Longtime Partners Sue Each Other In Multimillion Lawsuit
A feud over clients, partnerships wrenched apart and business loyalties gone sour has degenerated into a multimillion dollar lawsuit and countersuit between long-time former advisory firm principals in the Washington, D.C., suburbs.
The case with far-reaching ramifications for advisory firm partners far and wide-Rembert, Pendleton and Fox Inc. v. Fox, Joss & Yankee-will be tried in Fairfax County Circuit Court beginning April 16. "I believe the litigation has implications for the future of the entire financial planning profession," says Marjorie Fox, a defendant named in the Rembert lawsuit and a plaintiff to the countersuit her firm has brought against Rembert's company.
Rembert's suit is seeking compensatory damages of $2 million and punitive damages of $350,000 from each of the three defendants in the case, along with attorney and court costs. He alleges that the defendants solicited by mail 215 of his firm's clients in violation of the privacy requirements promulgated under the Gramm-Leach-Bliley Act and other regulations. The Fox countersuit is seeking unspecified damages.
Fox, a principal in Rembert, Pendleton and Fox, in Falls Church, Va., for 15 years and an employee for 20 years before that, was terminated by Don Rembert, the principal of Rembert, Pendleton and Fox, in late 2005 when she declined to sign a noncompete agreement triggered by a departing principle.
Jobless, Fox went on in January 2006 to launch her own neighboring firm, Fox, Joss & Yankee, with two other former lead advisors of Rembert, Pendleton and Fox, taking with them clients they had recruited and worked with for years.
Don Rembert filed a lawsuit shortly after that accusing Fox and her partners of numerous alleged violations of law, including conspiring to injure his business, unjust enrichment, breach of fiduciary duty, tortuous interference with contractual relations, conversion and violation of the Virginia Uniform Trade Secrets Act. Rembert declined to be interviewed for this article, but is rebuilding his firm with his two remaining principals, his son Charles and a 17-year veteran of the firm, Newton G. Pendleton III.
Fox and her partners are countersuing for defamation, unpaid wages, unfair competition, tortuous interference with business relations, conspiracy to injure their business, shareholder oppression and breach of fiduciary duty to a minority shareholder.
Fox says at stake are the ownership of client relationships absent a nonsolicitation or noncompetition agreement, the nature of an advisor's fiduciary duties, the application of various rules under the CFP Code of Ethics and an advisor's right to decide her or his career path and succession plan. She declined further comment, saying that she does not want to litigate the case in the press.
An advisor familiar with the lawsuit, who asked not to be identified, called the Rembert lawsuit "vicious."
Numerous advisors and investors of the firms have been subpoenaed, including Joseph D'Orazio, a former partner of the original Rembert firm, Rembert, D'Orazio & Fox. His unexpected departure to start a competing firm in 2004 surprised and chagrined Rembert, by Rembert's own admission, and probably prompted the subsequent use of noncompete contracts by the Rembert firm. D'Orazio declined to be interviewed for this article.
As far as lost clients and assets under management go, that will be up to the involved parties to prove in court starting April 16, if they can't settle first. But according to their SEC filings, Rembert has $611 million and about 500 clients today (the same amount as the firm had when Financial Advisor published a cover story on its principals in November 2004). Fox and her partners have built assets to $193 million in the firm's first 18 months of operations. D'Orazio has built his firm, D'Orazio & Associates, to $225 million in assets over two years.
All CFP certificants who provide financial planning services would be required to provide clients with the "care of a fiduciary" under a second revision of the CFP Board of Standards ethics code.
The CFP Board also raised the professional standard for all CFP certificants-including those who do not provide financial planning services. The new rules would require that all CFP professionals "shall at all times place the interest of the client ahead of his or her own."
This is stricter than the current baseline standard for CFP certificants, which requires they provide "reasonable and prudent professional judgment." The proposal revises a controversial first draft, released in July, which would have allowed CFP certificants to "opt out" of the fiduciary standard so long as they defined their relationship with clients in writing.
