CFP Board's New Conduct Standards
The financial advisory industry is always changing, and so are efforts to govern the way it's practiced. On July 1, the Certified Financial Planner Board of Standards' revised Standards of Professional Conduct took effect for the more than 57,000 CFP certificants, part of a long and ongoing process that began two decades ago.
In essence, the revised code of ethics clarifies the fiduciary role of advisors and the responsibility for acting in their client's best interest. The baseline duty of care provision was raised from "reasonable and prudent professional judgment" to requiring that a CFP practitioner "shall at all times place the interest of the client ahead of his or her own." And the provision for fiduciary duty of care for financial planning services raises the bar from to acting "in the interest of the client" to the "duty of care of a fiduciary," with fiduciary defined as "one who acts with the utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client."
"We believe these are clearer than the old standards," says Marilyn Capelli Dimitroff, the CFP Board's chair-elect and president of Capelli Financial Services in Bloomfield Hills, Mich. "They are stronger, more enforceable and better reflect the current climate for practitioners."
Another key aspect of the revised standards are strengthened disclosure standards to clients, including prospective clients, not just existing ones. "We want to make sure prospective clients have sufficient and accurate information to make informed decisions," Dimitroff says.
The first code of ethics was written in the 1980s at a time when the advisory industry was product-oriented and in its nascent stage with far fewer CFP certifications. The standards have been rewritten through the years and will need to be continually rewritten to fit the times, says Rick Adkins, CEO of The Arkansas Financial Group in Little Rock, who in past years held various leadership roles with the CFP Board and oversaw its practice standards board.
"They'll never nail it," Adkins says. "The code of ethics is a living document, and as the profession continues to evolve it will have to adapt to that." He adds that the CFP Board's new fiduciary definition isn't as rigorous as the one laid out for employee benefit plans under the Employee Retirement Income Security Act of 1974, but he says it's a simple and understandable definition that's an improvement over the prior standard.
"I think what they've done is outstanding for our time," Adkins says. "They kept in mind that two-thirds of certificants hold insurance or securities licenses, and they made clearer to everyone that they should represent the best interests of their clients."
Dimitroff acknowledges that when the CFP Board revised the standards it realized this might cause an ebb in new certifications. "We hope it doesn't," she says. "We all have liability fears, but we believe the practices embodied in the standards will decrease liability because they will increase disclosure and decrease misunderstandings."
As for the possibility of an uptick in violations under the revised code, the CFP Board says it's delaying the enforcement of the new standards until January 1, 2009, to give people time to get up to speed.
Dimitroff says the CFP Board received "broad and robust" dialogue from the rank and file regarding the revised standards. "We got a lot of good 'what-if' questions," she says. "Some fall into certain categories, and we've written FAQs to make sure people get the answers."
Avani Ramnani, a CFP at Athena Wealth Advisors in Jersey City, N.J., believes the new standards align the profession's practices with public perceptions of what it should be doing in any case. "There's a gap between what should be happening and what is happening," she says.
The revised standards and related information can be found at http://www.CFP.net/aboutus/Standards.asp.
SEC Examining More RIAs
The U.S. Securities and Exchange Commission (SEC) this year is conducting more one-day examinations of fledgling registered investment advisors to assess their risk areas and compliance policies. The SEC is expanding its examination efforts nationally on the heels of a pilot program it launched last year in its Atlanta, Denver, Los Angeles and Fort Worth, Texas, regional offices.
"The program was developed in response to the growing number of independent advisors who register with the SEC," says Lori Richards, director of the agency's Office of Compliance Inspections and Examinations.
Richards says there are more than 11,000 SEC-registered independent advisors, and that the agency can't thoroughly examine all of them in a timely way. In response, it developed a program to touch base with a larger number of young RIA firms to make sure they're starting off on the right foot.
"it's very informal," Richards says. "it's designed to give us a snapshot of a firm's compliance culture and its activities early in its registered life."
It might be more informal than a full-blown audit, but the SEC's one-day exams still require a lot of prep work on the part of advisors. As part of the process, the SEC requests in advance to see a variety of key documents such as Form ADV Part II and schedules; organizational charts (both internal and of all affiliated entities); compliance policies and procedures; client lists, including calculations of assets under management; and financial statements.
Topics of discussion can range from disclosure policies and brokerage arrangements to marketing information and questions about whether portfolio management decisions jibe with client mandates, says Jarrod James, senior compliance consultant at RIA Compliance Consultants in Omaha, Neb.
