and educational pursuit to continue building the firm competency and to continue increasing the value and benefit of the work we delivered to clients. Financial planning staff was exploring life planning and legacy planning, learning about advanced estate planning law and techniques, and so on and so forth. Investment team staff members were pursuing the CFA, CAIA and other designations, constantly learning about new theories and investment vehicles and expanding their knowledge.

Tremendous effort was put into the culture of fiduciary at Wealth Management LLC. We were at every turn trying to do what was best for clients. Despite all of this, clients were greatly harmed. Clients who had invested in various private investment pools with Wealth Management LLC had their lives crushed. No recovery. No major bull market to make up lost ground. This was true lost wealth, and tons of it. There were long-retired wealthy people who had to find any kind of work possible or move in with children to make ends meet. There were spouses who had never worked and had to get their first jobs in their 60s.

As news broke on the disaster of the private investment pools, I don’t think anyone at the firm quite knew how bad the damage was going to be to clients’ lives. Over several months, losses in their portfolios moved from small write-downs to indeterminately large losses. While you were watching markets knowing the pain, we sat in the dark, uncertain if a client now had 95 percent of their previous wealth or 5 percent.

During this process, staff became even more focused on working in the best interest of our clients. Water-cooler discussions often revolved around what we should be advising clients, who faced so much uncertainty and fear. As rank-and-file employees, we weren’t privy to many of the details, and this drove us to be laser-focused on doing what was in our clients’ best interest to the best of our abilities. We desperately wanted to do whatever we could to preserve their lives as much as possible.

Employees were frightened, both professionally and personally. As news reached us and clients about the mounting losses, we had no idea what might happen. There was a genuine fear that a client might show up with a gun. One afternoon, a news truck parked itself outside the building for several hours.

This was the backdrop that led me to an exploration of what went wrong at Wealth Management LLC. The conclusions I’ve drawn are frightening and have broad implications for the entire financial planning profession.

How Could It Go So Wrong?

How could it go so wrong? That’s the question I asked myself for a very long time. I spent a little over three years at Wealth Management LLC, and 30 months of that were likely the most exciting, invigorating, educational months of my professional life. I was transformed from someone “going to work” to a professional engaged in a profession and passion. The final six months of my time there could only be characterized as “hell,” where everything I thought we had been working for unraveled so spectacularly and painfully.

How could it go so wrong? Clients weren’t crushed because of the undisclosed compensation Putman and Fevola received, although this seems to be the prevailing opinion. Clients were crushed because the investment pools simply did not work as the investment team expected, which was exacerbated by the extreme liquidity crisis in 2008. Clients were crushed because Wealth Management LLC did what so many other planning firms do: offered strategies and advice based on internal research and opinion, and tried to do something to differentiate themselves in a competitive market. Clients were crushed because, instead of trying to help clients make good financial decisions based on the overall impact of those decisions, Wealth Management LLC provided advice based on theoretical economic benefit to clients. Client were crushed because our fiduciary focus was on (in words Jim Putman often used) “making clients money.”

The causes of the disaster at Wealth Management LLC can be seen at planning firms around the country. Four major factors seem to have caused the failure at Wealth Management LLC:

• Differentiating with untested strategies.  Financial planning lives in a competitive environment. Practices must compete with one another, with accounting firms, with wirehouses and insurance companies. Financial planning practices look for ways to stand out from the crowd, ways to give them an edge in a competitive market. This differentiation may be a specific geographical location or expertise and niche.

Often the differentiation relies on specific strategies that are touted as superior to standard practice. It might be an investment strategy (as was the case at Wealth Management LLC) or tax strategy or any number of other strategies. The strategy or idea may be grounded in solid thought and be theoretically very compelling, but not something that has been publicly vetted and tested.

• Disdain for academia. This certainly isn’t the case for all financial planners, but there seems to be a strong dislike for academics in the financial planning profession. I’ve seen this both in person and in online communities and discussions. Comments such as, “They don’t understand what it’s like to work with real people,” or “It’s easy to preach from their ivory towers,” often accompany discussions about academic research.

Undoubtedly, working with people and helping them make financial decisions in real life IS different than researching financial decision-making, strategies and ideas, but that does not invalidate the academic work! Yet, it seems many practitioners would prefer to simply ignore research that comes out of academia instead of trying to incorporate that learning into their daily practices.

At Wealth Management LLC, this disdain existed, but very quietly. Instead of understanding and accepting research on safe-withdrawal rates, the firm looked for strategies that would theoretically allow for a higher withdrawal rate. It was never stated outright, but implied in much of our work.