Many CFP certificants, as well as planning organizations such as the Financial Planning Association (FPA) and National Association of Personal Financial Advisors (NAPFA), objected to the idea of an optional fiduciary standard and pressed for a stricter code. The second draft eliminates the opt-out provision, and draws a line between CFPs who practice financial planning and those who do not, such as educators. In applying the definitions, the proposal says CFPs will fall under the fiduciary requirement if "the certificant provides financial planning or material elements of the financial planning process."
The CFP Board's Disciplinary and Ethics Commission will decide what constitutes "material elements" of financial planning on a case-by-case basis, according to the board. As with the first draft, CFPs will for the first time be required to have a written agreement with their client when financial planning services are being provided.
Addressing concerns that some advisors have been calling themselves "fee-only" while accepting compensation from product providers, the second draft also sets a new definition for fee-only. It states a CFP certificant may use the fee-only label "if, and only if, all of the certificant's compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly percentage or performance-based fees."
Karen P. Schaeffer, chairwoman of the CFP Board's board of directors, said the second draft was produced after the board considered more than 300 comments submitted after the release of the first draft in July. "You gave us [your comments] and we took all of it under advisement," she said during a presentation in Denver where the second draft was released.
NAPFA, the organization of fee-only planners, said it was pleased with the second round of revisions in the ethics code. "Based on an initial review of the second exposure draft, they have addressed NAPFA's concerns regarding the definition of 'fee-only,' tackled the aspirational nature of the code and have clearly defined 'fiduciary,'" NAPFA Chairman Dick Bellmer said in a prepared statement.
When contacted, Daniel Moisand, chairman of the FPA, said he had not yet reviewed the new draft, but was pleased with the way the CFP Board has proceeded since the first draft was released. "They put a lot of effort into changing the process and making it more open and transparent," he said.
Schaeffer said the CFP Board is taking public comments on the second draft for a 45-day period ending April 25. If approved, the ethics code changes would take effect in 2008.
LPL Keeps On Growing
LPL Financial Services Inc. has agreed to purchase three broker-dealers owned by Pacific Life Insurance Co.
LPL, the nation's largest independent brokerage firm, will acquire Mutual Service Corp., Associated Financial Group and Waterstone Financial Group, which collectively have 2,200 financial advisors and $353 million in annual revenues. The financial terms of the deal were not disclosed, but it should boost LPL's 2007 revenues to well above $1.5 billion.
The sale of some or all of Pacific Life Insurance's Pacific Select Group-a subsidiary that serves as the umbrella company for its broker-dealers-has been rumored for months. LPL was identified as one of the potential buyers as far back as fall of 2006. Pacific Select Group is whole or part owner of three other broker-dealers that are not part of the deal: M.L. Stern & Co., United Planners' Financial Services of America and Sorrento Pacific Financial LLC.
The acquisition, expected to close in June, will give LPL 9,900 financial advisors nationwide, according to the company. The acquisition "is a major cornerstone for our growth strategy in an industry where, increasingly, size and scale matters," Mark Casady, chairman and CEO of LPL, said in a prepared statement.
The three broker-dealers will continue to operate under their current brand names, while retaining current management, led by John Dixon, Casady said.
Behind The Ultimate Gift
A new movie about the familial quagmire of inherited wealth and the impact of a financial legacy on younger generations marks an auspicious and unusual marriage between financial advisors with clients impacted by its theme and Hollywood producers in search of backing.
Based on a book with the same name, The Ultimate Gift, currently playing in over 800 theaters in the U.S. and Canada, tells the story of GenY trust fund baby Jason Stevens, who anticipates a big inheritance from his billionaire grandfather. But grandpa Red Stevens, played by James Garner, has devised a crash course on life with twelve tasks-or "gifts"-designed to challenge Jason in improbable ways, "sending him on a journey of self-discovery and forcing him to determine what is most important in life: money or happiness," according to the movie's Web site (www.theultimategift.com). Before he can inherit his fortune, the materialistic, self-absorbed grandson must complete a series of tasks his grandfather describes in videotaped instructions. Along the way, he learns important life lessons and gets a much-needed dose of humility through experiences such as performing manual labor and living with the homeless.