Another goal of these one-day, abbreviated exams is to validate the risk assessment assigned to each firm by the SEC, says Katherine Addleman, regional director of the SEC's Atlanta office. The SEC applies a risk level on newly registered advisory firms based on the ADV, but the agency realizes that this only tells part of the story about a firm's operations. The abbreviated exams, however, can help paint a fuller picture.
"They can give us insight into the type of business a registrant is doing and whether that initial risk valuation model is correct," Addleman says.
These exams result in three possible outcomes. The best case is a "no further action" letter from the SEC that says it has found no compliance deficiencies. If the SEC does find problems, it sends the firm a deficiency letter asking it to correct its shortcomings and write back to the agency describing the steps taken to fix the problems.
"More than 70% of our exams (both full audits and abbreviated exams) result in deficiency letters," Richards says. "About 95% address the problem and implement stronger controls so the problems don't reoccur."
The third possible outcome-which involves fraud, stealing, lying to clients and the like-can lead to enforcement actions.
The SEC earlier this year paid a visit to Nashville financial planner David Goldberg. "It was like having big brother talking to you about your business," says Goldberg, a former independent advisor with Raymond James who in April 2007 started his own firm, Snow Creek Wealth Management. He got a fax from the SEC in early January that informed him the agency planned to examine his practice the following week and instructed him to make certain materials available.
The SEC staffer came on a Monday, and Goldberg says he spent much of the prior week preparing for the meeting with help from RIA Compliance Consultants. The examiner looked over numerous documents and asked a lot of questions over the course of the six-hour audit. Goldberg says things went smoothly for the most part, although the examiner "had a couple of picky things about the ADV."
Ten weeks later, the SEC sent him a "no further action" letter.
"I'd rather have this done toward the beginning [of being in business] than wait five years to find out things weren't done right," Goldberg says.
Advisors Await Word On New Privacy Regulations
Now that the comment period for the Securities and Exchange Commission's proposed amendments to Regulation S-P has ended, financial advisors are left wondering how much time and money they'll have to spend to meet the required privacy standards for their clients.
Regulation S-P covers privacy practices pertaining to safeguarding client information and handling security breaches. The SEC's proposed amendments aim to bolster information protection in a number of ways, from requiring more specific standards under the safeguard rule-including those pertaining to data security breaches-to amending the scope of information covered and the types of institutions and persons covered by the rule.
Among other things, the proposed amendments would also require written records of privacy procedures and compliance, and would facilitate information flow to make it easier for investors to follow an advisor who moves from one firm to another.
The comment period ended in May. Generally, the SEC holds a hearing on an issue after the comment period on it concludes, and then finalizes its rule within a few months.
If the amendments go through as proposed, advisors would need to create an information security program customized to the advisory practice's size and to the complexity and sensitivity of the personal information. Advisors would also have to designate a staffer to be the information security officer, or ISO, that reviews, maintains and enforces the program.
"I think people are troubled by the details and by the anticipated costs," says Patrick Burns, president of Advanced Regulatory Compliance, Inc., a compliance consulting company in Beverly Hills, Calif.
"Smaller firms are more alarmed about this," Burns says. "This could be quite costly for two- to three-person shops already burdened by high cost structures and large administrative responsibilities. Larger firms will be better able to absorb the costs, but even for them the capital outlays could potentially be large."
An SEC spokesman says the agency won't speculate on what the final rule will entail.
First Western Buys Fourth RIA Firm, Doubles Size
First Western Investment Management in Denver recently acquired Financial Management Advisors (FMA) LLC, an independent registered investment advisor in Los Angeles, for an undisclosed amount involving cash and stock. The deal is the fourth purchase of an RIA firm by First Western since its founding in 2002, and the company says there are more on the way as part of its goal to expand its footprint throughout the west.
The FMA purchase doubles First Western's assets under management, to $2.9 billion, and adds 14 employees. FMA founder Ken Malamed will stay on as chairman of the L.A. office.
"We're trying to become the first western-based private bank and trust company," says First Western Chairman and CEO Scott Wylie, who years ago sold his previous private banking company to Northern Trust, where he worked for several years before starting First Western.
First Western Investment Management, an affiliate of First Western Trust Bank, provides private banking, investment management, personal trust and wealth planning for high-net-worth individuals with at least $1 million and their families.
Wylie says his original plan was to create a presence in the 10 largest cities in the west in terms of wealth demographics, but has since shifted his strategy to focus on smaller markets in the west. First Western plans to open an Arizona-chartered bank in Scottsdale later this year, and hopes to be in more than 20 western locations by the end of 2011, Wylie says.
