Market Drop Blamed For Rise In Investor Complaints
The number of investor complaints increased by more than 25% last year, with 700 new cases recorded in October alone by NASD Dispute Resolution.
That increase isn't a surprise to Walter Baumgardner, a veteran securities attorney who represents both advisors and investors. "This is fallout from the basic collapse of the technology market and the decline in the stock market as a whole," says Baumgardner, who is seeing more investors determined to recoup their losses by suing their planners and brokers. "I've turned away investors and told them they can't sue for a market decline unless the original investment was unsuitable."
But not all attorneys feel the same way. Adding to the feeding frenzy is the fact that tort reform is driving many attorneys into the securities arena. A recent American Bar Association survey found that financial advisors are a leading target of litigation and that securities attorneys top the field in income, just behind personal injury attorneys. At last count, Baumgardner says, there were more than 800 Web sites encouraging investors to sue their planners.
More bad news: The cost to an advisor of mounting a defense is rising. The average planner paid $28,000 for legal defense in 2001, but those fees will continue to rise as the arbitration process becomes as complex as the court system, predicts Jerry Reiter, chairman of the Financial Advisors Legal Association in Las Vegas. Founded in 1999, the group offers advisors unlimited legal consultation and representation, both before and after arbitration claims or lawsuits are filed, for an annual fee of $730. Unlike errors and omissions insurance, membership in the group offers legal consultation and counsel if investors or regulators claim a planner committed fraud.
The group reports signing up more members in September and October 2001 than it did in all of 2000. The group's network of securities attorneys represented 25 advisors last year and settled 25% of those cases, says Baumgardner, who is part of the association's legal team in addition to running his own practice. Leading complaints include unsuitability and "selling away," or selling securities not approved by the firm, he adds.
Bachelor's Degree To Become A Must For CFP Designation
New financial advisors will have to meet stiffer education requirements for a Certified Financial Planner (CFP) designation in several years.
The CFP Board of Standards has announced that starting January 1, 2006, all CFP candidates will be required to have a bachelor's degree from a regionally accredited college or university.
Under current rules, an advisor without a bachelor's degree can get the designation as long as he or she has five years of experience as a financial planner. Anyone who gains a CFP certificate before the effective date will be exempt from the requirement.
The board also has approved resolutions supporting pro bono work by CFP certificants and allowing them to submit documents to the CFP Board electronically.
"These actions each represent a maturing of the financial planning profession," says CFP Board Chairwoman Patricia P. Houlihan. "In 2006, financial planners with the CFP certification join professionals in law, medicine and accounting by meeting a degree requirement as part of attaining professional status."
About 11% of current CFP certificate holders do not have a bachelor's degree, says CFP Board spokesman Doug Nogami.
Small Businesses Need Help With Employee Retirement Plans
Helping small-business owners with their employee retirement plans may be fertile ground for financial advisors, according to a recent study.
The study, commissioned by Nationwide Financial Services, found that small businesses aren't taking advantage of the many choices they have in selecting employee retirement plans.
Part of the reason is that shopping for plans is too complex for the average small-business owner, says Don Jones, national pensions sales manager for Nationwide Financial.
"Small-business owners are busy running their businesses and can't be expected to be experts on every aspect of their retirement plans," Jones says. "Investment professionals have an opportunity to grow their businesses by understanding small-business owners' needs, providing tailored solutions and offering individual advice."
Because the time they can devote to the subject is limited, small-business owners often buy into the first "one size fits all" plan they find, he says.
"Many times, however, a small-business owner's needs are better met by another type of profit-sharing or money-purchase plan than by a 401(k), and nobody ever told them that," Jones says. "Investment professionals who work with providers that can customize plans for a client's individual needs have an advantage here."
Among the study's findings:
Fewer than half of the surveyed small-business owners say they consider more than one option when choosing a retirement plan for their businesses.
Asked to name their top concerns regarding employee retirement plans, business owners cited cost (89%), fiduciary or legal concerns (83%) and the complexities and time of plan administration (81%).
Owners say their reasons for offering a retirement plan are a concern for employee welfare (96%), to positively impact employee morale (93%), to gain a competitive advantage in recruitment and retention of employees (90%) and to provide employees with tax-deferred savings (90%).
