How Much Is That Planner In The Window?
The Financial Planning Association in May polled some 1,500 planners, pinpointing 21 of the most common financial advisory positions, how they are paid, and what their responsibilities are. Then it broke down these numbers further by region and education level. The association has published its findings in a new booklet, Financial Planning Salary Survey, and spread the word at its 2009 Anaheim conference.

Among the key findings: The average annual compensation among sole practitioners nationwide is $115,266. Among the nine geographic regions profiled, the highest paying region is the East North Central, with an average pay of $168,625. Other top paying sections include the Pacific ($134,419) and East South Central ($129,571) regions. The West North Central ($74,800) and Middle Atlantic ($83,600) regions are the lowest paid.

But all work and no play isn't necessarily the ticket to a fat paycheck. FPA's survey found that sole practitioners who take 21 to 30 days of vacation a year make an average of $111,696; that's 12% more than those who take 15 days or less.
Regarding employment trends, nearly one-third of financial planning practices plan to hire additional staff in the next 12 months. And almost 80% of firms offer 401(k) plans to their employees, while 80% of those firms match employee contributions or salary.

Ian MacKenzie, FPA's managing director of knowledge and business development, says the survey is a thumbnail guide to help advisors know what their peers are paying for employees doing similar types of work. "Because the profession is in a seminal phase, there's not a lot of standardization of job descriptions," he says. "People don't have good job descriptions or they're all over the place. Business owners must figure it out on the fly."

Becca King, manager of the FPA Research Center, blames the confusion about salaries on the fact that many times employees do lots of different jobs, especially at smaller firms. The distinction between junior- and senior-planner job functions often isn't clear if not spelled out. King saw this firsthand at the Anaheim conference. "I was actually just talking to somebody who was trying to figure out, am I a junior planner or a senior planner?" she says.

The study found significant disparities in senior planners' income among firms. Those at smaller firms (one to five employees) tend to make more, an average of $113,369 in salary compared with a salary of $94,694 at firms with 31 employees or more. But it's also likely that senior planners at smaller firms wear a lot more hats, and the compensation reflects that. Another surprising finding, King says, was that senior planners with advanced education like doctorates or master's degrees didn't necessarily command higher salaries (notwithstanding JDs and CPAs, who can ask for more). 
Instead, King says higher compensation tends to dovetail more with time spent doing actual planning work and direct
work with clients.

"There's the people who work with the client and then there's the people who don't and the people who don't tend to get under-compensated in terms of sort of a national average," King says.

The Financial Planning Salary Survey is available for $125 for FPA members and $350 for nonmembers at the FPA Store.
-Eric Rasmussen

Citi Embracing Fee-Only Model
Citigroup last month said it began transitioning the bulk of its financial advisors at its retail bank locations away from commission-based compensation and into a fee-only model. The advisors are part of the Citi Personal Wealth Management unit, a recently branded network of branch-based advisors led by Deborah McWhinney, former president of Schwab Institutional.

As part of the new makeover, Citi's fee-only advisors are to comply with a fiduciary standard and will charge fees based on assets under management. The goal is to convert the 600 advisors at Citi Personal Wealth Management to the fee model by 2011. Currently, advisors are paid a percentage of the commissions charged to clients. A Citi spokesman said the new compensation plan hasn't been finalized yet.

Citi plans to form investment advisor teams comprised of its top in-house advisors. Other advisors, who will be called investment consultants, will be the so-called gatekeepers to help gauge the financial needs of prospective clients and place them in their choice of investment team-both within Citi and outside the firm. These consultants will be paid a salary and bonus.

The company plans to partner with some of the nation's top independent registered investment advisors to form alliances to help leverage Citi's service offerings and build its geographic footprint. Given McWhinney's background at Schwab, her address book will likely come in handy as her advisory group looks to partner with outside RIA firms.

"It fills out our skill set, and we can partner with outside firms on a referral basis," says Citi spokesman Alex Samuelson. Outside advisors will pay a percentage of their fee to Citibank for a successful referral. That fee could be in the ballpark of the 2.5% asset-based fee that Schwab gets in its referral program from its brokerage network, although Samuelson says Citi hasn't yet determined what it will charge. Citi also expects to recruit advisors from other firms who want to work in a fee model.

"It's a great idea, but the execution might be difficult," says Chip Roame, managing principal at Tiburon Strategic Advisors in Tiburon, Calif. "The world is moving toward fee-based accounts, and I've got to give them [Citi] credit for trying to move its sales force in that direction. But I think someone who might be successful in making such a move would be a high-end brokerage sales force like Morgan Stanley because they serve wealthier clients."

