Complaints Soar Against Brokers, Rise Less For Advisors
Both investor complaints and arbitration claims are escalating, thanks to the bearish market, chagrined investors and perhaps some less-than-savory sales practices.
Arbitration claims against securities professionals were up 22% as of May, says NASD Dis-pute Resolution Inc. President Linda D. Fien-berg. Customer complaints against brokers and advisors have jumped as much as 70% in 2001.
"Particu-larly striking is the increase in complaints for unsuitable investment recommendations and misrepresentations," says John Nestor, spokesman for the Securities and Exchange Commission‚s Office of Investor Education & Assistance.
Still, not all advisors should be tarred with the same brush. There has been a relatively small increase in complaints against registered investment advisors, but it‚s fairly miniscule compared with the flood of complaints against commission-based brokers and advisors. "We are careful to ask whether the investor work-ed with a broker or advisor, and if there appears to be any error, we‚ll call the firm to confirm," says John Gannon, deputy director of the SEC‚s investor-education office.
In 1998, there were 419 total complaints against SEC-registered investment advisors, 389 in 1999 and 397 in 2000. So far this year there has been a slight uptick, but not a significant one. However, the case of Stevin Hoover, a Boston, Mass.-based investment advisor who was listed in Worth magazine‚s list of top advisors, drew attention. Hoover was accused of illegally transferring or misappropriating more than $450,000 in client assets.
Sales abuses top the list of grievances against brokers at both the NASD and the SEC. Fienberg says negligence or misrepresentation, churning, lack of suitability and margin-call complaints are dominating arbitration claims. The SEC‚s Nestor agrees. "Unsuitability wasn‚t even in the top 10 complaints last year, but it‚s quickly moved up to the No. 5 spot so far in 2001," he adds. What‚s No. 1? Misrepresentations.
It‚s more the market than broker wrongdoing, Fienberg maintains. "I haven‚t said to brokers, ‘You‚re doing something wrong.‚ All I‚ve said is there‚s a 22% increase in claims. My speculation is that claims are caused by a number of things. The market has turned down precipitously, more people than ever before are investing, and more people bought on margin. We‚re telling investors they need to be careful and check brokers‚ CRD records and not buy from brokers who are cold calling or who they don‚t know."
Fidelity To Launch Wealth-Management Offices
Fidelity Investments plans to open private wealth-management offices in affluent areas to attract well-heeled clients, Financial Advisor has learned.
The investment company, which historically has preferred to leave financial decision-making to its clients or work through intermediaries, has formed a Wealth Management Group to better target the affluent. It plans to open a wealth-management office in Palm Beach, Fla., this summer, among others.
The wealth-management centers are among a series of steps Fidelity is taking to court the affluent market at a time when these investors looking for advice. At least some of the new services are designed to compete with Schwab‚s Signature Services and the Merrill Lynch Private Client Group. Fidelity is also expected to offer to help affluent individuals find independent financial advisors who use Fidelity‚s custodial and clearing services.
In May, Fidelity launched an Advisor Access Service, which began matching investors with at least $250,000 in assets to private money managers.
The wealth-management centers are expected to target individuals with net worths of at least $500,000. But a premium service also is planned for people with a net worth of at least $3 million. In addition to money management, the new centers are expected to offer financial-planning services for wealthy individuals.
A spokesperson for Fidelity declined to comment. An announcement, however, was expected in late June.
Fewer Workers Confident About Retiring
In what may be a reaction to the volatile stock market and the softening economy, more workers have grown pessimistic about their ability to retire, according to a recent study. However, the majority think they‚ll have enough money to retire comfortably.
"There‚s no real panic out there–not yet," says Danny Devine, spokesman for the Employee Benefit Research Institute (EBRI), one of several groups that co-sponsored the 11th Annual Retirement Confidence Survey.
One of the survey‚s key findings was the first drop in worker retirement confidence since 1996. Sixty-three percent of respondents say they are either "very" or "somewhat" confident about retiring comfortably, down from 72% in 2000. Thirty-five percent say they are not confident about retiring comfortably, up from 28% a year ago.
But the lagging confidence apparently hasn‚t caused workers to spring into action because fewer of them say they have saved for retirement. Seventy-one percent say they have saved for retirement, down from 75% in 2000.
The survey didn‚t question respondents on what factors are impacting their feelings about retirement, but speculation is that the stock market, the economy and even rising medical costs could enter into play. One official says health-care considerations may play a larger role than some may think. "The decline in retirement confidence has occurred as public attention to the high cost of prescription drugs and long-term care has increased," EBRI President and CEO Dallas Salisbury says. "Fifty-one percent of those who retire early say it is for a medical reason, and confidence in having the funds for medical expenses or for long-term care is very low."
Another theory is that people have become more aware of retirement issues because of the proliferation of employee-managed retirement plans. As people become more aware, they also can grow more concerned, says Devine.
He notes that although the percentage of workers saving for retirement is down this year, it is still higher than at any other time during the 1990s, when the percentages were in the 50% to 70% area. "As we get more of those folks into systems, they become stake holders in their own retirement," he says.
