Industry Groups Want Oversight Board For Planners
A consortium of leading financial advisory trade organizations is calling for a professional standards-setting oversight board to establish financial planning standards for the industry. The board, as envisioned, would report to the SEC.

The proposal is the first significant policy work coming from the self-billed Financial Planning Coalition, an entity created late last year that comprises the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors. The coalition's raison d'être is to present a unified response to expected legislation in Congress that could reshape the financial services industry.

"The proposal is that the oversight board would regulate those who hold themselves out as financial planners, wealth planners and similar titles," says Kevin Keller, chief executive of the CFP Board.

Among other things, the coalition's proposed oversight board would work with the financial planning profession to set standards for training, experience and competence, subject to SEC review. It also calls for the board to enforce its rules and standards in cooperation with other regulatory bodies.

As part of its proposal, one of the coalition's chief -and perhaps controversial-goals is to hold the delivery of financial planning advice to the fiduciary standard of care that aims to put the interest of the client ahead of that of the advisor. The competing suitability standard of care required of Wall Street brokers requires them only to sell products and services that are suitable to particular investors, based on an investor's risk tolerance or investment goals.

"It's a little less controversial than it was more than two years ago when I started at the CFP Board," Keller says. He notes that FINRA's new CEO, Richard Ketchum, recently called for adopting the fiduciary standard for all advisors. 

In the letter announcing its proposal, the coalition posited the CFP Board as a logical choice to lead efforts to create the oversight board based on its role in setting and enforcing industry standards. Keller said it's premature to speculate whether the CFP Board would be the de facto oversight board.

Meanwhile, the coalition has been working the crowd in Washington. "We haven't seen a lot of other organizations on the Hill trotting out regulations for financial advice," says Duane Thompson, managing director of FPA's Washington, D.C. office. "A lot of activity on Capitol Hill is currently focused on the topic of the day. I think there's a void now [in the area of reforming financial advice], and we're filling an area that Congress hasn't turned its attention to yet."

Thompson says that while the coalition is taking a lead on regulatory reform of financial advice, it isn't operating with blinders on. "There are a lot of industry groups involved in giving advice and interested in what others are thinking, and we're giving them our perspective," he says.
Neil Simon, vice president for government relations at the Investment Advisors Association, says the coalition has kept his group abreast of its plans, but he couldn't comment much because he doesn't have many specifics. He says the IAA isn't sure where advisors fall under the coalition's oversight board proposal.

"One of the things we're curious to learn more details on is how they definitionally separate advisors and planners," says Simon, whose group represents SEC-registered investment advisors. "That's a critical detail.

"I think there's a lot of dust being kicked up as part of the regulatory reform debate," he continues. "Like all things dealing with law and regulations, the devil is in the details."

Target-Date Funds In Crosshairs
The sweeping examination of all things financial will turn to target-date funds on June 18 when the Securities and Exchange Commission and Department of Labor will hold a joint one-day hearing focusing on portfolio composition, risk and disclosure issues.

Target-date funds invest in a mix of equities, fixed income and cash equivalents that automatically rebalance toward a more conservative mix the closer the fund gets to its retirement target date. Both praised for their "auto pilot" convenience and knocked for their one-size-fits-all approach, target-date fund assets ballooned from $66 billion at year-end 2005 to $152 billion as of March 2009. That's down from $178 billion in 2007, due largely to the beating they took during the market downturn. 

In a speech last month, SEC chairman Mary Schapiro expressed concern that the average loss last year among 31 funds with a 2010 retirement date was almost 25%, with losses ranging from 3.6% to 41%. That's a hefty hit for near-retirees, and it calls into question the equity allocations for these funds-particularly those with near-term retirement dates.

Putnam's 2010 target fund, for example, was recently invested 32% in equities versus 58% for the T. Rowe Price 2010 target fund. The latter company has long had a heavy equity tilt in its target date offerings.

"We've revisited all of our assumptions and re-ran our numbers from different perspectives, and it reaffirmed our belief in the equity allocations we use," says Christine Fahlund, a senior financial planner at T. Rowe Price.

Fahlund says being too conservative might be counterproductive over the long haul. "The problem with that is it really constrains your lifestyle down the road because you won't be able to increase withdrawals, there's not much inflation protection and there's no cushion for unexpected expenses," she says.

