Royal Alliance Ups Ante For OSJs

AIG Advisor Group‚s Royal Alliance unit is raising the minimum production requirement for reps to open and manage their own office, or "bonus group," in the firm‚s terminology. The move, which is likely to be viewed as both bold and controversial, reflects the desire of Royal‚s management to focus on recruiting larger offices and providing them with upgraded services.

As part of the move, Royal plans to review all manager-based contracts with offices generating less than $400,000 in annual fees and commissions and enter into new contracts generating more than $1 million in annual revenues.

Existing bonus groups under $400,000 may face the choice of having to grow their revenues, merging with another Office of Supervisory Jurisdiction (OSJ), getting grandfathered because of their long history at Royal or leaving the firm. AIG Advisor Group includes two other broker-dealers, Atlanta-based FSC Securities and SunAmerica Securities in Phoenix, and OSJs who decide to leave will be encouraged to move to either of these sister firms.

Mark Goldberg, CEO of Royal Alliance, acknowledges that the new strategy is likely to anger some smaller reps and prompt rival brokerages to portray Royal as elitist. "I expect rivals to recruit small reps against us," he says. "But we have to define who we are in the marketplace. We‚re looking to recruit only 15 to 20 premier practices a year. This strategy enables us to ensure that we can maintain our payouts and service quality."

For more than a decade, Royal Al-liance has offered OSJs some of the highest payouts in the independent brokerage universe. Greater economies of scale among its OSJ network would reduce pressure on its thin margins and also ease the burden of compliance and supervision. Coincidental with this program, Royal plans to slash ticket charges on mutual fund and securities transactions.

At present, Royal has about 2,700 reps dispersed among 320 offices, or an average of just over eight reps per office. Goldberg says his goal is to shrink the number of firms to about 250 while increasing the number of reps to about 3,000, for a ratio of 12 reps per office.

Pivotal to the success of the strategy will be the acceleration of Royal‚s attempt to shift recruitment of reps doing between $100,000 to $300,000 annually from the home office to branch managers in the field.

Should the National Association of Securities Dealers require all brokerages to have a compliance officer in every branch office, Royal would find such a rule much easier to satisfy than most of its rivals, some of which have two or three reps per office on average.

Advisor Group Says Come One, Come All

It appears the crowded field of financial planning designations has gotten even larger. A group called the International Association of Qualified Financial Planners (IAQFP) has announced its designation–QFP–is now available to all qualified financial planners.

To qualify, a planner must have at least one of five designations: CFP, ChFC, PFS, The American College‚s MSFS degree or the College for Financial Planning‚s MS degree, the latter two with financial planning concentrations.

Planners previously had to be dues-paying members of the IAQFP to use the designation. The association decided to open the designation to both members and non-members "to bring about the realization of the one designation, one profession ideal," says IAQFP Chairman Paul League.

The association was founded in January 2003 and thus far has 200 members using the QFP designation, he adds. The effort by the IAQFP places it at odds with the CFP Board of Standards and the Financial Planning Association, both of which have embarked on a campaign to make the board‚s CFP certification the unifying designation for financial planning practitioners.

League says his association feels there are other designations just as worthy as the CFP mark. The emphasis on the CFP certificate, he says, "ignores the nation‚s other 60% of financial planners, who in many cases have met equivalent or more rigorous educational and other requirements."

The CFP Board had no comment. "As a rule, we don‚t comment on other credentials," says CFP Board spokesman Lance Ritchlin.

Others question whether the QFP is a real designation since it has no unique qualifications but simply requires one to earn another designation.

Securities America Tests New Transition Options

Securities America has developed an "incubator" program aimed at giving its reps an easier transition from a retail to an independent platform.

The independent broker-dealer is touting the program in conjunction with its recent acquisition of GWR Investments Inc., a broker-dealer and advisory firm that, like Securities America, is based in Omaha, Neb. It comes hard on the heels of a similar move announced by Raymond James Financial Services last month.

"One of the difficulties advisors have is to successfully move from a retail to a purely independent platform without suffering some client attrition," says Chris Flint, Securities America vice president for branch development. "We‚ve created a platform that allows them to graduate to an independent platform over a couple of stages."

The program is currently being tried in Omaha as a test before making it available to the rest of Securities America‚s branch offices. The three-tiered program starts with the "independent employee" model, in which a representative receives a payout of 45% to 60%. The ground-level programs provides benefits including medical, life insurance and 401(k) eligibility, office space, E&O insurance coverage, technology and infrastructure costs such as phone lines picked up by Securities America, Flint says. He describes it as the "ground floor" option that‚s designed to alleviate the headaches that normally take place during a rep‚s transition.

The second tier is called the "semi-independent" model, which requires reps to be doing a minimum of $250,000 in business. It consists of a $1,200 monthly service fee that covers the same administrative and technology services as the lower tier, but without the medical, insurance and 401(k) benefits, and a higher payout of 65% to 70%.

