Let the food fight begin. As expected, people from all corners of the financial services industry are weighing in with their ideas about the future shape of the industry, including thoughts about whether all financial advisors should be held to the fiduciary standard of client care.
In March, T. Timothy Ryan, president and chief executive officer of the Securities Industry and Financial Markets Association, told a U.S. Senate committee he advocates a "universal standard of care that avoids the labels that tend to confuse the investing public and expresses, in plain English, the fundamental principles of fair dealing that individual investors can expect from all of their financial services providers."
Ryan said the 2007 Rand Corp. report commissioned by the Securities and Exchange Commission found that efforts to describe financial services providers' duties in terms of "fiduciary duty" or "suitability" confused investors. "The Rand report makes clear that individual investors generally do not understand, appreciate or care about such legal distinctions."
In late February, Financial Planning Association board member Deena Katz told a U.S. Senate committee that Congress could help boost the chances for successful baby boomer retirements by ensuring that all financial advice offered to investors "be based on fiduciary principles; i.e., the simple and equitable concept that recommendations will be made based on the best interest of the client, that conflicts of interest will be minimized and that any remaining conflicts be clearly disclosed."
Katz, an associate professor in the personal financial planning department at Texas Tech University and chairman of Evensky & Katz, a Coral Gables, Fla.-based fee-only planning firm, also said that all professionals who provide advice to retirees should be held to this fiduciary standard, as they would be under ERISA.
The debate stems from the polyglot regulation of advisors put in place decades ago. John Bogle, founder and former chairman at the Vanguard Group, traces the fiduciary standard to eight centuries of English common law, which states that a fiduciary duty is basically a legal relationship of confidence or trust between two or more parties.
Speaking last month at the IA Compliance Summit in Washington, D.C., Bogle said there are two types of investment advisors. One is defined by the Investment Company Act of 1940 as working at a management company and providing selection and portfolio management advice to mutual funds. The other is defined by the Investment Advisers Act of 1940 as getting paid for providing advice to others. The latter, Bogle said at the summit, excluded broker-dealers because the advice component is incidental to the conduct of their businesses.
Bogle firmly supports the fiduciary duty standard. After he cited the FPA, the National Association of Personal Financial Advisors and other industry organizations whose members operate under such a standard, Bogle said the standard "must be extended to other advisors, including broker-dealers who elect to act as advisors."
"Of course, this idea generates heat, but I am not sure why," Bogle said. He contrasted the difference between investment professionals paid solely through fully disclosed fees and "sales representatives who sell the products and services of the companies they represent."
Indeed, Bogle's comments drew criticism. "I question the logic," said David Bellaire, general counsel and director of government affairs at the Financial Services Institute, a membership group for independent broker-dealers and financial advisors.
Bellaire said the issue is more about reviewing, examining and enforcement on the advisory side than it is about dealing with regulatory standards. He said the Bernard Madoff case is a lesson that investment advisors should be held to the same level of supervision and examination as broker-dealers are now.
"Most of our members are dually registered firms used to FINRA, SEC and state exams on the broker-dealer side, and to the SEC and state exams on the investment advisor side," Bellaire said, "And in my experience, these types of advisors hold themselves
to the higher standard of the two," depending on he circumstances.
Congress has other things on its mind these days, so this debate won't be solved anytime soon-if ever. Meanwhile, stay tuned.
LPL Seeing Explosive Recruiting Growth
The turbulence sweeping the financial services industry, coupled with the continued deterioration of some of the nation's largest securities firms, is triggering explosive recruiting growth at LPL Financial, the nation's largest independent brokerage firm. In the first two months of 2009, recruiting climbed 160%, according to Bill Morrissey, executive vice president of new business development, independent advisor services.
Wall Street's wirehouses, battered every week in the headlines, have proved to be the most fertile source of new recruits. In normal times, wirehouse brokers account for about 30% of reps who decide to move their affiliation to LPL; so far in 2009, they represent about 42%, according to Morrissey.
Surprisingly, retail clients have provided a major impetus for many advisors going independent. "Clients are asking them to explore new business models," Morrissey reports. "Their clients read the same things in the newspaper they do."
In 2008, new leads to LPL from wirehouse reps increased 146%, which translated into a 66% increase in meetings. Moreover, revenue generated by the average wirehouse recruit in 2008 jumped 27% from 2007. "This year the difference is even more pronounced," Morrissey says.
The brokerage business is a mature one, and market conditions have shrunk the number of new entrants into the industry. This means many independent firms find themselves competing for the same pool of reps.