• A lack of awareness about one's own money biases. It’s been touched on by many writers and speakers: Many financial planners have not done their own work to discover their personal money scripts and biases. This lack of awareness can affect their personal financial lives and the service and advice they provide clients. The impact of an advisor's personal biases is unavoidable to some extent, but they certainly need to be understood.

Our own money scripts offer a tricky, unique conundrum for financial planners. Experience is a critical element in creating a great financial planner. It takes years of working with clients and learning how to reach people to truly become a financial planning professional. Yet this same experience can lead planners to take suboptimal positions. This experience can blind us to change. Experience can lead us to believe all people we encounter in the future will behave like people we’ve encountered in the past. This ends up leading financial planners to make well-intentioned recommendations that may ultimately fail.

At Wealth Management LLC, this was a strong factor. The entire reason the private investment pools were first considered and built was in response to the harm that had come to clients in the technology stock bust early in the millennium. An experience and subsequent money script (“Avoid equity market risk”) were at the root of a decision that ended up causing tremendous harm.

• A deep desire to help. By and large, financial planners are a group of people who have a deep desire to help our clients and to help people. We want to improve their financial lives, and their lives in general. We want to offer ideas and strategies that will make life a little better for our clients, that will allow them to have a bit more money or live a little more fully.

And this desire to help leads financial planners to constantly look for new solutions and ideas to replace those that have failed in the past. At Wealth Management LLC, the investment strategies that ultimately destroyed clients’ financial lives were born out of the desire to prevent clients from being harmed and allow them to live a life filled with more financial wealth. These strategies were researched and implemented well, and I believe truly came from a need by those involved to help people.

Add these four factors up, and an environment for harm has been created even while maintaining a fiduciary standard. These lead to a financial planning firm creating private investment pools designed to pay a steady income stream using a variety of alternative and sometimes bizarre investments, instead of considering old-fashioned time-tested investment vehicles.

Theoretical Economic Impact Versus Real Life Impact

Yet, these four factors are simply symptoms of one giant issue that impacts the financial planning profession, and an issue we seem to be ignoring entirely. I believe these four factors are symptoms that show that we don’t know what the real impact of our advice is!

At Wealth Management LLC, our focus was almost entirely on the economic impact (“making clients money”) of the advice we offered instead of on the overall life impact. Both the financial planning team and the investment team could put together spreadsheets and documents that would blow clients away and help clients make decisions understanding theoretical economic impact. But we had no idea how the decision would impact the clients’ lives overall. We didn’t understand how these things would play out in the real world. We had no idea what the real impact of our advice was.

When many financial planners help someone make financial decisions, we pretend only economics will be impacted. When we help them buy insurance or an annuity or a mutual fund, we help a client understand the potential monetary impact of this purchase. We choose to pretend that the overall life impact really doesn’t matter.

Yet, every decision we help a person make impacts many parts of their lives. Sure, there’s some theoretical economic impact, but there’s also behavioral impact and emotional impact and physical impact and social impact. For example, carrying debt has been tied to an increased incidence of depression. But do any planners raise this with clients when making debt payoff decisions? How can we not help our clients understand this dynamic? Worse yet, depression has been shown to increase poor financial decision-making. So through a vicious cycle, the non-financial impact ends up having more financial impact.

When you recommend a client stay invested in a strong down market (a position with plenty of research suggesting it is advisable), do you know how this impacts your client’s emotional and physical well-being? What if taking this position increases the likelihood of that client making other poor decisions?
 
If you touch a client on the shoulder when they walk in your office as a gesture of kindness and friendship, do you realize that you may have increased their willingness to accept greater financial risk?

This is not stuff we can ignore. The real-life impact of the way we are with clients and the decisions we help clients make is critical to doing great work. A great economic decision that creates negative life impact is not a good decision.

Wealth Management LLC Redux

The harm caused clients at Wealth Management LLC is incredible. We didn’t know what the real impact of our advice was going to be. Not only were the private investment pools based on theoretical research with poorly understood risks, but we didn’t know how that type of investing would impact clients emotionally or physically. We didn’t know what the real impact of our advice was.

And I fear something similar may be happening in your practice today. It might not be something as big and obvious as private investment pools. And it might not be something that causes the massive, sudden harm that Wealth Management LLC did. But even a series of small pieces of advice with all sorts of unintended consequences can lead to dramatic harm.
 
As a profession, we simply don’t know what the real impact of our advice is. And we don’t seem to be trying to figure it out.