Clients Want Insured Investments
In the wake of the last year's financial collapse, insurance guarantees are in huge demand. In a recent six-month period, 58% of advisors said their clients have inquired about guaranteed investments, according to an August survey by Financial Research Corp., Boston.
In addition, the Federal Reserve's Flow of Funds report in June indicated that households have been moving significantly more of their assets to safety, and the majority went to Treasury securities, CDs and interest-bearing deposits.
But because of the low interest rates on CDs and bonds, many advisors are turning to insurance products with higher returns and principal guarantees. One example is variable annuities, where total assets in June were $1.2 trillion, up 11% from the first quarter of 2009, according to LIMRA. And second-quarter data showed a record high 59% of contracts elected a guaranteed lifetime withdrawal benefit rider.
With a guaranteed minimum withdrawal benefit, investors typically are guaranteed 5% of the principal or stepped-up principal value-depending on how the contract is structured-as annual lifetime income regardless of how the underlying investments perform.
But a principal guarantee is only as good as the financial strength of the insurance company backing it. A number of insurance companies have received ratings downgrades by A.M. Best. Additionally, total annual costs for a variable annuity with a guaranteed minimum withdrawal benefit can hit 300 basis points.
Immediate annuities and deferred fixed annuities are also finding a growing market thanks to guaranteed payout rates of 5% to 9%. Combined market sales in the first half of 2009 were $63 billion, according to Beacon Research. That's a 39% jump over the year-earlier period. "The severity of the current recession . . . reignited customer concerns about their principal's safety, renewing interest in fixed and indexed annuities," says Scott Hawkins, analyst at Conning Research. "At the same time, the baby boomer generation is shifting focus from asset accumulation towards asset decumulation."
Some advisors have access to a new hybrid product called "stand alone living benefits" (SALBs), which are guaranteed income riders that can be applied to fee-based advisors' managed accounts.
Tamiko Toland, an analyst with New York-based Strategic Insight, says the insurance portion of the product is a contingent deferred annuity certificate, registered with the Securities and Exchange Commission.
Clients also can arrange for income to continue for a spouse. But these products aren't cheap: The annual charge for a SALB ranges from 85 to 260 basis points.
Companies offering these riders include Phoenix Companies, Nationwide Financial, Allstate Life Insurance Co. and Genworth Financial. They are available on broker-dealer platforms such as Lockwood Management, Envestnet, Genworth Financial and Morgan Stanley Smith Barney.
SALBs may have limits on how much investors can allocate to stocks. Nationwide's "Retirement Income Solutions" limits the stock allocation to 50% of assets. By contrast, Phoenix permits a 100% allocation.
And the tax consequences of these products remain uncertain. Insurance company attorneys take the position that policyholders owe ordinary income tax on dividends and interest and capital gains when clients draw down the managed accounts for income. Once the investment is depleted and the annuity kicks in, about 60% of the annuity income is taxed. The rest is considered a return of principal, based on the IRS's published "exclusion ratio."
Also, be aware that insurers can raise the annual fee for SALB protection during the life of the contract. And the insurance coverage typically is not transferable.
--Alan Lavine
Francais Succeeds Kochis As Aspiriant CEO
Rob Francais will become chief executive of Aspiriant on November 1, replacing longtime industry leader Tim Kochis in a transition that was planned roughly two years ago when both executives' respective firms merged to become one of the nation's largest independent wealth management companies.
Aspiriant, which officially formed in January 2008 when Kochis Fitz in San Francisco teamed up with Quintile Wealth Management in Los Angeles, has nearly $4 billion in assets under management and ambitious plans to expand around the country from its California base.
Kochis will take a six-month sabbatical, during which he and his wife plan to travel to three continents and Hawaii. When he returns, Kochis will be chairman of the board and will focus on client relationships and business development and strategy.
When Aspiriant was created, the game plan called for Francais to replace Kochis as CEO at the end of 2009. "One of the reasons we accelerated this transition to November 1 was because integration of the firm is proceeding at a faster-than-expected pace," Kochis says.
And one reason for that was the recent market downturn. "That really helped us focus and brought us together as a unified client-service organization faster than it might otherwise," Kochis says.
