Facing RIA Trouble, Rhoades Quits NAPFA Board

Facing RIA Trouble, Rhoades Quits NAPFA Board

Ron Rhoades’ decision to step down as chair-elect of NAPFA may have been inevitable, but industry observers view his compliance error as a relatively minor mistake.

Ron Rhoades’ decision to step down as chair-elect of NAPFA may have been inevitable, some industry observers said Tuesday, even though they viewed the compliance error at his RIA that sparked the move as a relatively minor mistake.

The National Association of Personal Financial Advisors, whose 2,000 members practice fee-only advice for clients, has been tarnished in the past by charges of investor fraud against former NAPFA officials, they observed.

“It hurts to see members harming NAPFA’s reputation. Maybe Ron Rhoades thought falling on his sword would be the best for NAPFA,” said Bernard M. Kiely, a CPA and former board member who runs an RIA with $55 million in AUM in Morristown, N.J.

“NAPFA is concerned about backlash. Unfortunately, too many members’ names have been appearing in print,” Kiely said.

Current Chair Susan John said Rhoades’ resignation was the right thing to do, but his compliance problem—failing to register his RIA with Florida in a timely manner—was out of proportion to the transgressions of other NAPFA officials.

“This is nothing like that whatsoever,” she said. “I think he did make an honest mistake in failing to register. That’s a serious error, even if you rectify the situation and no harm was done. That’s probably forgivable to some extent. But we want everybody who’s giving advice to the public to be registered.”

(On Thursday, Rhoades said Florida had agreed to register his RIA and would not impose a fine for the compliance oversight.)

Rhoades (right), an attorney and professor who chairs the financial planning program at State University of New York in Alfred, had been on NAPFA’s board for three years. He was due to take over as chair on Sept. 1.

An outspoken critic of suggestions that FINRA should take over regulation of RIAs from the SEC—Rhoades has called for FINRA’s dismantling—he was expected as chair to continue to press for rules that would protect RIAs. He also warned advisors about the need to improve practices.

Late Monday afternoon he sent an announcement to the media saying that he wouldn’t be serving as chair because of the compliance issue involving his RIA, ScholarFi Inc. The practice had $25 million in assets and about 20 clients, he told REP. last spring.

In his letter Monday, he said he had formed his firm in September 2011 as a state-registered firm in New York. He had 11 Florida clients, enough to warrant registration in that state, but Rhoades said he mistakenly believed he had until the first quarter of 2012 to register with that state. He said he learned of the mistake in May.

“Since then I have undertaken candid disclosures of all requested facts to the state, and I await their final determination of this matter,” he wrote. “While my mistake was unintentional, the violation of compliance regulations is nevertheless material in nature. The mistake was mine, and mind alone.”

Rhoades’ error follows a string of embarrassing news reports about NAPFA alumni.

Last spring Seattle investment advisor Mark F. Spangler, a former NAPFA board chair in the 1990s, was charged with defrauding clients of $47.7 million by putting their money into private investments without their consent. And in 2009 the SEC charged James Putman, a former NAPFA president in the 1990s, with accepting $1.24 million in kickbacks in connection with unregistered investments.

Rhoades did not respond to a telephone message or e-mail for comment. A spokeswoman for the Florida Office of Financial Regulation confirmed in an e-mail that ScholarFi filed for registration in February. The firm responded to a state request for more information, and the firm’s registration request is pending, the spokeswoman wrote, without elaborating.

Brian Hamburger, managing director of MarketCounsel, a regulatory consulting service in Englewood, N.J. for RIAs, said Florida takes registration errors more seriously than other states.

“The way Florida looks at this is as if he were an unregistered investment advisor giving investment advice in the state of Florida,” he said. “The vast majority of states would not even have given it a second glance and would have just registered him without any further questions.”

Florida regulators would want to know how much revenue advisors generated from clients during the period when they were practicing as unregistered in order to assess penalties in a settlement, Hamburger said.

Hamburger said he understood why Rhoades would resign, and why NAPFA would accept resignation.

“Knowing Ron the way I do, he holds himself to the standards that he seeks to hold other people to,” Hamburger said. “To him accountability means not having the opportunity to serve in that role.”

NAPFA “is out there to be a cut above the rest, to be the guys that are independent, fee-only, free of conflicts. They can’t continue to sustain having their leadership dealing with these issues,” he added.

Kiely said he was saddened by the news that Rhoades had left. The move wasn't commensurate with the problem at Rhoades' RIA, he said.

"It’s not like robbing a bank,” Kiely said. "Personally, I think he’s overreacting. He should have sent out a letter and said, 'Folks, I goofed. I was supposed to file in Florida and I didn’t, and when I realized my mistake I rectified it.'”


(This story was updated to reflect Rhoades' announcement on Aug. 23 about the Florida regulators' decision.)


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