The survey also found that despite more pessimism about retirement in general, faith in Social Security and Medicare continues to grow. Thirty-four percent say they are confident Social Security will continue to provide benefits of equal value to the benefits received today, up from 28% a year ago. Thirty-nine percent expressed the same confidence about Medicare, up from 35% in 2000. These percentages have been rising since 1995, according to the report.
The survey consisted of telephone interviews with 1,000 workers and retirees in January and February 2001. In addition to EBRI, it was co-sponsored by the American Savings Education Council and Mathew Greenwald & Associates, a Washington D.C.-based market-research firm.
Will Retirement Ceilings Be Lifted?
The Senate Finance Committee and staffers were working around the clock to prepare their tax-cut bill for a floor vote scheduled for mid-May. The bad news? The retirement-plan stimulus package approved overwhelmingly by the House on May 2 was moving more slowly through the Senate than was hoped.
Many thought the retirement package, which would raise maximum annual contributions on IRAs and retirement plans, would be part of the tax-cut bill, but that hadn‚t happened. Financial-services lobbyists say the retirement initiative could be introduced as an amendment when the tax-cut package gets to the Senate floor, or it could be considered separately. "The thing is just so damn popular, it will have to fly, even if it‚s not in the Senate Finance Committee mark," says American Council of Life Insurance spokesman Jack Dolan.
The retirement package would cost $52 billion over 10 years, compared with President Bush‚s $1.25 trillion tax-cut plan, and would ratchet up the amount Americans can save in their IRAs from $2,000 to $5,000 annually over the next three years. It also would raise maximum annual retirement-plan contributions from $10,500 to $15,000 over five years, increase plan portability for workers and reduce plan-vesting periods to three years from the current five years.
A similar bill cleared the House last year but was waylaid in the Senate when former President Clinton announced his opposition. The Bush White House is supporting this bill.
Veteran advisor Eileen M. Sharkey, chairman of Sharkey, Howes & Javer in Denver, says the change is "long-overdue recognition that some people will be retired longer than they work."
College Savings Falling Short
Saving for college tuition remains a top priority among families–but more in concept than in practice. That‚s the conclusion of a recent study that found 41% of respondents were saving far less than they needed.
"Parents could be in for an unpleasant surprise when the time comes for them to pay for their children‚s college education," says Elaine M. Sullivan, senior vice president and director of education savings for Putnam Investments, which commissioned the survey. "However, if they have a realistic idea of what college will cost and learn to use existing investment vehicles, they will be in a better position to help their children."
The survey–which polled 499 adults with children or grandchildren who plan to go to college–found that 41% expected to save $20,000 or less by the time their youngest children were ready to attend college. That, Putnam says, compares to an average price of $45,000 for in-state residents to study for four years at a state college.
Still, 86% of respondents described saving for college costs as their "top priority." And, despite the finding that 41% were lagging in their savings, 67% felt confident they could pay for their children‚s education.
The discrepancy between what parents feel is important and how well they save is not unusual, says Dr. Richard Geist, a Harvard Medical School instructor and president of the Institute of Psychology and Investing in Newton, Mass.
"Psychologically, most parents focus heavily on their children‚s present needs rather than their long-term financial requirements," he says. "In addition, the future costs of college are so overwhelming that they use denial to cope with their anxiety."
The survey also found that:
• About half of respondents save money on a monthly basis for future college costs, and 59% say they would save more if they could contribute to a plan through payroll deductions.
• Few people were using tax-deferred college savings plans. Only 7% use a Section 529 plan and only 12% use an Education IRA.
• Thirty-two percent had saved less than $5,000 thus far.
SEC Developing Investor Profile With Online Survey
The Securities and Exchange Commission is trying to get a read on the habits of individual investors, including what they want from a brokerage firm and how they use the Internet.
Investors are being invited to complete a Web-based survey the SEC launched in May at its www.sec.gov Web site. The survey will be taken until July 1.
"As technology continues to transform the securities markets, I‚m asking investors to share their experience and expectations with us," acting SEC Chairman Laura S. Unger says. "The survey results will give us valuable insights as we continue to develop programs and policies to help investors profit from technology while avoiding potential pitfalls."
Among the survey‚s questions is how much trading investors do with traditional versus online brokerage firms, how frequently investors trade and how they analyze risk.
Investors also are asked what qualities they look for in a stock broker, how much research they conduct before making a transaction and how they describe themselves as investors.
The SEC retained InfoQuest, an independent research firm, to conduct the survey and tabulate the responses. The SEC will analyze the results and issue a public report. The survey is filled out anonymously.
Managed Accounts, Wraps In Demand
Advisors‚ clients are taking a liking to separately managed and mutual fund wrap accounts.
In a poll of 100 advisors with an average experience of 20 years each, 40% say their clients are more heavily invested in managed accounts than five years ago. Thirty-eight percent say mutual fund wraps have increased in popularity during that time.
"The survey shows asset-based investing is becoming more mainstream for a growing number of investors," says Jack Sharry, president of the Private Client Group of Phoenix Investment Partners of Hartford, Conn., which commissioned the survey. "High-net-worth investors are finding that managed accounts–with their built-in tax efficiencies and portfolio customization–may suit them better than mutual funds."