Samuelson says Citi's advisory service hasn't set an asset minimum for its existing Citi customers. But he notes that accounts from outside advisors looking to partner with Citi must have a $500,000 minimum.

Clients of Citi Personal Wealth Management have the option to work with the firm's in-house advisors, or tap into Citi's National Investor Center for self-directed transactions involving no-load or commission products.

Citi still has 13,000 advisors at its Smith Barney retail brokerage unit, which are now part of a joint venture with Morgan Stanley's wealth management business. Morgan Stanley holds a 51% stake in the business. In a speech in September, Citi CEO Vikram Pandit said the company will ultimately sell its stake. So in a sense, Citi is getting a fresh start in the advisory space with its fee-only approach.

"Every firm to some degree is trying create an in-house, RIA-only type of option," says Dennis Gallant, president of GDC Research, a consulting firm in Sherborn, Mass. "This is the first Wall Street organization to do it."

Citi Embracing Fee-Only Model
Citigroup last month said it began transitioning the bulk of its financial advisors at its retail bank locations away from commission-based compensation and into a fee-only model. The advisors are part of the Citi Personal Wealth Management unit, a recently branded network of branch-based advisors led by Deborah McWhinney, former president of Schwab Institutional.

As part of the new makeover, Citi's fee-only advisors are to comply with a fiduciary standard and will charge fees based on assets under management. The goal is to convert the 600 advisors at Citi Personal Wealth Management to the fee model by 2011. Currently, advisors are paid a percentage of the commissions charged to clients. A Citi spokesman said the new compensation plan hasn't been finalized yet.

Citi plans to form investment advisor teams comprised of its top in-house advisors. Other advisors, who will be called investment consultants, will be the so-called gatekeepers to help gauge the financial needs of prospective clients and place them in their choice of investment team-both within Citi and outside the firm. These consultants will be paid a salary and bonus.

The company plans to partner with some of the nation's top independent registered investment advisors to form alliances to help leverage Citi's service offerings and build its geographic footprint. Given McWhinney's background at Schwab, her address book will likely come in handy as her advisory group looks to partner with outside RIA firms.

"It fills out our skill set, and we can partner with outside firms on a referral basis," says Citi spokesman Alex Samuelson. Outside advisors will pay a percentage of their fee to Citibank for a successful referral. That fee could be in the ballpark of the 2.5% asset-based fee that Schwab gets in its referral program from its brokerage network, although Samuelson says Citi hasn't yet determined what it will charge. Citi also expects to recruit advisors from other firms who want to work in a fee model.

"It's a great idea, but the execution might be difficult," says Chip Roame, managing principal at Tiburon Strategic Advisors in Tiburon, Calif. "The world is moving toward fee-based accounts, and I've got to give them [Citi] credit for trying to move its sales force in that direction. But I think someone who might be successful in making such a move would be a high-end brokerage sales force like Morgan Stanley because they serve wealthier clients."

Samuelson says Citi's advisory service hasn't set an asset minimum for its existing Citi customers. But he notes that accounts from outside advisors looking to partner with Citi must have a $500,000 minimum.

Clients of Citi Personal Wealth Management have the option to work with the firm's in-house advisors, or tap into Citi's National Investor Center for self-directed transactions involving no-load or commission products.

Citi still has 13,000 advisors at its Smith Barney retail brokerage unit, which are now part of a joint venture with Morgan Stanley's wealth management business. Morgan Stanley holds a 51% stake in the business. In a speech in September, Citi CEO Vikram Pandit said the company will ultimately sell its stake. So in a sense, Citi is getting a fresh start in the advisory space with its fee-only approach.

"Every firm to some degree is trying create an in-house, RIA-only type of option," says Dennis Gallant, president of GDC Research, a consulting firm in Sherborn, Mass. "This is the first Wall Street organization to do it."

RIAs Set Record For Repurchasing Their Firms
Registered investment advisors (RIAs) are on pace to set a new record for management buybacks of advisory firms, according to Schwab Institutional's chief of merger advice, David DeVoe.

Breaking the record isn't that much of an achievement. Since Schwab started tracking M&A statistics on management buybacks in 2005, the previous record was four; so far in 2009, there have been five.

But the real story is the number of acquired RIAs who are entertaining thoughts or are approaching their corporate parents or other financial institutions about repurchasing their firms. Fully 60% of the merger deals completed this year involved one RIA purchasing another one, although most weren't buybacks. In about 35% of the deals, holding companies were the acquirers.