The top tier is the company‚s standard pure independent model, which consists of a payout of 92% to 95% and a $279 monthly service fee, which covers E&O insurance and technology, Flint says. This tier requires a minimum of $125,000 in business, he says.

Flint says he expects the program will be limited to Omaha for the remainder of the year before a decision is made on whether to roll it out nationally. "We‚re going to use this as the laboratory," he says. "At the end of this year we will evaluate if this is a desirable national platform."

Award Established To Honor Viragh

An award has been created in the name of Skip Viragh, who as founder of Rydex Investments became a pioneer in creating mutual funds geared specifically to advisors and their clients.

The award, created a month after Viragh‚s death in December, is sponsored by Rydex Investments in affiliation with Financial Advisor magazine.

The Skip Viragh Award will be presented annually "to a company or individual who offers a new and innovative service, benefit or product that positively impacts the financial advisor community and its clients," according to Rydex.

Applications will be taken until July 1 and the winner of the award will be announced at The Financial Advisor Symposium, which will be held October 6-8 in Chicago. The recipient of the award will have a wish funded in their name by Rydex Investments for a Make-A-Wish Foundation child. Financial Advisor magazine will also host an annual golf tournament in the name of the award to raise funds for the foundation.

Viragh founded Rydex Invest-ments in 1993 to fill what he felt was a void in the way mutual funds serviced registered investment advisors and their clients. During his tenure at the company, he pioneered the creation of the leveraged fund, an inverse equity fund, an inverse fixed-income fund and the first publicly available funds to be traded twice daily to investors at large.

The winner of the award will be chosen by an advisory board consisting of up to a dozen of Viragh‚s friends and family members and leaders of the profession.

Study Claims Investors Are Wiser

The rough-and-tumble ways of the stock market in recent years may have made investors hardier–and smarter, according to a new study.

The study of high-net-wealth individuals found that these investors are increasingly adopting the refined strategies of institutional investors to deal with the volatile market.

The study, released jointly by Merrill Lynch and Cap Gemini Ernst & Young, found that these investors were mirroring institutions in their use of active portfolio management, diversification strategies, proactive risk management and consolidation of financial assets to maximize returns and protect wealth.

In a section of the study that should be of special interest to financial advisors, it was found that these investors–those with investable assets of at least $1 million–were also demanding more sophisticated service and expertise from their advisors. "Investors are adopting a more serious, disciplined approach to making investment decisions, and a critical ingredient in that is using a financial advisor in the process," John Nersesian, a wealth-management strategist in Nuveen Investments‚ wealth management group, told Dow Jones Newswires in reaction to the study. "In the 1980s it was a ‘do it for me‚ process. In the ‘90s, it was, ‘do it myself.‚ And now, in this new decade, it‚s the ‘do it with me‚ approach."

The study found, for instance, that high-net-worth investors are increasing their use of managed products and real estate investments. This was reflected in the fact that managed accounts hit an all-time high of $500 billion at the end of last year. These investors were also seeking out other alternatives in an attempt to diversify, including commodities such as precious metals and hedge funds. This is partly due to investors seeking an alternative to traditional fixed-income vehicles, which have been slumping. Investors are also more cognizant of the need to use noncorrelated instruments as a way to guard against losses. Hedge funds, derivatives and managed futures have filled this role, according to the survey.

High-net-worth investors are consolidating their accounts for two main reasons, according to the study. One reason is to provide themselves with a single point of contact. The other is to be able to view their holdings all at the same time. For advisors, the study states, this means it‚s important to provide clearly stated, objective advice and innovative solutions.

The increased sophistication of these individual investors is not surprising, the study notes, since high-net-worth individuals were among the first investors to move from equities to fixed income in 2002. That trend started to reverse itself last year, it notes.

"In response, financial advisors will be expected to adopt practices that establish specific financial goals at the outset of the relationship with attention to tax sensitivity, risk management and outlook on transfer of wealth," says Alvi Abuaf, vice president at Cap Gemini Ernst & Young. "With the product market highly commoditized, providers will have to differentiate themselves through quality of service and the advice they offer."

Direct Investment Market Soars

Direct investment programs are experiencing a resurgence in popularity, largely through the real estate market, according to newly released data.

Sales of publicly registered direct investment programs reached $7.6 billion in 2003, the highest level in 15 years and up 76% from $4.3 billion a year earlier.

The 78% increase last year represents a growth trend that started after 1999, when sales of direct investment programs hit a 20-year low of $840 million. The peak of popularity was 1987, when sales were $10.7 billion.

"The direct investment market is back," says Larry Goff, chairman of the Investment Program Association in Washington, D.C., the association of the direct investment industry. "New investment has soared as investors recognize the diversification and attractive asset alternatives offered by this investment vehicle."

