Once brokers are out, keep them out

Brokers who sell investment products are licensed for a reason. So, too, are financial advisers who charge fees for financial planning. It is the system under which we live, and by and large, it works. The greater-fool theory, however, is built into this system, and so unsuspecting investors do get fleeced by hucksters out to make a buck. A look through a few issues of InvestmentNews undoubtedly will turn up at least a couple of stories of brokers or advisers rapped on the knuckles — or worse — for selling inappropriate investments to investors, misrepresenting themselves or an investment opportunity, or breaking other rules. Where things break down, unfortunately, is when brokers or advisers get kicked out of the business. In too many cases, such brokers, rather than going off and finding another line of work, return to financial services under the guise of a radio talk show host, investment coach or maybe a newspaper columnist. And because they know that easy money can be made from unsuspecting investors, they are more than happy walking the fine line between simply offering opinions and offering advice. Indeed, many go over that line, and there is nothing anyone can do about it. Take the case of Dan Levin, for example. InvestmentNews senior columnist Bruce Kelly recounted his tale last week. Mr. Levin has a radio show called “Investment Talk,” but it would appear that he does more than just talk. The website for one of the Dallas radio stations that broadcasts his show and his own website make no mention of the fact that he lost his license to sell investments as a broker last September and hasn't been licensed to give investment advice as an adviser since last June. Rather, the website talks about how Mr. Levin “specializes in helping his clients work toward achieving their financial goals. After thorough analysis, he creates a detailed investment portfolio emphasizing diversification, asset allocation and alternative investments.” Mr. Levin may not directly sell investments or planning advice via his radio show and, hence, can't and shouldn't be accused of breaking any laws. But he should be upfront and transparent about his scrapes with regulators and the loss of his licenses. Worse than Mr. Levin's walking the line between free speech and breaking the law is the case of two independent registered representatives who violated securities laws but remain in the financial advice business by calling themselves teachers or wealth coaches.

PONZI SCHEME

Mr. Kelly wrote about these two former reps, Frank Bluestein and Jeffrey Forrest, in March. According to his report, Mr. Bluestein was at the center of the $250 million “Ed May” Ponzi scheme, while Mr. Forrest sold close to $40 million of a faulty hedge fund that invested in high-risk and subprime-mortgage investments. A U.S. magistrate has recommended that Mr. Bluestein, who is already suspended, be barred from the industry. Mr. Forrest was barred by both the Financial Industry Regulatory Authority Inc. and the Securities and Exchange Commission four years ago. Therein lies the problem for the financial advice industry. Once brokers no longer are registered with Finra, the regulator effectively loses jurisdiction over them, and they are free to reinvent themselves and return to the easy-money trough of selling investment products or strategies behind the guise of something else. Some might view these cases as outliers in an industry in which 99% of practitioners are straight shooters, and that may be the case. But on the other hand, barely a week goes by without either Finra or the SEC issuing a news release about nailing crooked brokers or advisers. To be sure, there are bad apples in every industry. But if the financial advisory business is to become a true “profession,” pressure needs to be put on regulators, both on the federal and state levels, to include some teeth in their censures and bans so those who are kicked out can't simply come back by calling themselves something different, then claiming that they aren't really doing what they have been barred from doing. In addition, advisers need to be sure that their clients are aware that these snake oil salesmen are out there trolling for dollars from unsuspecting investors — even if they say that they aren't.