But the downturn also has crimped Aspiriant's original growth plans. Under a five-year plan approved by Aspiriant's board of directors, the company wanted to triple its AUM to $15 billion. "It might be more like $12 billion now," Kochis says. "But that doesn't change our strategy to grow both organically and inorganically."
Francais says Aspiriant's initial focus was on building its platform in areas such as governance, client service and investments. In March, the company began to embark on its fold-in strategy to add new firms and expand its number of advisors. The company currently has 75 employees and about 425 clients.
"We're meeting with different firms and we anticipate some sort of activity along those lines sometime next year," Francais says. He adds that possible expansion cities include Chicago, New York, Dallas, Atlanta and Seattle.
"The cultural fit of an organization is far more important than the geography," Francais says.
FPA's Top Lobbyist Stepping Down
Duane Thompson, managing director of the Financial Planning Association's Washington, D.C., office and one of the advisory industry's top lobbyists, left the organization last month.
Thompson, who in 1995 joined the Institute of Certified Financial Planners (which merged with the International Association for Financial Planning in 2000 to form the FPA), said he is leaving for personal reasons. He will be succeeded by Dan Barry, the current director of government relations in the FPA's Washington office.
"It's something I've been thinking about doing for a while," says Thompson, who before joining the FPA worked at a family business in Colorado and was a lobbyist with the International Franchise Association in Washington. He says he'll probably remain in the nation's capital and be involved in some type of government relations work.
Thompson has played a pivotal role in lobbying Capitol Hill for regulation favorable to the financial advisory industry. He spearheaded FPA efforts in the legal battle with the Securities and Exchange Commission over the so-called "Merrill Lynch rule," which enabled brokers to give fee-based advice and call themselves investment advisors yet remain exempt from regulation under the Investment Advisers Act of 1940. The Merrill rule was adopted in 2005, but was struck down by a District of Columbia appeals court two years later.
Lately, Thompson and the FPA have joined forces with other industry groups to lobby Congress as it debates the regulatory overhaul of the financial services industry. Current pressing issues involving advisors include whether the fiduciary standard should be imposed across the industry and which regulatory body should oversee the advisory business.
"I feel like we're covered because we have good people in the D.C. office," says Marv Tuttle, the FPA's executive director. "But I can't say it's not a big loss because he has so much understanding and expertise in industry issues."
New Web Sites Aim To Keep You Honest
The Web has been a great marketing tool for financial advisors, but now some third-party Web sites enable clients to peek deeper into your operations than you might want.
The following two sites represent different plays on the keeping-your-advisor-honest theme. AdvisorBackgroundCheck.com allows clients and prospective clients to look closely at your regulatory and compliance record. EvaluateMyAdvisor.com gives the client a second opinion on whether the investment performance you report to that client is accurate and what, if any, value you add by way of your management.
AdvisorBackgroundCheck.com
AdvisorBackgroundCheck.com essentially asks, "How do you know your advisor isn't the next Bernie Madoff?" It streams a series of news reports about advisor fraud, Ponzi schemes and identity theft. The implication is that your motives are questionable until proved otherwise, according to AdvisorBackgroundCheck's criteria.
The main purpose of the site, though, is to provide viewers with information it gets from background checks it runs on advisors. "We run multiple checks including a civil/criminal check, a financial liens/judgments check, a bankruptcy check, a professional license check, a State Department of Insurance check, a FINRA check, an SEC Check, a State Securities Department check and a Better Business Bureau check," says company spokesman Bryan Binkholder. "Of the personal financial information checked, the only portion that would be divulged to a consumer would be if the advisor had had a bankruptcy." Advisors are given the opportunity to respond to and clarify any items on their checks.
Advisors who pay $189 to become site members and who have clean regulatory records are displayed prominently as already having AdvisorBackgroundCheck's seal of approval. The site posts information it has found and comments or explanations the advisor has added. A consumer interested in an advisor who isn't a member can request a free background check. The site then contacts the advisor, gives the advisor the client or prospect's name, and explains that the consumer wants a background check done. The advisor must pay $50 to have the check done or instead pay the $189 member fee and avoid any present or future $50 charges.