Possible solutions for target-date funds' perceived shortcomings are hard to come by. "If there was a way to protect the downside for a reasonable price everyone would already be doing it," says Mike Henkel, managing director of retirement services for asset manager Envestnet.

One idea is to provide some type of guaranteed income as part of the package. "Theoretically it makes a lot of sense," says Morningstar analyst Michael Herbst. "Operationally is where things can get sticky because these annuity or insurance-like features can be pretty costly."

A small number of companies have rolled out target-date funds with income guarantees. But the financial condition of some of the large financial companies with capacity to offer annuity-like target-date funds raises another question. "People talk about longevity risk in terms of investors outliving their savings," Herbst says. "But for some of these types of products, the longevity risk is whether these insuring entities will be around long enough to make their guarantees stick."

Some industry observers believe annuity-like features will play a growing role in target-date funds. "There will be a lot of experimentation on them, but they're on their way," says David Krein, senior director of institutional markets at Dow Jones Indexes.

That said, they're not a cure-all. "The income-guarantee is an important tool in post-retirement," Krein says. "But it doesn't really solve the puzzle on the pre-retirement side regarding what risk level is appropriate as people approach retirement."

As for the June 18 hearing, some people are skeptical it will achieve anything substantive. "If they invite the normal cast of characters that they have been for all of the hearings on advice legislation, then not much use will come out of it," Henkel says. 

Fidelity Ramps Up Technology Platforms
Senior executives at Fidelity Investments expect close to 1,000 advisors to move onto their Wealth Central platform, which the Boston-based custodian and clearing firm unveiled earlier this year. In the two months since the advanced platform was introduced, just under 100 advisors have converted all their files to the system, although all new client accounts go straight to Wealth Central.

The new platform is debuting at a time when the firm is experiencing a significant increase in new business. According to Mike Durbin, president of Fidelity Institutional Wealth Services, the custodian opened an average of 17,000 new accounts a month in the first quarter of 2009, up from 13,500 for the same period last year.

Durbin, who joined Fidelity earlier this year after 18 years at Morgan Stanley, believes the RIA channel of the retail financial services arena is poised for significant growth. "In two or three years, the RIA share will be meaningfully greater," he says. "They will take share from a lot of places, but disproportionately from the wirehouses."

Simply put, Durbin calls the RIA model a "better mousetrap." It's a "more compelling business proposition" for clients and a "better economic proposition" for advisors, he said in an interview at Fidelity's annual executive forum conference for advisors in Orlando in early May.

In a separate development, Fidelity's National Financial clearing unit also officially launched two new programs called Business Process Manager and Consulting Services. These services were launched to address an environment where the company's brokerage clients are finding their margins squeezed by client service demands and increased regulation. The first program attempts to streamline operations through work-flow automation and enhanced electronic records and document management, according to National Financial senior vice president Bobbi Masiello.

She adds that the programs can generate significant savings in document storage and retrieval, and that using National Financial's backup facilities "eliminates the need" for a broker-dealer to manage its own disaster recovery program.

Broker Disciplinary Records Could Be Permanent
A Financial Industry Regulatory Authority (FINRA) proposal to expand its online database of broker employment history could make brokers' disciplinary history permanently available for public review.

FINRA's BrokerCheck service enables the public to examine the employment, qualifications and disciplinary history of more than 650,000 brokers under FINRA's jurisdiction. Currently, a broker's record is removed from the public record two years after he or she leaves the securities industry.

But recent shenanigans in the financial services industry that involved defrocked brokers with no traceable record of past misdeeds prompted the agency to seek approval to make records of regulatory actions against brokers permanently available, even if they're no longer part of the securities industry. FINRA estimates that more than 15,000 people who left the industry after violating regulations no longer have records available on BrokerCheck. 

"Individuals previously barred by FINRA and other securities regulators have surfaced in a number of recent frauds responsible for millions lost by unsuspecting investors," FINRA chief executive Richard Ketchum said in a statement. "Investors should be able to check if the financial professional they're dealing with has been the subject of a disciplinary action by regulators."

FINRA filed its rule proposal with the Securities and Exchange Commission this spring and is soliciting public comment for an undetermined time period. "It could be for two months or five years," says a FINRA spokesman. "It all depends on the issue."