Fidelity, Schwab Ramp Up Platform For Breakaways
With the exodus of wirehouse brokers showing no signs of abating, the leading custodians for independent registered investment advisors are expanding their offerings to ease the transition process. In early June, Schwab Institutional unveiled a comprehensive new platform with numerous services and discounts for start-up RIA firms, while Fidelity's National Financial clearing operations and Institutional Wealth Services unit launched its HybridOne programs for advisors with both commission and fee businesses.
Barnaby Grist, managing director of strategic business development at Schwab Institutional, says the number of new firms Schwab is working with is running at double last year's pace, when 114 new firms decided to custody assets with the San Francisco-based giant. Of those 114 firms, about 70% came out of wirehouses, with some bringing nearly $1 billion in assets.
The platform, Schwab Business Start-Up Solutions, combines many of the services already available to Schwab affiliated advisors with several new enhancements. Schwab Performance Technologies will offer a comprehensive Web-based performance reporting solution allowing advisors to outsource many back-office tasks.
Start-up firms with at least $75 million in assets can apply for loans of $100,000 or more to finance costs like technology, office space and furniture.
As part of Schwab's agreement with TriNet, advisors can access an integrated 401(k) plan. Grist reports that one existing advisory firm with $5 billion in assets has outsourced its human resources functions to TriNet. Numerous discounts also are available, including 50% off of UPS shipping services.
Many breakaway brokers have substantial fee businesses but don't want to give up their commission clients. Therein lies the raison d'être behind Fidelity's HybridOne offering. Jack Callahan, president of Fidelity Institutional Wealth Services, says one-third of the 3,500 RIA firms that custody at Fidelity are dually registered.
"Our proposition lets them carry their own name, and as time goes on and their business changes, they can have several choices," he explains. Many firms will derive 90% of their revenue in fees but get another 10% in commissions from alternative investments and annuities.
Often a breakaway broker or a team of brokers will want to set up their own RIA firm but won't want to start a brokerage operation. "We can refer them to a broker-dealer in our network," says Norm Malo, president of National Financial, which provides clearing services for 336 different firms. "If you have all your business with us, we can make it advantageous."
HybridOne is structured to leverage the technology, practice management support, product and trading services capabilities of both Fidelity units. For example, National Financial clients can use Fidelity Wealth Services' capabilities in the trust services arena.
High-Profile Departure At Leading Advisory Firm
Alice N. Finn, a founding partner in Ballentine, Finn & Co. Inc., has left the company, one of the largest and fastest-growing independent wealth management firms in the country.
"Since my departure from the firm is the subject of an arbitration proceeding, unfortunately I'm not in a position to comment," Finn said
in an e-mail.
In a June 13 written statement, Roy C. Ballentine, the firm's majority owner, said Finn left the firm in January. While he also declined to explain the reasons behind her departure, breakups in the business seem to be occurring with increasing frequency as the industry experiences very rapid growth. The firm has about $2 billion in assets under management, serves 95 wealthy families and has 45 employees, including six senior client advisors and four senior investment advisors.
Also during January, according to the firm's Form ADV filed in February, Ballentine, Finn added two other owners, Senior Client Advisor Andrew J. McMorrow and Senior Investment Advisor Gregory L. Peterson, both of whom joined the firm in 2002. The ADV says the other owners are Ballentine, president and chief compliance officer, who became an owner in January 1997; Kyle J. Schaffer, director and vice president, who became an owner in January 2006; and Claudia J. Shilo, vice president, who became an owner in January 2007. Ballentine is the majority owner, with at least 50% but less than 75% of the firm, the ADV says.
"In the ten years she was with the firm, Alice played a valuable role in its evolution. We gratefully acknowledge her contributions and offer her our best wishes," Ballentine said. "The separation had nothing to do with any client situation or regulatory issue. No clients have left as a result of the separation and the firm has continued to grow by adding both clients and employees."
Ballentine and Finn formed the firm in 1997. Its precursor operation was Ballentine & Co., which Ballentine, a Yale graduate, founded in 1984 in Wolfeboro, N.H. Before that, he worked in his family's business and as a marketing rep for IBM.
In the 1990s, he began looking for a partner and found Finn, an honors graduate of Harvard University and Harvard Law School. She began working with Ballentine in 1996 and previously was vice president of Kinder Financial Services Inc. Prior to that, she practiced corporate law-specializing in mergers, acquisitions and public offerings-as an attorney at the Hale and Dorr law firm in Boston. Earlier in her career, Finn worked for NASA, negotiating international contracts for the space shuttle and International Space Station projects.
Financial Advisor magazine published a profile on the firm entitled "Perfect Together" in its May 2007 issue.