Some advisors will certainly feel blackmailed by this system. It may feel intrusive and even a bit like extortion. On the other hand, it might cost you just $50 to pick up an ideal client. If you refuse to pay the $50, the prospect is told the advisor has declined to submit to the background checks and no information will be released to them. Of course, at this point the advisor's record is clearly suspect, and AdvisorBackgroundCheck gives the prospect names of full members in his area, if any.
So what's in it for you? Full disclosure. Also, you may have an erroneous complaint on your record that AdvisorBackgroundCheck would discover and then give you the opportunity to correct.
EvaluateMyAdvisor.com
After Norm Pappous was laid off from Merrill Lynch last February after 15 years in the financial markets, he started EvaluateMyAdvisor.com to counter what he perceived as the low level of investment knowledge held by most wirehouse financial advisors.
His belief is that most wirehouse advisors are little more than skilled hand-holders, so his site enables advisory clients to determine if their advisor is adding value to their portfolios. The basic concept is that a client or her advisor logs on to the site and pays $500 to purchase an evaluation report, and then either the client or her advisor enters the data necessary to produce the report.
The advisor or client must enter at least 37 consecutive months of portfolio data; a portfolio's monthly "time-weighted" returns or deposits, withdrawals and monthly ending balances; and the asset allocation model that the advisor used.
EvaluateMyAdvisor compares a portfolio's cumulative and annual performance to an appropriate benchmark; assesses its annual and quarterly risk; determines how much of the market's rise or fall the portfolio is capturing; and calculates its alpha, beta and Sharpe Ratio. Other reports also are provided.
"A lot of people thought what we're doing was an attack on advisors, but it's not," Pappous says. We're trying to make certain that good advisors get all the business they can handle, and that others find a new career."
The report may be somewhat technical for the average client and draws no conclusions. "We're trying to develop a normal 'street talk' explanation of our graphs," Pappous says, adding that the report will eventually include an executive summary in the first few pages with check boxes indicating whether value is being added.
-- David J. Drucker
Native Tribe Buys Broker-Dealer
The Lower Brule Sioux Tribe in South Dakota has bought Westrock Group Inc., a New York-based financial services firm that includes an independent broker-dealer. Westrock becomes the industry's first financial services firm to be wholly owned by a Native-American tribe. The terms of the deal--which marries a Park Avenue office with a Great Plains reservation of rolling shortgrass prairie, hills and buttes-weren't disclosed.
It's a groundbreaking deal for both parties, and each stands to benefit in different ways. Westrock's new status as a Native American-owned company could give it a leg up on getting government and pension-fund business, and it could also benefit from underwriting deals syndicated by the largest Wall Street firms, which must allocate a certain percentage of business to minority-owned companies. The tribe hopes to use a portion of company profits to bolster economic activity and improve housing, education, health care and infrastructure on the reservation.
The deal, announced last month, came about through the two groups' shared acquaintances. "A friend of mine who knows the advisor for the tribe called and asked if we had an interest in being bought," says Westrock CEO Donald Hunter. "At first I said no. Then he said, 'What if it was by an Indian tribe?' And I said, 'How can I find out about this?' I knew right away the benefits that come with being a minority-owned business." From there, the two sides began a roughly two-and-a-half year due-diligence process before they closed the deal.
Founded in 1995, Westrock offers financial services through its three different business groups-Westrock Advisors, a full-service independent broker-dealer; Westrock Institutional Group; and Westrock Asset Management. The company has roughly $1.4 billion in assets under management and 150 employees. Westrock will continue to operate as an independent broker-dealer, and its daily operations and management will remain unchanged.
Michael Jandreau, chairman of the Lower Brule Sioux Tribe, said his group bought Westrock to diversify its revenue stream and participate directly in the U.S. capital markets. "With an unemployment rate of 44%, we'll use the money to create jobs and to strengthen products we're already involved with, such as Lakota Foods," says Jandreau, who has led the tribe for 30 years.
