Schwab Offering Loans To RIAs Going Independent
With its client assets topping the $500 billion mark in 2006, Schwab Institutional has decided to open up its war chest to a new advisor offering: startup loans. The company-a provider of custodial, operational and trading support for more than 5,000 independent advisors-announced it is now accepting loan applications from its advisor clients who are starting their own firms.
Although large broker-dealers provide their representatives with loans, this marks the first time a major custodial firm has started a program to loan its own money to advisor clients. Schwab Institutional considers the offering a significant perk because banks have traditionally viewed the investment advisory profession as too risky for small business loans.
"It's been near impossible for advisors to get access to bank loans," says Barnaby Grist, Schwab Institutional's managing director of strategic business development. "What you see out there is that banks may be willing to provide financing, but only if [the advisor] gives them a piece of their business."
Schwab Institutional, however, considers advisor startups a good loan investment based on the track record of advisors who have worked with the company, Grist says. Over the past four years, he says, Schwab's advisor clients have achieved an average annual growth rate of 24%.
Schwab Institutional has also been growing into a more significant piece of Charles Schwab, accounting for more than half of the net new assets of the parent company in 2006. Schwab Institutional's client assets rose 23% last year, to $502 billion, and the company says it is striving for $1 trillion in assets by 2010.
"We know how good these business are and we are willing to service them," Grist says. The loan program is part of a series of moves Schwab has made to capture a market that it estimates will result in $80 billion and between 300 to 400 advisors teams moving to Schwab by the end of the decade, Grist says.
In addition to announcing the loan program, Schwab Institutional has partnered with real estate services company CB Richard Ellis Group Inc. to offer advisor help on securing office space, including the negotiation of leases. Insurance broker and administrator Marsh Affinity Group Services has also been signed on to provide Schwab advisor clients with group rates on errors and omissions insurance.
Schwab Institutional also has expanded its conversion team program-started in 2005 to help guide advisors through the process of transitioning into independent firms. The loan program, Grist says, will initially launch in 11 states and will be limited to startup and transitional costs only.
Schwab Institutional expects most of its new advisor clients will meet the $75 million asset level requirement, as the average asset level of new advisor clients last year was $100 million. It's expected that advisors' largest financing needs will be for office space leasing and the funding of payrolls during transition periods, Grist says.
TD Ameritrade Purchases iRebal
TD Ameritrade has purchased iRebal through its wholly owned subsidiary ThinkTech Inc.
A rules-based rebalancing tool for independent RIAs, iRebal, developed by Gobind Daryanani, automatically generates recommendations for multiple account level rebalancing and cash management trades. It was the first application targeted at advisors capable of providing optimized rebalancing recommendations at the family or household level.
"It allows advisors to automate the costly and time-consuming process of manual rebalancing, which can easily take 18 to 20 minutes per account, according to Mr. Daryanani," says Brian Stimpfl, managing director of business solutions at TD Ameritrade Institutional.
"This is a great opportunity for both iRebal and TD Ameritrade," adds Stimpfl. "A number of our advisor clients encouraged us to explore the purchase of iRebal, and we have responded."
Stimpfl emphasizes that iRebal, which offers multi-custodial support, will continue to do so. "iRebal will continue to service all advisors, as they have in the past," he says.
As to the possibility of a less expensive version in the future (iRebal prices start at $50,000), Stimpfl says, "We have no explicit plans at this time, but it is certainly something we will be exploring."
Several advisors speculated that TD Ameritrade could create a two-tier pricing program for iRebal, charging a significantly lower price to firms that use TD Ameritrade as their primary custodian and pricing at the current Rolls Royce level to others.
Suitability Standards For DPPs Could Rise
If the North American Securities Administrators Association (NASAA) has its way, many Direct Participation Programs (DPPs) just might see their presence shrink on the investment landscape. In the September 26, 2006, proposal from its Direct Participation Programs Policy Project Group, NASAA recommends raising investor suitability standards for DPPs.
Since 1995, the current rule has required an investor to have 1) a $45,000 annual income and a net worth of at least $45,000, or 2) a net worth of at least $150,000. NASAA is proposing to change the rules so the investor must have 1) a $70,000 annual income and a net worth of at least $70,000, or 2) a net worth of at least $250,000.
Included is the relatively benign recommendation to increase the combined $45,000 income and net worth requirements to $70,000, and the net worth figure from $150,000 to $250,000. While the DPP community as a whole seems to have no objection to this aspect of the revision, what has raised objections are two proposals that would: 1) exclude any and all retirement or pension plan accounts or benefits from the calculation of an investor's net worth, and 2) cap the investment at 10% of the investor's net worth.
Opponents include broker-dealers offering such programs as oil and gas, equipment leasing, and nontraded real estate investment trusts (REITs), program sponsors and trade associations. They argue that by excluding retirement assets, a chasm in the diversification of an investor's portfolio would be created. John Wurth, vice president of regulatory strategy at Ameriprise Financial, says that "the minimal additional protection that may be gained from [this exclusion] from the calculation of liquid net worth is more than offset by its impact of making a large number of otherwise suitable investors ineligible to purchase them."
For example, the industry estimates that up to 80% of current nontraded REIT investors will be ineligible under proposed guidelines and the market will dry up, cutting the investor base by two-thirds.
Proponents of nontraded REITs say they are one of the few remaining long-term, high-yield products that advisors and brokers can sell to investors who need the diversification and income, especially during their retirement years. Opponents don't agree, saying that nontraded REITs offer investors little more than seeing their principal diminished by a combination of hefty fees and commissions.
To counter this argument, proponents suggest that mutual funds are more expensive when held over comparable periods, and that industry research by Ibbotson and others makes a very compelling case for diversified portfolios using real estate or other noncorrelated assets. It is also one of the last significant sources of commissioned products, some brokers say. (Many opponents say that last claim is dubious and relevant only to very high-commission products.)
As the proposal reads now, loosely regulated private placement hedge funds also are more accessible to investors than SEC-registered nontraded REITs, another source of concern from broker-dealers. In its comment letters, broker-dealers say that they are the ones who should set suitability standards for clients, not the states. "The broker-dealer is ultimately responsible for 'knowing its clients' and determining which investments are suitable for its individual clients," says Mary-Jean Hanson, senior vice president at Ferris Baker Watts Inc. in the firm's comment letter.
Mike Stevenson, the securities administrator for the State of Washington who took over the chair of NASAA, Corporation Finance Section, in late 2006, says, "Three years ago, NASAA undertook a process of updating all policy statements as part of a general review. Many had been in effect for quite some time, and special consideration was given to policies that would have been impacted by inflation."
He went on to say, "This particular statement includes not only commodity pools, but also asset-backed securities, mortgage-related products, oil and gas, REITs and real estate programs. On behalf of NASAA, we are looking to update the suitability rules, and in the area of the commodity pool guidelines, we are carefully reviewing all the comments. The process is not over yet."
After having received more than 80 comment letters from the DPP community, industry executives and broker-dealers, the NASAA is "taking all statements very seriously," says Peter Cassidy, chairman of the NASAA project group.
To read the complete NASAA proposal go to: http://www.nasaa.org/issues___answers/regulatory_activity/2791.cfm.
To read the comment letters visit: http://www.ipadc.org/member_alerts.htm.
N.J. Firm Was B-D's Biggest Catch In '06
Royal Alliance Associates Inc. has reached an affiliate agreement with a West Long Branch, N.J., advisory firm consisting of 140 representatives.
The broker-dealer's agreement with Investment Advisors & Consultants was Royal Alliance's largest affiliation agreement in 2006, giving it affiliations with about 2,000 independent advisors.
Investment Advisors & Consultants, founded in 1979, has a network of 16 offices and a 14-member support staff. Royal Alliance is part of the AIG Advisor Group.
Thomas E. Musumeci, chairman and founder of Investment Advisors & Consultants, says the deal gives his firm national brand recognition, improved operating efficiencies and an upgraded advisory services platform.