If the movie's plot hits home among financial advisors who work with the ultra-affluent there is a good reason. The $20 million production cost-fairly low by Hollywood standards, but enough to foot the bill for stars Garner, Academy Award nominee Abigail Breslin, Drew Fuller and Brian Dennehy, among others-was raised mainly from financial services companies, financial advisors, estate planners, insurance specialists and others in the wealth management business. The largest contributor was Houston-based Stanford Financial Group, a network of private wealth management and investment banking companies with more than $26 billion under management, which poured $14 million to the project. The Legacy Companies, a wealth coaching firm based in the Boston area, has provided financial as well as promotional support, with many of the firm's advisor clients hosting special screenings of the film in their communities for clients, friends and the local media.
The Ultimate Gift movie marks the latest chapter in a grass-roots story that began in 2001, when the novel first came out. Written by Jim Stovall, the book is divided into 12 chapters, each containing a single life lesson about values. Stovall, a former Olympic weight lifter who went blind at age 29, is a successful entrepreneur and co-founder of the Narrative Television Network. He is also a motivational speaker who has appeared frequently at financial services industry conferences, including a keynote speech at the 2005 annual meeting of the Financial Planning Association.
The book had trouble finding an audience at first, but eventually financial advisors got wind of it through Stovall's speaking engagements. Financial advisors and nonprofits ordering bulk purchases to distribute to wealthy clients or donors accounted for much of the book's early success. The slim 154-page parable has sold four million copies worldwide with no promotion or advertising budget, and has become something of a cult classic in some corners of the financial planning community.
Eventually, a copy of The Ultimate Gift landed in the hands of film producer Rick Eldridge, who pitched the idea for the movie to Stanford Financial CFO James Davis. The book already had a strong following at the firm, where many advisors were using it to counsel clients about issues surrounding intergenerational wealth transfers.
"The book and the movie struck a chord at our firm and in the community," says Stanford Executive Director Jay Comeaux, who believes the spoiled trust fund baby isn't just a stereotype. "Out of every ten wealthy families we counsel, I'd say between three and five of them have legacy concerns they want to address."
Although the average moviegoer probably doesn't have to worry about living up to the expectations of a billionaire grandfather or addressing the emotional conflicts of the uberwealthy, Comeaux thinks its message will resonate among middle-class people as well. "All kids can benefit from learning the values of hard work, giving back and humility," he says.
Americans Saving Marginally More
American workers are showing slight improvement in saving for retirement, but still are far short of where they need to be to maintain their quality of life, according to a recent survey.
The 2007 Retirement Index, conducted by the Fidelity Research Institute, found that the average American household is on course to replace about 58% of its income in retirement through savings and Social Security.
That represents a slight increase from a year earlier, when the Retirement Index calculated the average household was saving enough to replace 57% of its income. The annual index is established through an online survey of more than 2,000 Americans who work full time, are 25 years or older, earn $20,000 a year or more, are married or partnered with individuals who also are not yet retired and who are the financial decision makers in their household.
"We're beginning to see a positive savings trend in the index, as significant numbers of workers have reported taking financial action during the past two years to improve their retirement readiness," says Guy L. Patton, executive director of Fidelity Research Institute, an investment and public policy research arm of Fidelity Investments. "But these numbers also tell us that the typical American household ... will need to adjust to living on 42% less income when they retire. This is worrisome, since many retirees say they're spending more money than planned and some have not been able to work as long as they would have liked."
Patton attributed the rise in savings to a combination of better savings habits and improved stock market performance. The survey found Americans have a median of $22,500 in household retirement savings and expect a median Social Security benefit of about $29,500 per year.
Baby boomers-the generation that is currently at or near retirement-were the most prepared for retirement, according to the survey, with an income replacement level of about 62%, up two points from a year earlier, and a median of $45,000 in household retirement savings.
A separate survey of 793 people already in retirement, conducted by Northstar Research Partners on behalf of the institute in January, suggests many Americans could be in for a struggle when it comes to trying to recoup more of their preretirement income, according to Patton.
The survey found that 22% of retirees were forced to retire early because of health problems or disability. At the same time, the Retirement Index survey found that 63% of workers plan to work in retirement to supplement their incomes.
"Americans are relying on their ability to work longer to make up for their savings shortfall," Patton says. "However, the experience of the retirees we surveyed, many of whom had their work years cut short due to health issues, makes that expectation a risk."