Levitt Disavows Brokers' RIA Exemption
Former Securities and Exchange Commission Chairman Arthur Levitt stunned attendees at TD Waterhouse's annual conference in Orlando in early February when, in response to a question, he indicated he was opposed to a proposed rule that would grant exemption from registered investment advisor registration for wirehouse brokers. Scheduled to go into effect this year, the rule had been proposed in 1999 by Levitt himself.
The dramatic reversal by the SEC's longest-serving chairman came in response to a question from Roy Diliberto, principal of RTD Associates in Philadelphia, who had personally lobbied Levitt against the proposed rule as president of the Financial Planning Association in 2000. Though be did not acknowledge his own responsibility in proposing the rule, Levitt urged Diliberto and others in the room to talk to the five SEC commissioners, since there are "two or three" whom he claimed were very sympathetic to independent advisors' viewpoint.
"I'd like to know who they [the commissioners] are, since I've talked to most of them," Diliberto noted, adding that if they were against the rule they certainly were not saying so. Other attendees speculated that the scandals that have enveloped Wall Street since Levitt left the SEC may have caused him to rethink the exemption.
Levitt also was questioned about why it was New York Attorney General Eliot Spitzer and not the SEC who uncovered the majority of these scandals. Levitt replied that there were issues on which "we couldn't seem to move," like the accounting and Wall Street analyst scandals. "I knew about this problem [Wall Street research] from running a brokerage," Levitt said. "And the accountants paid millions to seven lobbying firms to tie us up. We couldn't galvanize public, media and congressional support on this."
He also explained that the environment makes a difference. "Once Enron, Arthur Andersen and Worldcom happened, Spitzer made creative use of the Martin Act in New York state" to interject himself into the unfolding debacle, he said.
Raymond James Unveils AdvisorChoice Program
Raymond James Financial Services (RJFS) is expanding the number of possible business models for advisors seeking to affiliate with the St. Petersburg, Fla.-based firm. The new platform is designed to give advisors maximum flexibility in structuring their business and the ability to move from one business model to another as their career evolves.
"We're trying to restructure relationships with advisors and clients in ways that respect the relationship between advisors and clients," explains Bill McGovern, senior vice president of business development at RJFS.
The first business model is the traditional employee format, under which reps would be paid as employees with human resources support including insurance and qualified plan participation. Traditional employees would work out of a branch office with all expenses paid and retain a significant degree of control over their book of business.
A second option, the independent employee model, gives advisors greater control over how and where they work, but they still get the benefits of being a Raymond James employee. However, independent employees are expected to manage their own offices and assume all expenses, except for employee benefits. They can also pick and choose where they work, whom they hire and what type of furniture they want, while receiving higher payouts than traditional employees. RJFS management believes this model may hold special appeal to reps generating more than $500,000 a year in fees and commissions.
The independent contractor model is the third option and currently the most widely utilized at RJFS. Advisors in this category manage human resources, as well as payroll and administrative support, and can earn payouts of up to 90%.
The fourth option is the RIA model for fee-only firms. RJFS launched a separate division for fee-only advisors and is growing in that arena. McGovern says many prospective recruits in wirehouses ultimately want to move to a fee-only model. "But it takes time to register, so they could go to an independent contractor model and then transition to an RIA business," he says. "We can help people do that."
A fifth option is for financial advisors at community banks or credit unions to become independent contractors.
Would RJFS ever consider buying the business of independent reps and RIAs? McGovern acknowledges that the topic has surfaced but has yet to be fully explored. "We're not there yet," he says.
Custodians Report Strong Years In Their Advisory Business
Charles Schwab, Fidelity Investments and TD Waterhouse reported strong years in their advisor businesses last year.
Fidelity, the second-largest player in the advisory services industry behind Schwab, announced record growth in its advisor business last year. Assets increased nearly $40 billion, representing a 65% growth rate, according to the company.
Fidelity says it now custodies about $100 billion in RIA assets. The company also reported it entered into new relationships with 475 advisory firms last year, and custodied assets for a total of 2,100 firms as of the end of the year.
"In an increasingly demanding marketplace, advisors are looking for a stable, trusted custodian who understands their firm's distinct needs and who can help them drive business growth-on their own terms," says Jay Lanigan, president of Fidelity Registered Investment Advisor Group. "Our growth momentum clearly demonstrates the value advisors see in a Fidelity relationship."
Schwab's Services for Investment Managers (SIM) ended the year with $287 billion in client assets, up 29% from a year earlier.
Net new client assets in accounts at Schwab with an ongoing advisory component-including Schwab Private Client, accounts managed by independent investment advisors, U.S. Trust accounts, and the effect of Schwab's acquisition of State Street's Private Asset Management Group-totaled $41 billion during 2003, and total assets in these accounts equaled $436 billion at year-end, up 31% from December 2002, according to the company.
Schwab, reporting on Schwab Advisor Network, the client-referral portion of its advisor business, says the network closed 2003 with assets of $7.9 billion, up 341% from a year earlier. The network consists of about 325 independent investment advisor firms, all of which had to meet several criteria to participate, including having at least $50 million in assets under management and at least two principal partners.
Coming off the smallest asset base, TD Waterhouse's institutional arm practically doubled assets in custody to $30 billion in 2003. "Of the $10 billion we grew last year, $6.4 billion was net new assets and 70% of that came from the wirehouses," says Tom Bradley, president of TD Waterhouse's institutional services arm. "The larger advisors are bringing in more assets because of their scale."
