Over the past year, the SEC renewed its commitment to focus on protecting our senior citizens from abuse and financial exploitation. As fiduciaries, Investment Advisers (IAs) must act in the best interest of their clients and put their clients’ needs ahead of their own. Most of you have already adopted policies and procedures to detect and report such abuse to the proper authorities. This makes it all the more disheartening when an Adviser abuses this position of trust, to exploit elderly retail investors.
In an ongoing case recently filed by the SEC, one firm’s deceptive marketing techniques, and failure to provide required disclosures is an example for other IAs. As you go forward in the new year with revamped marketing strategies, a “fake it until you make it” plan is not the right way to do business, and definitely not a way to keep trust within the industry.
Multichannel Marketing Mayhem
From January 2014 through December 2019, Springer Investment Management, Inc. (DBA Springer Financial Advisors) is alleged to have used deceptive marketing practices to lure in retirees and near-retirees into fixed indexed annuities in which Mr. Springer, the sole owner, had numerous undisclosed conflicts of interest.
Older Americans are the prime demographic for radio advertisements. Using a radio show, “Smart Money with Keith Springer,” and representing himself as a designated “Qualified Retirement Advisor,” retirees were lead to believe that Mr. Springer was selected to host the show due to his unique expertise. In fact, there is no such designation and more troubling, he paid to host and broadcast the show without disclosing this to any of these clients.
💡 If you’re going to do a radio show, podcast, YouTube channel or any other similar marketing, try building a following on your own. If you pay to host a show or to be a guest on a show, you need to comply with the disclosure upfront.
Springer Financial Advisors also distributed advertisements to appear as paid sponsored content on Forbes.com and Money.com. Springer directed employees to write these advertisements in such a way that they appeared as published work on these websites, and not paid advertisements, even having the word “published” at the top.
Springer also claimed in his advertisements that he spent “hundreds of thousands of dollars a year” on research, software, and portfolio monitoring. In fact, he only spent $3,000 a year on a Morningstar subscription, which was fully reimbursed by a third-party. He did, however, spend tens of thousands of dollars to hire internet search suppression consultants to prevent the SEC’s 2005 Order against him from appearing in Google search results. He also failed to disclose this Order to his clients.
💡 Good original content does well on its own. With so many avenues to write and publish, there’s no need for blackhat or deceptive methods. Try using LinkedIn to publish articles or your website to build a blog. Spending tens of thousands in good promotional practices and honest content is a much better investment in your business.
The Disclosure Devil is in the Details
After allegedly deceiving prospective clients into believing he was a retirement expert with a clean record, Mr. Springer placed clients into fixed indexed annuities, often recommending that clients sell securities in their existing retirement accounts to fund these annuities. His clients would never learn that while Springer’s standard advisory fee was typically 1% – 2% of Assets Under Management, he would receive up-front commissions for selling annuities that ranged from 5% – 7% of the product’s total value. Springer also received trailing commissions from the insurance companies that issued the annuities, and a bonus for selling a certain number within a given period. This was a substantial conflict of interest
Clients were also none the wiser that most of their managed assets were managed by a Third-Party Asset Manager. The Third-Party Asset Manager provided Springer with a number of benefits that created a conflict of interest, again undisclosed, including free marketing and web design, Morningstar subscription, and a $1,500 a month compensation for continuing their relationship.
The Third-Party Asset Manager relationship was further hidden in portfolio selections. The Third-Party’s fees depended on which portfolio the client selected. Springer’s fee depended on the difference between the total fee he charged his clients and the Third-Party Asset Manager, giving him an incentive to recommend the cheapest portfolio.
No ADVantage to Non-Compliance
On top of all of the false advertising and undisclosed conflicts of interest, Springer failed to update his ADV, deliver his ADV to clients, maintain books and records, and failed to maintain a compliance program. He simply had a set of procedures drafted in 2009, and despite changing his business substantially since then, it was never updated.
As a financial industry professional, it is your duty to provide full and honest disclosures to clients and to put their interests above your own. We understand the challenges to keep up with the ever-changing nature of your disclosure requirements. If you have questions regarding requirements, please contact the Red Oak team today.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes.