SEC To Research Broker Rule
The Securities and Exchange Commission (SEC) is getting ready to see how investors have been impacted by having two sets of regulations for brokers and investment advisors. The SEC has published a contract proposal for hiring a firm to conduct the study, a preliminary step for soliciting comments from the public and potential contract bidders.
The study was promised by the SEC in April 2005, when it adopted a rule exempting brokers offering fee-based services from the Advisers Act of 1940 as long as the services are "solely incidental" to their brokerage services and they meet certain other conditions.
Critics of the rule contend that it confuses consumers and allows brokers to act as financial advisors without being regulated by the strict fiduciary standards of the Advisers Act, which place the interests of the client first. Brokers are instead regulated under the Securities Exchange Act of 1934.
Opponents also argue that the rule confuses consumers by creating two sets of regulations, even though both brokers and RIAs will often call themselves "financial advisors" in their relations with the public. If past surveys on this subject are any indication, investor perceptions of the differences between advisors and brokers are foggy at best.
The brokerage community, however, counters that the rule will encourage brokers to move from commission-based to fee-based work, benefiting consumers in the process. Brokers also say the Securities Exchange Act already contains rules that adequately protect consumers.
The broker exemption continues to stir controversy, with the Financial Planning Association (FPA) pressing ahead with a lawsuit against the SEC that seeks to void the rule.
The SEC, meanwhile, says it will rely on the study to address the issues raised by opponents. "Our goal is to improve investor protection by updating our regulation to deal with the realities of today's marketplace," SEC Chairman Christopher Cox said in a written statement. "We will develop the best available information, from inside and outside of the commission, to inform this important process. We welcome public input on the proposal."
At least one company has already probed investor attitude's regarding investment advisors versus brokers. A survey conducted by TD Ameritrade earlier this year found that 43% of investors were not aware that stockbrokers and RIAs provide different levels of investor protection. This compares to a prior survey in 2004, where that figure was 41%.
The survey, which involved interviews with 1,000 investors, also found that 51% of investors were unaware that brokers are not required to disclose all potential conflicts of interest before providing financial advice, according to TD Ameritrade. Only 26% of investors were aware that only investment advisors have a fiduciary responsibility to act in a client's best interests, while 51% incorrectly believed both brokers and advisors were subject to the requirement, according to the survey.
Public comments on the SEC's draft proposal were due by July 19.
The Affluent Reportedly Less Confident
After expressing optimism about the economy all year, millionaires have suddenly grown wary of the future, according to a survey.
The Spectrem Group, which publishes an index of the economic outlook among millionaires and the affluent, says millionaires are now neutral about the economy for the first time since late 2005.
The Millionaire Investor Index fell 11 points in June-the biggest drop since the index was started.
What are millionaires so worried about?
Inflation, according to surveys. "Inflation fears have finally taken their toll on millionaires," George H. Walper Jr., Spectrem Group president, says in a statement.
He noted 16% of surveyed millionaires felt inflation was the greatest threat to their household financial goals, topping the list of concerns ahead of the economy, unemployment and oil and gas prices.
"Over time, millionaires have tended to take the long view of the investment environment, so a decline this steep should be seen as cautionary," Walper says.
Schwab Assets Boosted As Webcasts Reach Broker Converts
With Schwab attracting more than $1 billion in new advisor assets each quarter, largely from wirehouse brokers, the company plans to be even more aggressive in targeting potential wirehouse recruits in 2006. Their newfangled approach to getting more bang for their recruiting buck? A series of broker-turning-independent Webcasts (called BTI Webcasts in Schwab parlance) that brokers can dial up anonymously from the privacy of their offices.
"More than 400 brokers tuned into our last Webcast. In all my years recruiting, that's an unheard of number," says Barnaby Grist, Managing Director, Business Consulting with Schwab Institutional. "We're seeing a rapid acceleration of the independent model in attracting wirehouse brokers. The thirst for knowledge is out there. People are wanting to hear from us and get the facts."
While Grist declined to say how many new advisors have joined Schwab year-to-date, he did say that assets from new advisors at Schwab increased by more than 400% in 2005. "We expect to double again this year. We don't see any signs of deceleration," Grist says. Currently, 5,000 advisors custody more than $440 billion with Schwab.
"What we see is that that wirehouse brokers and their clients are extremely open to the idea of independence, and our Webcasts are a great way to reach then," Grist adds. "Our generation is open to a small boutique feel versus a big corporate brand name. That's why our emphasis is on communication and education. It quickly becomes obvious to any broker who has all the facts that turning independent and owning your own business makes perfect sense."