Neil Simon Named FPA's Chief Lobbyist
The Financial Planning Association (FPA) has appointed a new director of government relations as part of an expansion of its Washington, D.C., office.
Neil Simon, a veteran lobbyist, was named governmental relations director and counsel. He will supervise FPA's lobbying efforts on Capitol Hill and in the 50 state governments, according to the organization.
The appointment comes shortly after Duane R. Thompson, who headed FPA's government relations the past four years, was named group advocacy director. Thompson will supervise FPA's overall advocacy program-which includes government relations, public relations and international relations-from the Washington office, according to FPA Executive Director Marvin W. Tuttle Jr.
"This restructuring allows FPA to take advantage of Duane's public affairs background and to coordinate more effectively FPA's outreach to the public and within the broader financial planning community," Tuttle says.
Simon was formerly executive director of the National Franchise Council, a trade group of the franchise industry. Previous to that, he was a counsel in the Washington, D.C., law firm of Hogan & Hartson LLP. He also served as a legislative director in the U.S. House of Representatives.
Act Would Nix 12b-1 Fees, Other Charges
Many common fund charges would be ended under the Mutual Fund Reform Act (MFRA), recently offered in the U.S Senate by a bipartisan trio. The 12b-1 fee would be prohibited because its original purpose "has been lost and its current use is confusing," according to Peter Fitzgerald, (R-Illinois), a sponsor of the bill along with Carl Levin (D-Michigan) and Susan Collins (R-Maine).
Loads could still be used under MFRA but would have to be more effectively disclosed along with other transaction costs. But "shadow transactions"-such as directed brokerage and soft dollars-would be ended because they "are riddled with conflicts of interest, serve no reasonable business purpose and drive up costs," according to the sponsors. The bill has the backing of Vanguard founder John Bogle.
Deposit Insurance Coverage Expanded
The FDIC Board of Directors has eliminated a hurdle to obtaining FDIC insurance coverage on deposits of more than $100,000 per person. If a bank fails, the FDIC will immediately provide insurance coverage up to $100,000 for each "qualifying beneficiary entitled to a living trust's account's assets upon the death of an account owner."
When a bank fails, the FDIC typically figures whether deposits are above or below its $100,000 insurance limit per person. If a client's money is in the "revocable trust" category, it can be more. One of the easiest ways for a client to claim more is to include a term like "ITF" or "in trust for" in the title of an account, and name family members as beneficiaries. With this set-up, the client's FDIC coverage typically is not just $100,000 per owner, but up to an additional $100,000 per beneficiary.
Under the old rules, however, the FDIC often was forced to eliminate FDIC coverage for added beneficiaries if the depositor also had a separate revocable living trust, drawn up by an attorney. Reason: 90% of living trusts have "defeating contingencies" or conditions. The most common is a clause that says the whole trust agreement is subject to being overruled by a separate will. Under the old rules, such a "defeating contingency" erased the added FDIC insurance coverage for beneficiaries. No more.
Now, "bankers, customers and the FDIC can easily determine the extent of deposit insurance without having to perform a legal analysis of the trust document," declares Karen M. Thomas, director of regulatory affairs for the Independent Community Bankers of America in Washington, D.C.
Warning: To qualify for more than $100,000 of FDIC coverage under this system, named beneficiaries must be a spouse, children, grandchildren, parents or siblings. Depositors who set an account up in trust for any other beneficiary still could come up short on FDIC coverage.
Schwab Offers Investors A 'Choice'
Charles Schwab is touting a new program it says can appeal to all investors-everyone from active do-it-yourselfers to total delegators.
The program, called Schwab Personal Choices, bundles eight Schwab programs-most of them pre-existing-into a menu of offerings that also includes services by Schwab affiliates U.S. Trust and CyberTrader.
That, says Schwab, will give investors 10 program choices, all with varying degrees of advisor services and investment tools suited for all types of investors.
"Schwab Personal Choice is a dramatic evolution of our services-as profound, we believe, as our introduction of no-transaction-fee mutual funds in 1992 and our expansion of Internet trading in 1998," says company founder and Chairman Charles Schwab.
For independent investors who are also active traders, Schwab Personal Choices offers as choices Schwab Signature Trading, Schwab Trader CT and CyberTrader. For those customers who want advice, the choices include Schwab Private Client, Schwab Advisor Network and Schwab Advised Investing-as well as the services of U.S. Trust for very affluent investors. Independent investors who are not active traders are being offered Schwab Independent Investing.
Although only one out of 10 of the programs-Schwab Advisor Network-directly links investors to independent advisors, Schwab maintains the overall impact to advisors will be positive.
"We think that Personal Choice will be good for advisors beause it'll raise the awareness of the value of advice generally," says Schwab spokesman Morrison Shafroth. "We expect the referrals to advisors to increase."
The program is aimed at serving investors with assets in the range of $100,000 and $1 million who are seeking more advice than online brokers normally provide but who do not want to pay for the services of traditional brokers, says Jody L. Bilney, the company's chief marketing officer.
Survey: Retirement Fears Intensifying
Workers aren't only worried about reaching retirement-they're also afraid of what's going to happen once they get there.
A survey by MetLife found that 48% of employees rank "outliving their savings" as their greatest retirement fear. In fact, nearly half of the employees-48%-feel they will be forced to work on a full- or part-time basis again after retirement.
The survey found that 26% of workers have not done any specific retirement planning and only 57% have done some research on their own. The end result is that 23% are significantly behind their retirement savings goals, and another 30% are somewhat behind.
The survey, done in the third quarter of 2003, polled 728 full-time employees.