Case Study: Orpheus Financial Advisors

Orpheus was an extremely successful, and very well respected financial advisory firm with offices throughout the United States. Orpheus had a reputation for well-trained advisors and was known to be very selective in terms of the investment managers they would recommend to their clients. As a result, Orpheus clients tended to stay with the investment choices they were recommended for an average of ten years. The average for other platform managers was less than five year. As a result Orpheus was a very desirable platform for firms to get their funds placed on. Traditionally, Orpheus employed a commission based system to charge customers for its advisory services. That is, customers would be charged for specific securities transactions executed on their behalf. Mutual fund transactions would be paid by the fund family based on the initial sales charge of the fund in question. In 2005, Don Shipman, the Senior Vice President of sales convinced Orpheus management and board to also offer investment advisory services on an asset fee based system. Clients would be charged a fixed percentage of their assets under management no matter which or how many transaction they generated. Management and the board approved and the new program was rolled out late in 2005. The new program became immediately very profitable. Branch offices enrolled a large percentage of new customers in the fee-based rather than commission-based program and many existing commission-based accounts were converted to a fee-based compensation system. Shipman and Daryl Greene, the Chief Compliance Officer, agreed that this new business vehicle did not require any addition supervisory systems or written procedures. They continued to rely on their existing supervisory system, which was directed towards its commission-based business, nor did they monitor their fee-based accounts for transaction activity. In 2007, a client, Rose Garcia, seeing the fees applied to her account increase substantially complained to her Orpheus rep. He explained that her account was now being charged under the fee based system which the rep asserted was appropriate for her portfolio and investment profile. Rose was very conscientious and had all of her statements and activity reports for 2006 and 2007 and on reviewing them confirmed that she had made no trades during those years. She was a conservative, buy and hold investor.

1. Identify the principal actors

2. Identify the stakeholders

3. Determine if there have been ethical or regulatory breaches and what principles have been violated.

4. Determine if there has been material harm to any stakeholder and what steps are required to mitigate or correct it.

5. Discuss any other issues of ethics, compliance or good governance that extend beyond the immediate details of this case.