To communicate that message effectively, Schwab featured an impressive lineup in its most recent Webcast, Going Independent: Joining an RIA Firm, available online (http://disclosure.mshow.com/SchwabShow116/). Hosted by Bernie Clark, senior vice president of Schwab Institutional, the Webcast highlighted the findings of Phillip Palaveev, a senior consultant with Moss Adams, and the firsthand experience of advisor Patrick Sizemore, president of Strategic Wealth Management, along with broker-turned-advisor Jason Davis, whom Sizemore, himself a former wirehouse broker, hired earlier this year.
The independent advisor model is a compelling proposition, Palaveev said. Advisors can price their services as they see fit, have full control to do what is right for the client, take full responsibility for their purchases and costs and can reap the rewards of their own profitability. Davis, who left a wirehouse to join Sizemore's Kirkland, Wash.-based advisory shop, said the question brokers should ask is, "How do I want to serve clients? If you want to be able to put clients first and grow a business, the independent model is for you," he said.
The average advisor in Schwab's 5,000-advisor network has $90 million under management, Grist says. Typically, the cost to transition to independence for a similarly sized portfolio ranges from $30,000 to $40,000, he says. Advisors who don't have significant assets may be better served joining one of the 5,000 existing firms that work with Schwab, executives said.
"The people who come over to us are positioned to grow very aggressively. We really streamline their lives and take care of a lot of back office problems for them," Grist says. What we find is that typically it is brokers who are client advocates in the first place who reach out to us. They seem to self-select."
The company expects to Webcast four more "turning independent" sessions by year-end. "We have extremely aggressive ambitions in terms of recruiting," Grist adds. "Brokers are ready to own their own businesses and stop paying taxes to the wirehouses."
Space Station Vet To Speak
A former NASA astronaut will head the list of speakers at this year's Financial Planning Association national conference in Nashville, Tenn.
The FPA announced that Jerry Linenger-who spent a harrowing five months on the Russian space station Mir in 1997-will kick off the conference's first general session on Saturday, October 21, at the Gaylord Opryland Resort and Convention Center.
Drawing upon his experiences in space, Linenger will challenge the audience "to embrace change, confront challenges and work together to overcome adversity," according to the FPA.
During his service on Mir, which at the time was the longest-duration space flight of any American astronaut, Linenger and his two Russian crewmates faced several life-threatening incidents. Those troubles included a fire, a near collision with a cargo supply ship, loss of electrical power and a malfunction that caused the aging station to tumble in space.
On Sunday, author Lee Eisenberg will give a talk entitled, "How History's Largest Generation Lost Its Way-and How You Can Come to the Rescue." The general session address will touch on the concerns of baby boomers as they look to professionals for financial guidance, according to the FPA.
During the closing session on Monday, contemporary philosopher and business guru Tom Morris will present, "Mastering the Seven 'C's' of Success in Business and Life," which will be a discussion of the various principals that lead to achievement.
Morningstar Hedge Fund Data More Accessible
Users of Morningstar's Web site, and its advisor workstation, now have access to the research company's hedge funds data.
Morningstar announced that its database of 3,000 hedge funds-which the data provider started offering to its Morningstar Direct subscribers last year-is now available to accredited individual investors who are Premium members and advisors who use Morningstar Advisor Workstation Office Edition.
Members can search key data points, which include fundamental risk/return metrics, management background and fees.
"Despite their growth, there is a lack of information on hedge funds, making research difficult and oftentimes expensive. We hope to bring more transparency to the hedge fund industry," says Joe Mansueto, chairman and chief executive officer of Morningstar.
Advisors Help Manage Charitable Accounts
The Fidelity Charitable Gift Fund-which has grown into one of the nation's largest charities since its founding in 1991-is offering advisors a way to be more involved in donor accounts.
The fund has announced the Charitable Investment Advisor Program, which allows clients with accounts of at least $1 million to have their own advisors participate as managers. Under the plan, advisors can help manage their clients' charitable assets in the Gift Fund in consultation with fund management.
Advisors do not need an existing relationship with Fidelity to participate in the program and are free to use assets outside of the fund's designated investment pools, according to Fidelity. Fidelity expects that about 5% of the fund's donors will take advantage of the program, says fund President David Giunta. The fund currently has 37,000 accounts and $3.5 billion in assets.
"Through our new program, the Gift Fund can help donors and their advisors more effectively integrate charitable giving into the donors' overall financial plans," he says. The new program follows several recent changes in fund operations, including a reduction in management fees and the use of third-party funds in the Gift Fund's investment options.
The fund attracted $1 billion in new assets in 2005 and is 50% ahead of that pace in 2006, Giunta says. He attributes the growth partly to the rising tide of baby boomer retirees, increased wealth in general and the fund's ability to provide donors with consolidated, long-term charitable planning.
The Gift Fund, which relies on donor recommendations in making its donations, has dispersed nearly $6 billion to various nonprofit groups since its inception.