‘How Do I Know You Won’t Steal My Money?’

Journal of Financial Planning: February 2012​ 


Vern C. Hayden, CFP®, is president of Hayden Financial Group LLC in Westport, Connecticut, author of Getting an Investing Game Plan, and contributing editor to TheStreet.com.​

If a prospective client asked you that question, how would you answer? At first the question stunned me when I was asked it about nine years ago. My mind had gone suddenly rigid and I thought to myself, “How do I answer that question?” I quickly realized there was only one obvious answer: “You don’t.” Then I discussed with him what questions he should ask and what legal safeguards he should look for. He became an excellent client.

Not long ago my partner and I were playing in a handball tournament. We made it to the final match. We had won one game and lost a second tightly contested game. That sent us into an 11-point tiebreaker—whoever reached 11 first would win first place in our class. We were tied at 10 points each. Our opponent had the serve and I returned it with no problem. In the middle of the volley I heard my partner yell out the fateful word “wrist!” that meant he had hit the ball just above the wrist line. He had hit an illegal shot, giving our opponent the winning point. No one else knew he had hit a wrist shot. I immediately went over and shook his hand and said, “Good call, partner.” He thanked me because a lot of other partners would be cursing him out for making the call and losing everything. No one else knew it had happened, but Brett has character and made the call. I have a coffee cup that says, “Handball doesn’t build character, it reveals character.” Many of you have the same saying in a different context.

Back in 1975, George Foreman was fighting Muhammad Ali in the “Rumble in the Jungle” in Zaire, Africa. Foreman’s young attorney was with one of the most prestigious law firms in San Francisco. The young attorney was referred to me for help in putting together an investment plan that would include significant tax savings. I realized the situation was above my skill level, so I invited a highly respected financial planner, Mitchell T. Curtis, to help me. Mitch became the architect of a wonderful plan, and the young attorney loved it and thought it would work very well.

As Mitch and I were leaving his office, the attorney asked me to stay behind to go over something. Mitch and I agreed to meet later in a nearby coffee shop on Sansome Street. Now alone, the attorney asked me how much money we would make if he did everything we suggested, and then asked me if we could split the commission with him and pay him in cash. I said I had no problem sharing the commission as long as he was properly licensed and it was fully disclosed to his client. He said that could be a problem, but he would think it over.

That was the last time we ever heard from him. But not the last time we heard about him. It was only 10 months later that we saw his name in headlines in the San Francisco Chronicle announcing a young attorney with a prestigious law firm was up for disbarment. The story was all about how he authorized sleazy tax shelters while taking cash under the table. The tax shelters had already started to turn bad. I often wondered if George ever knew about the rest of the story, as I watched him sell George Foreman Grills on television.

Why do I bother you with these stories? Because these are not academic or journalistic or legal exercises. These and many others are from what I call “the mud of the marketplace.” It isn’t a position, a law, a standard, or a designation that determines a person’s honesty. It is good character.

Fiduciary in Name and Deed

Here are some practical observations about laws and standards of behavior. Foreman’s attorney was subject to a fiduciary standard. He failed to meet it. Mitch and I were not but behaved as though we were. All our attempts to create laws and standards such as fiduciary in an effort to serve clients better are commendable and necessary but will not change the evildoer.

It may be true that it is possible to move from a suitability standard to a fiduciary standard and create a greater degree of sensitivity for what is right for a client. Certainly there is more accountability.

Fiduciary can change the way people behave but not necessarily how they believe. If you don’t believe in doing what is right for a client, and yet claim to function as a fiduciary, you have a flawed character, which I hope will be revealed at some point.

There are mistaken impressions about being a fiduciary. As a fiduciary an adviser can sell and take commissions. It’s all about how it is done with a client. In a twist of circumstances, if I am fee-only and know of an excellent product that would be good and right for my client but will not use it because it pays a commission, am I fulfilling my fiduciary duty?

We can argue and discuss positions on fee-only, fee-and-commission, and commission-only all day. It has of course been done to exhaustion. Likewise, we can argue about services and products. For instance, there are excellent non-traded REITs and excellent indexed annuities, and there are terrible ones. Some choose to paint their criticism with an indiscriminate broad brush.

I remember back in 1988–1989 the Institute of Certified Financial Planners (ICFP) sponsored a board called the Financial Products Standards Board. The legendary and highly respected Henry Montgomery, CFP®, was chairman. He asked me to be a marketing adviser to the board. As I walked into his office one day I was amazed to see mutual fund prospectuses on display in plastic pockets on the wall. Most were load funds. One of the points Henry made to the board was that there were good and bad investments in most categories of investments. The task of the board was to establish standards and guidelines that could be used to pick the good ones. I believe it was able to finish three standards (mutual funds, limited partnerships, and annuities) before running out of money. It became apparent that there was not overwhelming support for the projects the board wanted to work on.

Character: What’s Inside

One advantage of being age 75 and in business for 43 years (4 years as a life insurance agent and 39 as a financial planner) is that I have seen clients age from their 30s to their 70s. Some did not stay with me over that long period for various reasons, not the least of which was a move from the West Coast to the East Coast in 1983. The handful I maintained a relationship with made it into a successful retirement. I made commissions and fees along the way. It wasn’t how I made the money; it is what I did for and with them that mattered.

The point of all this conversation is that there is a kind of behavior that is a result of external and objective factors. These are such things as securities and insurance laws and a suitability or fiduciary standard. Then there is a far more important kind of behavior. It is what comes from the inside of a person—character. If someone has excellent character, the rest is window dressing.

Another handball buddy is a retired FBI agent formerly in charge of the Santa Rosa, California, office. I recently spent time with him and his wife. In a discussion about this subject he said, “Vern, you and I both know that if we could just spend 30 minutes in the handball court with anybody we will know more about that person than 30 years of just knowing them.” It isn’t just making a “wrist” call. It’s about doing the right thing for a client.


General Financial Planning Principles
Professional Conduct & Regulation