"Part of this is an indication of the growing sophistication of RIAs looking to capitalize on decreased valuations [of RIA firms]," DeVoe says. "With the industry going through structural change, it's time for some [acquired firms] to look at the strategic fit."

Banks were once very active acquirers, but have been preoccupied with their own financial problems over the last year. Instead of doing acquisitions, they are strengthening their balance sheets.

"With banks, RIA acquisitions haven't generated the strategic fit that the bank hoped for," DeVoe says. Cross-selling, always a challenge, hasn't materialized to the degree many banks hoped, while cultural issues often have turned out to be more difficult to bridge than they expected.

Some advisors sold their firms to banks and expected them to open branches in their neighborhoods that would generate a steady stream of referrals. But with branch expansion plans now on hold, the raison d'etre behind the deals no longer exists.

But falling valuations of advisory firms have drawn attention from others, notably private equity firms and other institutional investors. Some are willing to finance buybacks.

Earlier this year, Dallas-based Fiduciary Network helped Sand Hill Advisors of Palo Alto, Calif., repurchase itself from Boston Private Financial Holdings. That deal may mark the beginning of a series of such transactions, according to Fiduciary Network CEO Mark Hurley.

"We feel very fortunate that several management teams have approached us to explore the potential option of a management buyback," Hurley says. "While each team has its own objectives and each deal is different, we hope that we will be able to help more than a few of them to achieve their goals."

Fiduciary Network typically buys minority equity stakes of 20% in firms and then makes "transition financing" loans to junior partners to help purchase shares from majority owners. In some cases where the parent company is a bank, the institution may also be willing to provide financing for management buyouts.

While some consolidators and roll-up firms reportedly are scrambling to raise capital or are looking at dissolving themselves because of rebellious advisors miserable with unfavorable capital structures, private equity capital continues to flow into the RIA space. In late September, Bessemer Venture Partners invested $15 million in United Capital, a national RIA and counseling firm that has completed more than 23 acquisitions around the nation.

Joe Duran, CEO of United Capital, believes that the RIA business is at a major crossroads as it emerges from the recession and some firms find it difficult to capitalize on opportunities because of cost and margin pressures. Moreover, he thinks the prospect of higher capital gains taxes in 2011 may spur a surge in merger and acquisition activity among RIAs and others.

The proliferation of holding companies entering the space continues unabated, despite the fact that many have failed to succeed so far. "Today, you have more than 20 or so firms, each with its own unique strategy," Schwab's DeVoe says. "Recently, we've seen a trend toward more specialization, which gives advisors more choices."

At the same time, there are reports many firms are considering another succession strategy-selling their firms over time to junior partners at prices that are less advantageous than what a financial or strategic buyer might pay. While the founding partners don't get to enjoy a big payday, the strategy ensures greater continuity and eliminates third parties more interested in return on investment than client satisfaction.

FINRA Expands Arbitration Pilot Program
The Financial Industry Regulatory Authority (FINRA) last month announced it expanded a pilot program enabling investors filing claims to choose three "public" arbitrators rather than the traditional three-member panel that includes one industry, or nonpublic, member. The number of participating firms will increase from 11 to 14, and the number of eligible cases will rise to 411, a nearly 50% jump.

The two-year pilot program, launched in October 2008, is aimed at addressing criticism that arbitration panels consisting of nonpublic members are biased against investors. "We're aware of the negative perceptions that accompany the presence of a nonpublic arbitrator when cases go to three arbitrators," says FINRA spokesman Brendan Intindola. "This program gives us something to compare with the status quo and a roadmap for any possible changes."

The three new firms contributing cases to the pilot program are Oppenheimer & Co. with 15 cases, and Chase Investment Services and Raymond James Financial Services/Raymond James & Associates with ten cases each. Among the 11 firms currently participating, five are increasing the number of pilot cases from 40 to 60-Citigroup Global Markets, Merrill Lynch, Morgan Stanley Smith Barney, UBS Financial Services and Wells Fargo Advisors.

Among other participating firms, Ameriprise Financial Services and Edward Jones both have 18 cases; while Charles Schwab, Fidelity Brokerage Services,  LPL Financial and TD Ameritrade all have ten cases each.

Only the claimant filing the claim-typically a retail investor-can elect to participate in the program and the firms cannot choose which cases are eligible. The program concludes on October 5, 2010.

FINRA says arbitration claims are up this year, which is customary after a market downturn as irate investors
seek compensation from the securities industry for their losses. There were almost 5,000 arbitration claims through the end of August, a 65% increase over the year-earlier period.