The study, conducted by Greenwald & Associates, surveyed 730 business owners and decision makers from businesses with 25 to 200 employees.
Women Becoming Wealthier, Depending More On Advice
Women are increasing their standing in the investment world, and they're relying on financial advisors to do it, says a recent report by UBS PaineWebber.
The report found that 72% of 900 women surveyed, all with $100,000 or more in investable assets, use a financial advisor. It also found that women value the relationship more as they grow older.
Financial advisors also were cited most as important sources of information. Forty-five percent called advisors their top source of information, followed by major newspapers (18%), friends and relatives (8%), the Internet (8%) and TV and radio (5%).
The growing reliance on advisors comes at a time when women are increasing their wealth and influence in the financial world. Over the past two years, the report found, women's wealth has grown to the point where they represent nearly half of all investors with $100,000 or more in investable assets. They represented 36% of that population two years ago and currently represent 47%, the report says.
"The findings in 'Women and Investing III' clearly demonstrate that women have come into their own as knowledgeable and sophisticated investors," says Mary C. Farrell, UBS PaineWebber senior investment strategist.
College-Savings Products Becoming More Important
College savings are becoming as crucial a component to financial plans as mutual funds, annuities and retirement strategies, says a recent report by Cerulli Associates.
The importance of college savings is exemplified by the expected growth in 529 plans and education savings accounts, or ESAs, formerly called Education IRAs, the report says.
Assets in 529 plans are expected to grow by $51 billion by 2006. That amount represents a compounded annual growth rate of nearly 50%, Cerulli says. Only 3% of families with children under 18 now have 529 plans, but 8% are expected to have them in five years.
In one example of how fast 529 plans are growing, Merrill Lynch reported its 529 plan in Maine, after only eight months in operation, had grown to $455 million assets and about 43,000 accounts, with an average balance of more than $10,000.
Meanwhile, ESAs are expected to grow to $33 billion by 2006. Together with 529 plans, that means the total college-savings market will reach nearly $101 billion by 2006, Cerulli says.
Changes in tax laws and the rising cost of education are among the chief factors in the expected growth, Cerulli says.
The report says families saving for a baby born in 2001 will need nearly $250,000 to send their child to a four-year private college.
"As parents seek out information about these new vehicles, financial planners and advisors are finding that they must be prepared not only to offer advice about mutual funds, annuities and retirement, but also about college savings," the report says. It adds college-savings offerings are "quickly becoming a fourth and crucial component of every financial service provider's product line-up."
Boomers Need More For Retirement
America's baby boomers may go bust when it comes time to retire, according to a recent nationwide survey.
People in the 37 to 55 age group, the survey found, are not saving enough for retirement. Yet many of them mistakenly believe they are prepared.
"This is a call to action for a generation that is in a critical financial situation," says Tom Wilson, president of Allstate Financial, which recently released the retirement study.
The survey found that baby boomers say they will need about $30,000 per year in retirement. Allstate says to achieve that level, individuals need to have saved about $1 million upon retirement, factoring in an 8% return on savings and an average 4% inflation rate.
Yet baby boomers, the survey found, have saved so far an average of $120,000-only 12% of what they will need.
And despite the fact that Social Security benefits replace only about 40% of the average person's salary, 32% of survey respondents plan to use Social Security for the bulk of their retirement income.
"The magnitude of the savings gap is stunning," Wilson says. "These findings should be a wake-up call."
But the survey says 66% say they plan to make no changes to the amount they are currently saving.
The results were based on a random polling of 1,004 baby boomers with household incomes ranging from $35,000 to $100,000. The margin of error is 3.1%.
Managed-Account Groups Combine
Allianz AG has combined its five managed-account groups into one new firm, PIMCO Allianz Investments.
Based in New York City, PIMCO Allianz will combine the sales forces of Dresdner RCM Global Investors in San Francisco, NFJ Investment Group in Dallas, Nicholas Applegate in San Diego, Oppenheimer Capital in New York and PIMCO in Newport Beach, Calif.
Instead of the sales forces of each firm operating independently, representatives now will be able to offer a combination of 17 managed-account products, says Phil Neugebauer, senior vice president and director of product management for PIMCO Allianz.
"It was done to offer a broader product base for the managed-account" business, he says.