Striking Out

Allan Roth

ROUGHLY 20 YEARS AGO, I left the world of corporate finance. I saw some of the ugly, high-fee undiversified products many of my friends owned—and how those differed from the ultra-low cost, disciplined investing at the companies where I had been a financial officer. I wanted to change things.

But after two decades, I’d say I’ve struck out. Still, there are lessons to be learned from my failures, as well as some encouraging changes occurring within the financial industry.

I started strong out of the gate. I met with Vanguard Group’s founder, the late John Bogle, and he encouraged and inspired me to become a financial advisor. I eschewed collecting commissions or levying a percent of clients’ assets, and instead charged by the hour. Soon, I was corresponding with some financial writers I admired, including William Bernstein, Jason Zweig and Jonathan Clements.

Months later, I was writing for what was then the big-time Money magazine. In an anonymous column called “The Mole,” I warned readers of the tricks of my trade and how to avoid being victims. I was committed to doing my part to ensure consumers got a fair shake. Here’s where I struck out—and the lessons for all of us.

Strike 1: Hold independent fund directors to their fiduciary duty.

I bought my first index funds in the late 1980s. Unfortunately, I hadn’t yet heard of Vanguard or John Bogle. Instead, I began with two giants, Dreyfus and Fidelity Investments. Over time, Fidelity did the right thing and lowered its index-fund fees. Dreyfus did the opposite and raised fees, trapping me and thousands of others between two bad choices—keep paying the higher fees or pay a large capital-gains tax bill to get out.

The Investment Company Act of 1940 dictates that the fiduciary duty of independent directors is to the fund shareholders, not the fund management company. The fund directors have the ability to negotiate fees or to change fund managers. Bogle introduced me to a senior officer at Vanguard who gave me permission to communicate Vanguard’s willingness to explore a tax-free merger of Dreyfus’s S&P 500 fund with Vanguard’s far lower-cost fund.

I sent a certified letter to Joseph DiMartino, the fund’s independent chair (and also the former Dreyfus CEO), in which I stated that a high-cost index fund had no chance of beating a low-cost index fund investing in the same S&P 500 index. I wrote that he would be violating his fiduciary duty if he didn’t explore this or use it as leverage to get Dreyfus to lower its fee. The Dreyfus legal department suggested we discuss a settlement that would require me to sign a confidentiality agreement. I declined.

I was sure the law was on the fundholders’ side. I was wrong. I later managed to get discussions going at high levels at the Securities and Exchange Commission, including a senior attorney reporting to the SEC chairwoman. In the end, nothing happened. I wrote about the SEC being too cozy with Wall Street. I sold all but a token amount of my Dreyfus shares. I wanted to hang on to a small amount, so it would remind me of one of my biggest financial blunders.

Lesson: Laws aren’t what they seem. Financial regulators may want to catch the Bernie Madoffs of the world, but that’s about it when it comes to consumer protection. Be your own regulator.

Strike 2: Stop advisors and brokerage firms from blatantly falsifying muni bond income.

In my practice, I saw client statements that showed the income on their individual municipal bonds was twice that of the interest rate of muni bond funds with roughly the same maturity and credit quality. The big muni bond funds got to buy in bulk—and yet the industry claimed that brokers could purchase smaller amounts earning much more. Baloney.

I discovered the muni industry’s simple but brilliant trick: Buy a muni bond at a premium that will mature or be called at par a few years later, and count that amortization of premium as income. Muni bond funds aren’t allowed to do this. On many occasions, I had to tell clients that the 3.5% tax-free income on their statement was really 0.5%, with the rest simply a return of their own principal. A typical response: “How is this legal?”

The muni bond industry is regulated by the Municipal Securities Rulemaking Board (MSRB), a self-regulatory organization that’s subject to oversight by the SEC. I sent a certified letter to the chair of the board, asking why this practice was legal and noting it’s the economic equivalent of an advisor saying they’re charging 1% when actually they’re withdrawing 3%.

The letter resulted in an invitation to come to Washington, D.C., to speak to Lynnette Kelly, the executive director of the MSRB at the time. She and her senior staff laid out a lovely breakfast just to meet with me—the nicest people you’d ever want to meet. Though no one argued with the point I was making, they noted that other parts of the bond market did this, though to a lesser extent.

In the end, all they did was invite me to write an educational paper that they would then put on their website. I did so. But when the edited version came back, it did more to continue to trick the public than to help, so I asked them to remove my name from the paper.

Lesson: The MSRB is a self-regulatory organization and, when a part of the financial industry regulates itself, bad things happen to the consumer. Really nice people are driven by financial incentives and, most of the time, that’s also bad news for consumers.

Strike 3: Help the CFP Board enforce the higher standard it touted.

I became a Certified Financial Planner because I wanted to be held to the higher standard the CFP Board claimed to enforce. Early on in my practice, I came upon a client who had a troubling portfolio designed by his previous CFP. The portfolio included a variable annuity where the CFP apparently couldn’t decide between charging a commission or an ongoing asset management fee, so he did both. This double dipping resulted in the client paying an estimated 5.29% annually.

When I confirmed the facts with the insurance company that managed the annuity, even it must have thought this crossed the line. The insurer offered the client a generous settlement, which the client took under the condition that he got to file complaints against the CFP in question. The client filed the complaints in 2008. Though I wasn’t surprised regulators took no action, I was confident the CFP Board would act. Wrong again.

The CFP Board said this was old news and, after that incident, that it takes enforcement of standards very seriously. But I pointed out that, for years, virtually every certificant that the CFB Board publicly sanctioned came after a regulator or a court took action. It was just a matter of time before the CFP Board would be exposed for falsely advertising that it enforced a higher standard.

That time came in 2019 when The Wall Street Journal revealed that more than 6,300 certificants—out of approximately 72,000—were shown as having clean records on the CFP Board’s search website but, in fact, had regulatory disclosures. Those disclosures included more than 5,000 who had received customer complaints, and 499 who had past or current criminal charges.

The CFP Board has its own board of directors, who are charged with holding senior management accountable. What did they do that year? According to the required filing, which I had to wait two years to see, they gave the two top officers hefty pay raises. Last year, the board’s chairman wrote me saying much has changed and claiming that the CFP Board now takes the establishment and enforcement of high ethical standards very seriously. Déjà vu all over again. The obvious conclusion: The CFP Board has given up on its mission to help the public.

Lessons learned: Talk is cheap. Those touting fiduciary duty and higher standards are perhaps more likely to be abusing clients than those who don’t. It’s easy to get fooled, as I was when I became licensed.

But where I may have failed in trying to get industry watch dogs to give consumers a fair shake, countless others succeeded in alerting consumers to some of these practices. Fund fees are plunging as much of the traditional media, as well as sites like HumbleDollar and, educate people on what they need to do to put their own financial independence ahead of Wall Street’s profits. These days, the mighty Dreyfus lion has become almost extinct and even the CFP Board is at least using advertising that’s less misleading. While I struck out with those that were supposedly protecting people, team consumer is scoring more and more hits—and may still win the game.

Allan Roth is a financial planner and writer. His investment columns can be found in publications such as AARP, Barron’s, and Advisor Perspectives. He’s the founder of Wealth Logic, LLC, an hourly based financial planning and investment advisory firm with the goal of providing a one-time plan. Allan is proud to have the lowest client retention rate in the business. He’s a licensed CPA and CFP, and has an MBA from Northwestern University’s Kellogg School of Management, but still claims he can keep investing simple—at least as simple as possible given the very complex tax issues in developing a plan. 

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