Yet in this area as well, LPL is continuing to see a significant spike in interest. Morrissey says his firm saw a 109% increase in new leads from independent reps in 2008, with 72% of those leads turning into meetings. "A lot of folks are re-evaluating their broker-dealer," he explains.
LPL's size, scale and technology may be contributing to the acceleration in recruiting. With between 50 and 60 transition specialists on staff, each recruit is assigned a point person and this specialist works out a series of milestones and deliverables to smooth out the process. The firm also offers new reps a suite of benefits, including deferred compensation and even LPL stock ownership, which usually is awarded to advisors twice a year based on revenue levels and growth.
The firm's recruiters have also managed to leverage the resources of other departments, notably the marketing and research departments. Late last year, LPL launched a program dubbed Clients First, designed to help both reps and new recruits find and convert new clients as well as keep existing ones. This program was developed by executive vice president and chief marketing officer Ruth Papazian.
Part of the goal, according to Papazian, was to help advisors with prospecting and advertising. LPL has conducted and acquired market research revealing that the majority of investors in the so-called "mass affluent" segment are "staying in the market, and looking to recoup" their losses, she says. To help advisors on the prospecting front, LPL is purchasing new lead lists to identify potential new clients.
With portfolio sizes down across the business, growth "is really about growing your book," Papazian says. With a great deal of money in motion, many advisors are focusing on new client acquisition and communication with existing clients. Three outside sponsors (Prudential, Van Kampen and Lincoln Financial), are participating in the program and delivering marketing consultations. The second phase of the program will focus on marketing and segmentation and will have four additional sponsors.
A Swiss Miss
The Internal Revenue Service is cracking down on tax cheats hiding money in foreign countries, and financial advisors who have wealthy clients with cash stashed overseas better hope their clients properly reported such funds.
After a former private banker with Swiss bank UBS pleaded guilty in June to helping a client hide $200 million in an offshore account, he blew the whistle on the bank by claiming it holds billions of dollars for U.S. customers in secret Swiss bank accounts. In turn, the U.S. government has sued UBS in a Florida court to hand over names of 52,000 American depositors. The IRS is offering amnesty to people suspected of hiding money in such accounts-fess up and pay back taxes, or face penalties that could include up to five years in jail and fines of $100,000 or 50% of the amount in the unreported foreign account, whichever is more.
Robert McKenzie, a partner in the white-collar criminal defense and tax practice at the Chicago-based firm Arnstein & Lehr, says advisors who put client money in offshore accounts for diversification or other legal reasons should put in writing that they properly advised clients of the legal responsibilities for reporting that money. That entails filing a Foreign Bank and Financial Account report for overseas accounts worth more than $10,000.
If the client willfully failed to report the income and the IRS nabs them, the advisor who didn't put his legally defensible advice in writing could get dragged into the case and potentially-depending on the outcome of the case-stand accused of aiding and abetting tax fraud. The penalties include jail time and heavy fines.
McKenzie says about 15 people have sought his advice in the UBS case, and some are laying low because they don't think the IRS can possibly catch all 52,000 suspected accounts. "In a given year, the IRS usually prosecutes 2,500 for tax fraud of all types," says McKenzie, whose advice is to come clean. "How much is it worth to sleep at night?"
McKenzie says UBS is probably the tip of the iceberg in going after foreign accounts. Credit Suisse and HSBC have been mentioned in the press as possible targets, and he says he's advised people who've made voluntary disclosures with banks other than the aforementioned three.
Millionaire Population Shrinks in '08
Millionaire Americans-a demographic that has undergone robust growth in recent years-has dwindled in size for the first time since the bear market of 2000-2003, according to a new survey.
A recent survey by Spectrem Group shows that the number of households with a net worth of
$1 million or more, not including the respondents' primary residences, fell 27% in 2008 to 6.7 million, from a record 9.2 million households in 2007.
That marks the first time since 2002 that the U.S. millionaire population has shrunk from one year to another, according to Spectrem. The reduced numbers were primarily due to the recession and the falling value of a broad range of assets and investments.
The number of ultra-high-net-worth households, those with a net worth of $5 million or more, also dropped 28%, to 840,000 in 2008, according to the survey. Affluent households, the group made up of those with $500,000 or more in net worth, declined 28%, to 11.3 million in 2008.
The decreasing population of millionaires could have an impact on financial advisors and the wealth management industry, which in recent years have experienced significant growth as the upper tier of the nation's wealth has swelled.
The shrinking pool of wealthy Americans won't help in the nation's attempt at a recovery, says Spectrem President George Walper Jr., because business owners won't spend as much to create jobs.