The Lower Brule Sioux Tribe is a band of the Lakota Nation whose reservation occupies a large swath of land along the Missouri River in
central South Dakota. The tribe's main economic activities are construction and agriculture, and it supports assorted other businesses such as the Golden Buffalo Casino and its motel. The tribe says its farm corporation is one of the country's biggest popcorn producers.
One result of the tribe's Westrock acquisition is the creation of a tribal services advisory group that will manage money for both the Lower Brule Sioux and other tribes around the country. The advisory unit, which will also help finance projects done on reservations, will be led by Gavin Clarkson and Dennis Ickes. Clarkson, a member of the Choctaw Nation, is an associate professor at the University of Houston Law Center with a research focus that includes tribal economic development and finance. Ickes is a longtime advisor to the Lower Brule Sioux Tribe.
"That business is aimed at tribes in general, and it's not looking down the food chain at individual tribal members," Hunter says.
Reaction to the deal at the tribal
level was mixed. "Of course, some people are concerned about what this exposure means," Jandreau says. "Others are
very supportive."
$800 Billion In Client Assets Will Change Firms in '09
Due to large numbers of financial advisors switching employers during these topsy-turvy times, $800 billion in client assets will likely change firms this year, according to Cerulli Associates.
In a recent research report entitled Advisor Migration: The Changing Landscape of Retail Distribution, the Boston-based consulting firm projects that wirehouse firms will lose the most assets and that registered investment advisors and hybrid advisors will gain the most. The report looks at asset flows across seven different channels.
Cerulli estimates that the wirehouses will lose $188 billion to other channels. It also estimates outflows of $13 billion and $6 billion for insurance and regional channels, respectively.
On the other hand, dually registered advisors are expected to see inflows of $62 billion, independent broker-dealers and RIAs are projected to gain roughly $50 billion each, and banks stand to gain $45 billion.
That's not to say the wirehouses will wither and die anytime soon. On the contrary, says Cerulli, these firms still control about half of the nearly $4 trillion in advisory-controlled assets.
But changes within the wirehouses will help accelerate the asset migration away from that channel, says Cerulli analyst Scott Smith. Specifically, Merrill Lynch (now owned by Bank of America), Morgan Stanley Smith Barney and UBS are culling their ranks of lower producers and focusing efforts to keep existing top talent at their firms or to poach large producers from their competitors.
Among the independent broker-dealers, Smith says the likes of LPL, Ameriprise, Cambridge Investment Research and Commonwealth Equity Services have done a good job in attracting high-quality advisors. "These firms are well-positioned to compete on a platform level with the industry's largest firms because they've made the commitment to make products and services available that advisors are accustomed to," he says.
Nonetheless, Cerulli's Projected advisor headcount breakdown by channel for 2012 (compared to year-end 2008) shows only the dually registered and RIA channels making gains. The dually registered channel is expected to increase from 6% to 8%, while the RIA space is expected to grow from 4.8% to 11.6%.
Team-Based Advisory Practices Grow
The number of financial advisors working in team-based practices jumped about 60% during the past two years, according to a Cogent Research study of 1,529 advisors.
Increases were seen across all channels, but the biggest rise came among wirehouse advisors, where 31% of surveyed advisors participated in team-based practices in 2009 versus 18% in 2007. Overall, 24% of respondents said they were in team-based practices this year compared with 15% two years ago.
Cogent sees the trend continuing as the advisory industry ages and client needs become more complex. John Meunier, Cogent's principal and cofounder, said the trend often takes shape by teaming a younger advisor focused on asset gathering with an experienced advisor who continues to provide financial planning advice.
"They're using the younger partner as a transitional figure to bring new blood into the practice," Meunier says. "Both advisors and their clients are getting older, so they're refreshing the book with new advisors and clients. I think that's one of the main drivers within the wirehouse channel."
Wirehouse teams typically include two members focused on asset management, but teams at registered investment advisory firms often include four members delivering a range of services such as estate planning, tax planning and trust services.
Clients today need more reliable retirement-income streams, Meunier adds, and that need places more demands on advisors. "The advisor has responsibility to not only grow the nest egg, but to manage it through retirement as clients live longer. The pressure is on to deliver more in retirement, and advisors are probably more comfortable now sharing some of that responsibility with other people in the practice."