Nonpublic arbitration panelists are people with some connection to the securities industry. They can be currently active, retired, or somebody who left the industry for another occupation. Public panelists generally are comprised of
attorneys, doctors, business owners or other professionals.

People who want to be public panelists can fill out an 18-page application available on FINRA's Web site. The agency conducts background checks, provides training and continuing education, and evaluates panelists once they're on the roster.

The pilot program is being evaluated by a number of criteria such as the percentage of investors who opt in and select an all-public panel. According to FINRA, about half of the investors in the program choose to have a nonpublic arbitrator on their hearing panel.

"It's too early to draw conclusions," says Intindola, "but some investors and their legal counsel see some benefit to having a nonpublic arbitrator there."

Some people believe the pilot program is unnecessary. "Every empirical study done on arbitration awards show no significant rate of dissent by industry arbitrators," says S. Lawrence Polk, a partner at the Atlanta office of Sutherland Asbill & Brennan, who represents broker-dealers in securities arbitration cases.

FINRA reports that 98% of all three-person arbitration panel decisions are unanimous.

Marc Dobin, director of the financial services department at LaBovick & LaBovick in Palm Beach Gardens, Fla., who represents both sides in arbitration cases, says he believes industry panel members are helpful because they know the industry and understand its nuances.

SEC Expects To Examine 9% Of RIAs Annually
The Securities and Exchange Commission last month unveiled a draft of its strategic plan for fiscal years 2010-2015 that includes its expected examination rate of SEC-registered advisors. As described in the draft, the agency plans to examine an average of 9% of advisors annually during this period. It also plans to examine 15% of all investment companies. And in tandem with the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization of broker-dealers, it plans to examine 55% of all broker-dealers annually in the upcoming five years.

One of the SEC's goals is to examine certain "high-risk" advisors every three years, which the draft report says is predicated on getting enough resources to keep pace with the growing number of SEC-registered advisors.

What's a "high-risk" advisor? In a June speech, former SEC compliance director Lori Richards said it could be a firm that uses an affiliate to custody client assets, a hedge fund that seems to have "smooth" or outlier returns, a firm that uses an unknown auditor or no auditor, a firm with a disciplinary history or a broker-dealer that sells captive or affiliate hedge funds or limited partnerships.

Richards said an exam of a high-risk advisory firm would include verifying with its independent third-party custodian and a sample of its clients that assets exist as represented by the firm.

The SEC is funded through annual appropriations from Congress. Critics contend that funding-and staffing-hasn't kept pace with the agency's workload that currently comprises oversight of roughly 5,500 broker-dealers and 11,000 RIAs.

The SEC's budget for fiscal 2009 is $960 million. Some people want to raise the asset level that puts investment advisors under SEC regulation from $25 million to $100 million. Under this plan being floated by state regulators and supported by various investment advisor trade groups, advisors with assets under $100 million would be regulated by the states. This would enable the SEC to focus on larger advisor firms.

RIA Assets Drop, But Number Of RIAs Rise
Total assets managed by SEC-registered investment advisors shrank 20% last year because of the financial crisis, but the number of advisors surprisingly increased during that time frame.

Total assets under management reported by all firms dropped to $34 trillion from an all-time high of $42.3 trillion the previous year, according to the ninth annual report, Evolution/Revolution, a profile of the investment advisory profession put together by the Investment Adviser Association and the National Regulatory Services (NRS), a compliance consulting firm. Last year was the first time RIA assets shrank since 2003.

"Given that the primary form of compensation for advisors is a percent of AUM, many small businesses have been faced with revenue declines of 20% in the fourth quarter 2008 and another 20% in the first quarter of 2009," says John Gebauer, managing director at NRS.

Despite the hefty haircut to assets, the number of RIAs increased by 2% to 11,257. "The growth in the number of SEC-registered advisors in the current economic climate is particularly remarkable when considering these advisors typically must have at least $25 million in AUM to qualify for SEC registration," said Robert Stirling, an NRS senior consultant.

Stirling added that new SEC-registered advisors arrive with substantial books of business, suggesting that the long-term trend to shift from a transactional to an asset management client service model may have been bolstered by displaced broker-dealer representatives forming new investment advisory businesses. That helped existing advisors reach the $25 million threshold.

The report is based on information on Form ADV, Part 1, data filed by RIAs as of April 10, 2009, which covers the 2008 fiscal year.