Edelman's Show Goes National
Move over, Rush Limbaugh and Howard Stern. After 16 years of providing financial advice over the Washington, D.C., airwaves, Ric Edelman is taking on a national audience.
The weekly Rick Edelman Show was scheduled to be available on eight metropolitan talk radio stations starting January 13, ABC Radio Networks announced. The show will be aired on WABC New York, KABC Los Angeles, WLS Chicago, KSFO San Francisco, WBAP Dallas, WJR Detroit, KPRC Houston and WMAL Washington.
Edelman is founder and chairman of Edelman Financial Services LLC in Fairfax, Va. In 2005, Edelman sold a 51% interest in his firm to Texas-based Sanders Morris Harris Group. In 2004, the firm had assets of $2.6 billion.
Fidelity Matches Advisors, Clients
Fidelity Investments has launched a program that matches high-net-worth customers with selected independent advisors.
The new program, called Wealth Advisor Solutions, is an expansion of Fidelity's nationwide AdvisorAccess referral program, according to the company.
The new program is designed for "customers who are seeking the personalized service offered by fee-based advisors, as well as investment advice and access to a broad range of investment products and services."
The referrals start with Fidelity evaluating customers' needs and financial situations, including the size of their assets and their desire to work with a financial advisor, according to the company.
If appropriate, Fidelity says, a customer will be matched with one of the company's independent advisor clients. To be eligible for the referral program, advisors must go through a "rigorous selection process, involving a detailed evaluation of their business model, firm reputation, level of experience and the products and services they offer."
The program will initially be available in San Francisco, Chicago and New England. A full-scale rollout is expected later this year, according to Fidelity.
TD Ameritrade Buys Trust Company
TD Ameritrade has bought the assets of Gail Weiss & Associates, including its trust company subsidiary, International Clearing Trust Company (ICTC). The deal, which closed in late December, is expected to make it easier for advisors to consolidate and custody 401(k) and other retirement assets at TD Ameritrade, company officials say.
Gail Weiss & Associates, based in Baltimore, was founded in 1998 as a consulting and software solutions company to the financial services industry. Among its services is an electronic interface that allows mutual fund trading via the National Securities Clearing Corporation (NSCC), according to the company's Web site.
Financial terms of the deal were not disclosed. Among the benefits the deal will bring to TD Ameritrade Institutional clients are an integrated trust accounting and trading system, real-time Web access to trust accounts and thousands of NSCC tradable mutual funds, and access to leading third-party administrators, according to TD Ameritrade.
The addition of ICTC is also expected to lead to simpler pricing and 100% pass-through of plan expense reimbursements, the company says.
"This is a tremendous opportunity for advisors to tap into the $3.7 trillion defined contribution marketplace," said Tom Bradley, president of TD Ameritrade Institutional, in a prepared statement. "Small business owners need RIAs to manage their retirement plans. Now advisors have the tools to effectively market these services."
FPA, CFP Board Team Up For Conference
This year's annual conference for directors of CFP Board-registered programs will have a new participant: The Financial Planning Association (FPA). The CFP Board of Standards is teaming with the FPA for its 15th annual conference for program directors, which will this year be held in conjunction with the FPA's annual meeting in Seattle in September.
"We are partnering with FPA to provide program directors with a larger-scale conference, increased support, a wider variety of subjects and interaction with other facets of the financial planning community," says CFP Board Chairwoman Karen P. Schaeffer.
Many observers were shocked last year when FPA, which probably includes a larger contingent of CFP licensees than any other organization, did not participate in the CFP Board's annual conference. At that time, relations between FPA and the CFP Board had grown somewhat frosty, largely as a result of the direction CFP Board CEO Sarah Teslik had taken the organization. Teslik resigned in October and, while the CFP Board has yet to name a successor, it would appear tensions are already subsiding.
The program directors conference will be held as a preconference event to the FPA meeting on September 7-8. The FPA annual meeting will be held September 8-11. FPA officials said they hope the joint effort will encourage more program directors, as well as their faculty and students, to attend the FPA conference.