One of the trends underlying the growth is investors‚ desire for something that provides better yields than Treasury bonds along with capital appreciation, according to Robert A. Stanger of Robert A. Stanger & Co. in Shrewsbury, N.J., which tracks direct investment program sales.

"Direct investment programs can provide these benefits," he says. "The very strong growth in real estate programs in particular has been boosted by historically low mortgage debt costs and the continued outstanding performance of publicly traded REITs."

Among the trends in the latest sales data:

• Real estate programs are dominating the market, including equity and mortgage loan programs and untraded REITs. Real estate program sales totaled $7.3 billion, up from $4 billion a year earlier. Untraded REITs accounted for $7.0 billion of the total.

• There‚s been a consolidation in the overall industry. There are currently 29 sponsor firms offering 38 direct investment programs, according to Stanger. That‚s down from 296 sponsor firms and 404 programs in 1987. "The door is open for well-capitalized and experienced sponsors to enter this marketplace with investment products," Stanger says.

Calculating Capital Gains Gets Acrobatic

Figuring out capital gains rates is going to be a mind-bending exercise this year. Taxpayers will benefit from a smaller hit on long-term profits, but to get that smaller hit they‚ll have to wade through up to eight different rates for 2003.

As always, you‚ll have to account separately for short-term and long-term capital gains, but this year you‚ll also have to apply a five-month cutoff to certain profits. Ordinary income tax rates may be part of the equation, and on top of that, sales of art as well as certain investment property will have to be calculated separately.

"I expect more mistakes and tax returns to be wrong" because people will apply the wrong rates this year, says Mark Luscombe, principal analyst at tax publisher CCH Inc. in Riverwoods, Ill.

Here‚s a breakdown of the rules.

Stockholders who realized long-term gains after May 5, 2003, qualify for the lower top rate of 15%, or if they‚re in the lowest income brackets, of 5%. But those who sold before this time would still be subject to higher rates of 20% and 10%.

Additionally, if the stock was held a year or less, then ordinary income tax rates–instead of the lower capital gains rate–would apply. The good news is that last year‚s tax cut brought down the maximum income tax rate to 35% from 38.6%. On the long end, if you‚ve held the stock for more than five years, you may be eligible for an 8% tax rate.

One aspect of capital gains taxes that has remained constant: the 28% tax rate on profits from collectibles including art, stamps and coin collections.

Also, a 25% rate still applies to the portion of gains that has depreciated on real estate used for business or rental purposes.

Netting rules, for the most part, remain the same this year. In general, if you have more capital losses than gains, you can deduct up to $3,000 of your net losses from other income. As with past years, you want to offset long-term gains and losses, then short-term gains and losses. You just have to do one additional step–separate out post-May 5 and pre-May 6 gains and losses, and then offset each of these groups against one another.

Mixing ETFs And Separate Accounts

Investors with separately managed accounts who want a little more diversification–or a bit less risk–might want to consider adding exchange-traded funds to their portfolios.

Exchange-traded funds, or ETFs, initially were used mostly by large institutional investors. They are gaining traction among financial advisors and retail investors as a useful tool, particularly as a means to round out their investment portfolios or to hedge their bets in case their actively managed assets underperform their benchmarks.

Separately managed accounts, or SMAs, typically require hefty minimum investments of at least $100,000–though they have come down of late. But even at that level, some argue it‚s not possible to get enough diversification. After all, SMAs typically focus on one style–large-capitalization growth stocks, for instance–and they usually house fewer stocks than a traditional mutual fund.

Enter the ETF, which offers "a cost-effective way to deliver a complete asset allocation instead of having to try to meet investment minimums of separate account managers," says Valerie Coradini, director of sales strategy at Barclays Global Investors‚ iShares, its ETF product.

"Advisors might say they want 20% in small caps, but you can put half of that with an active manager and half of that in an (ETF), which is more likely to track the benchmark, where the active manager provides the possibility of excess returns," she adds. "It‚s a way to have one foot on the gas and one foot on the brake."

Using an ETF to complement a separately managed account, or any other investment for that matter, will become easier as investment firms adopt platforms–also known as unified managed accounts–that allow several investment types to reside in the same account. For instance Smith Barney, Citigroup Inc.‚s brokerage arm, rolled out its version of the unified managed account, called Integrated Investment Services, less than six months ago.

"Separate accounts are a great way for clients to gain exposure to many sectors of the market, but an ETF is a great way to complement that," adds Greg Ehret, director of national accounts at State Street Global Advisors. "Say an individual had only $200,000 or $300,000–you can‚t be fully diversified in a separate account with that amount of money. You may be able to afford a core manager, but to get the other (asset class) boxes, an ETF is an easy way to do that."

Clarification

Financial Advisor‚s March 2004 cover and related inside photographs were taken by Patrick McNamara, who is represented by Robert Bacall in New York. McNamara was not credited for the work.