CRIME DOESN’T PAY, BUT STOPPING IT DOES

As bees to honey are drawn, so, too, are crooks to money. Today, more and more money — significant money — is in the hands of individual investors, so the growing financial planning field is certain to attract more and more shady operators, corner-cutters and outright crooks.

Of course, most financial planners and investment advisers are honest. (Indeed, there probably are no more dishonest planners and advisers than there are dishonest lawyers or accountants or journalists.) But that’s not enough of a comfort. Even a few crooked advisers cannot be tolerated. The damage they can do to an individual’s economic well-being can last a lifetime, and that damage often occurs past the midpoint of a working life, making recovery much more difficult.

Therefore, the Securities and Exchange Commission’s stepped up oversight of the sales efforts of independent financial planners, and the recent response by brokerage Royal Alliance Associates to spend up to $35 million to beef up its compliance efforts, is welcome news.

As InvestmentNews reporter Howard Kapiloff wrote last week, the SEC pressure is persuading SunAmerica Inc.-owned Royal Alliance and other companies that provide brokerage services and licenses to independent advisers to spend big money on broker oversight. Some are improving their central office computer technology to better monitor the accounts they service for independent brokers. Others, like Royal Alliance, are hiring regional managers to watch over reps and branch managers who might stray by recommending unsuitable investments, misrepresenting products or churning accounts.

Brokerages will first have to absorb and then find ways to defray these continuing expenses — preferably by finding efficiencies elsewhere, rather than by increasing the costs to customers.

And these pricey efforts must be considered a mere down payment, because the battle against crooks will be a continuing one. The bad guys will not stop trying to find ways to rip off the unwary investor or to create methods
to outwit corporate or government oversight. That’s a key part of a being a bad guy, after all.

Call it a necessary expense. Better yet, call it an investment. If too many crooks rip off too many individual investors, the brokerages, and then the whole financial planning industry, will be dealing with an angry public. The cost of that scenario could be far more expensive than preventive oversight.