Sometimes, advisors are willing to team up with professionals outside the practice to help with taxes, annuities, insurance or other matters. "A good advisor may defer to a specialist in ancillary areas who might not be permanent members of the team," Meunier says.
Advisors Don't Get Services They Want
Financial company executives continue to misread the types of practice management and technical support programs their advisors truly want, according to a survey by CEG Worldwide.
Nearly nine in ten advisors (89%) want to learn how the best wealth managers in the industry run their businesses and nearly one in three (31.9%) places a high priority on motivational support programs, according to the report, Winning the Allegiance of Top Financial Advisors.
However, research shows financial executives tend to underestimate the importance that top financial advisors place on these practice management support programs. Simultaneously, financial executives tend to overestimate the importance that advisors place on such practice management support programs as time-management solutions and staff training.
Additionally, CEG found that support for life insurance products most frequently topped the needs of surveyed advisors (cited by 41%), but ranked only fourth among surveyed financial executives (cited by just 22%). On the other hand, financial executives tended to overestimate the support advisors required by a nearly two-to-one margin with retirement planning (60% to 36.2%) and retirement distribution tactics (60% to 31.6%). CEG, based in San Martin, Calif., conducted the survey of 2,094 financial advisors and 50 financial executives between 2007 and 2009.
FA/Spectrem Innovation Forum Slated For October
Financial Advisor magazine and the Spectrem Group will host a forum on October 21-22 designed to be a financial services think tank on innovation. The forum, Innovation And Growth In A Post Economic Crisis Era, will be held at the Seaport Hotel in Boston.
Many companies have focused on cost-cutting to survive the recession. Historically, though, disruptive environments such as this have enabled innovative companies to gain competitive advantages and assume leadership roles in their industry.
The innovation forum brings to together thought leaders and innovators from 20 to 30 financial services companies to discuss current challenges and create new ideas. The meeting will help participants better understand the new environment and to frame individual corporate strategies to help them thrive.
As part of the forum, Spectrem will present some of its proprietary investment research on the mass affluent. Meeting topics will include technology, social networking and various business strategies. And meeting participants will get a tour of the Fidelity Center for Applied Technology, a research and development facility aimed at transforming business through technology.
Forum members include Ameriprise, Boston Private, Charles Schwab, Contango (Zions Bank), Direxion, eMoney Advisor, Fidelity, LPL, Pershing, TD Ameritrade, UNIFI, USAA, Vanguard, New York Life, Great West and Wells Fargo.
'Big Bang' Predicted From Tax, Retirement Law Changes
Various tax-related bills pending in Congress that are scheduled to be hashed out in the fourth quarter (in theory, at least) could dramatically alter trusts, estates, charitable contributions, gift taxes and financial planning in general. "It'll be a big bang in that we'll be hit with a tax bill at some point that's as monumental as we've ever seen," says Roy Adams, professor emeritus of estate planning and taxation at Northwestern University School of Law.
Adams spoke last month at a presentation in Minneapolis co-sponsored by Securian Trust Company and The Salvation Army on coping with the potential tax changes. Front and center are possible changes in the estate tax, which is slated to be repealed for one year in 2010 before reverting the following year to the exemption level of 2002 ($1 million, versus $3.5 million in 2009) and the top tax rate of 2001 (55%, versus 45% in 2009).
But the big push for health care reform is putting everything else on the back burner, including taxes. "My feeling is that Congress will punt on it this year and take next year to work out a comprehensive tax bill," Adams says.
Elsewhere, the income limitation on converting regular IRAs, 401(k) accounts and 403(b) accounts to Roth IRAs will be removed in 2010, opening it up to wealthy individuals. But that may not be the best move for everyone. "If you think you'll always be in the highest tax bracket and you think future tax rates will rise, you might want to convert now to lock in a lower rate," says Christopher Hoyt, who also spoke at the presentation and is a professor at the University of Missouri-Kansas City School of Law where he teaches courses in federal income taxation and business operations.
For advisors wondering how to position clients in a potentially unsettling tax landscape, both speakers suggested waiting for the dust to settle before putting clients into contingencies that might not be needed.