As is the case with wealth distribution in society as a whole, assets under management are highly concentrated with a small number of very large firms. Roughly 4% of SEC-registered investment advisors managed 82% of the total assets. Those upper-tier firms have AUM between $10 billion and $100 billion. Firms with between $25 million and $1 billion in assets, which combined represent 71% of the RIA market, controlled just 4.28% of overall AUM.

For firms with assets between $25 million and $100 million, the average AUM per account was $237,249. For firms between $100 million and $1 billion, the average was $600,001. RIA firms with assets between $50 billion and $100 billion held the largest average accounts, with $3.53 million.

Among other findings in the report, and as referenced above, the main source of RIA compensation comes from a percent of AUM. All told, 95% of all advisors charged asset-based fees as of early 2009, or identical to
the prior three years.

Other compensation sources included fixed fees (44%), hourly charges (36%) and performance-based fees (29%). Only 9% reported receiving fees from commissions.

As for advisory services, portfolio management for individuals and/or small businesses topped the list (75%). Next were portfolio management for businesses or institutional clients (63%) and financial planning services (40%).

And when it comes to geographic distribution, New York and California have the largest number of RIAs among states, with 1,514 and 1,455, respectively. The next closest are Texas (595), Massachusetts (523), Illinois (473), Florida (436), Pennsylvania (424), and Connecticut (410).

Excepting Guam (1) and the Virgin Islands (4), the fewest number of RIAs were in South Dakota (4), followed by North Dakota and Alaska (7 each).

Debt Increasing For Retirees And Near-Retirees
Just when they need it least, more folks at or near retirement are facing higher debts than people at that age in the early 1990s.

According to a study published by the Employee Benefit Research Institute (EBRI), one of the main culprits is higher housing debt, and that's a particular problem for the lower-income elderly.

Using data from the Federal Reserve's Survey of Consumer Finance, the EBRI survey found the percentage of American families headed by someone 55 or older who have some debt was 63% in 2007, up nearly 10% since 1992. In addition, the average total debt for the 55-and-older group ballooned almost 120% during this time frame, to $70,370, while the median total debt zoomed 170%, to $43,000.

Credit card debt played a role in the uptick, though the largest contributor by far came from housing debt attributed to mortgage refinancing, people cashing out equity in their homes or those who bought homes priced at peak levels during the housing boom. Families headed by someone between the ages of 65 and 74 saw the biggest increases in housing debt, which rose 23% between 2004 and 2007 to almost $66,000.

When age and income are considered, the largest debt increases occurred in families headed by someone between ages 55 and 64, and whose income fell in the first through third income quartiles (the groups with the lowest- through second-highest incomes). The survey notes that debt by itself doesn't necessarily spell trouble for elderly or near-elderly families if they have high incomes. But high housing debt can be a problem because housing is often the biggest asset for many elderly families. And carrying hefty housing debt later in life could drain money needed to fund an adequate retirement.

According to EBRI, the percentage of families with debt payments greater than 40% of income grew significantly between 2004 and 2007, from 7.3% to 9.9%. The upshot: More people are facing retirement insecurity.

401(k) Participants, Advisors Hurt By High Fees
Of the 600,000 401(k) plans in the United States, many, if not most, have hidden fees that are ripping off the participants and the advisors who administer the plans, says David Loeper, author of several books on financial advice for consumers and advisors.

Advisors can increase their business by helping 401(k) participants cut these fees, Loeper advised in a recent Webinar. Among his books is Stop the Retirement Rip-off. Loeper is CEO of Wealthcare Capital Management of Richmond, Va., a financial services consulting firm.

"Advisors are used to defending the need for all fees," Loeper says, "but they can help themselves and plan participants by finding out what the fees are."

Loeper offered an example that he said was typical: A 401(k) participant whose plan had a $120,000 balance cost 1.3%, or $1,566 per year in fees. Only $384 of that went to the advisor. The rest went to the product vendor, whose administration cost was just $246, while its profit was $936. "The advisor and participant were both getting ripped off," Loeper says. The same rip-offs are occurring in 403(b) and 457 plans, he says. "Nothing is being done because plan participants do not know they are getting ripped off, so no one is complaining." Advisors need to educate themselves about the excess fees and tell participants so that they lodge complaints. "Little has been said about this so far, but the awareness of the problem is growing. 60 Minutes did a piece on it recently and some news stories are beginning to appear," he says. Advisors can find out retirement plan fees for their clients or potential clients by filing a U.S. Department of Labor form requesting the information. "Advisors need to do their homework, but they can make the existing vendor disclose the fees because they are obligated to do so by the Department of Labor," Loeper says.