Branch Managers Break Away To Independence
(Dow Jones) The move to trim middle management at wirehouses is driving a growing number of branch managers toward independence.

Breaking away with years of experience and a hefty Rolodex, former branch managers are opening their own shops or joining independent registered investment advisory firms. In many cases, they are leaving with an already-experienced team of producing brokers.

After working at wirehouses for 28 years, former Smith Barney branch manager Glenn Fischer decided to go out on his own. In October, he and two Smith Barney brokers from his previous branch opened New York Wealth Management, an advisory firm in Garden City, N.Y., with $225 million in assets. The firm is affiliated with Raymond James Financial Inc.

Fischer says branch managers lost their autonomy as the wirehouses grew larger and compliance requirements and red tape expanded. Traditionally, branch managers were responsible for compliance, recruiting, training and the management of brokers. Many likened it to running their own businesses.

A spate of mergers, joint ventures and restructuring at major wirehouses during the financial crisis shrank the iconic company man's position and, in many instances, eliminated it completely. In September, Morgan Stanley Smith Barney and UBS AG restructured management, creating complex managers at main branches to oversee a number of satellite branches in each region. The moves displaced hundreds of non-producing branch managers and forced some to return to running their own books of business.

Those laid off or fed up with the changes are eyeing independence, says Michael Durbin, president of Fidelity Institutional Wealth Services. "They can leverage their skills, experience and relationships with financial advisors, many of whom they had previously recruited to their own branches," he says.

Custodians that safeguard client assets for independent advisors such as Fidelity Investments, TD Ameritrade and Charles Schwab Advisor Services, are stepping in to help facilitate these moves.

Former branch managers face distinct challenges when going independent. Non-producing branch managers don't have their own clients to start a business and must partner with other advisors to make the economics work.

"It's hard for branch managers to go independent unless they take a couple of steps back to go forward. It took 18 to 24 months before I could pay myself a dime," says Stuart Silverman, a former branch manager and regional president at now-defunct insurance brokerage firm Allmerica Financial. In 2003, Silverman launched Fusion Financial Network, which now consists of 260 financial advisors with about $7 billion in assets.

One opportunity for former non-producing branch managers could be with existing RIAs that are looking for help with recruiting and running the business, says Tim Oden, a managing director at Schwab Advisor Services.

As an officer employed by a wirehouse, a branch manager may face heightened legal considerations when breaking away. Employment contracts at wirehouses typically prevent brokers from recruiting others-particularly top producers-to leave with them and join a competing firm. Branch managers have potential influence on other brokers and are often targeted for so-called raiding cases, an industry term for taking 25% to 30% of gross revenue from a competitor in a directed, intentional move to poach top producers.
"As an authority figure, a branch manager could run into trouble if it appears as though he's soliciting financial advisors in his branch to make a group move," says Ron Amato, an attorney at Shaheen, Novoselsky, Staat, Filipowski & Eccleston.
Copyright © 2009 Dow Jones & Company Inc.

Call For Fiduciary Standard Unites Disparate Forces (Sort Of)
It's one thing when industry groups such as the Certified Financial Planner Board of Standards, Financial Planning Association and National Association of Personal Financial Advisors pound the table in support of the fiduciary standard of care. But what to think when a Wall Street titan does the same?

OK, when Goldman Sachs Group Chairman and CEO Lloyd Blankfein lent his public support to the fiduciary standard last month, he didn't exactly pound the table. Rather, he was testifying with other leading Wall Street executives before a Congressional committee hearing on Capitol Hill looking into the recent financial crisis.

According to published reports, during Blankfein's testimony he told the committee that he favors applying the fiduciary standard to broker-dealer registered reps who offer investment advice to retail investors. That brought words of approval from some industry folks who've long espoused the same.

Investment advisors are regulated under the Investment Advisers Act of 1940 and are governed by the Securities and Exchange Commission (SEC). They are held to the fiduciary standard of care, which requires them to act in their clients' best interests.
Broker-dealers, who are regulated under the Securities Exchange Act of 1934 and are overseen by the Financial Industry Regulatory Authority (FINRA), are held to the suitability standard that requires them to make recommendations that fit a client's risk tolerance, objectives and financial status.

The different approaches have governed the two sides for nearly 70 years, and ongoing financial services industry reform efforts in Washington have ratcheted up the debate: Investment advisors want the fiduciary standard applied to broker-dealers, while broker-dealers want to apply a universal standard of care to all advisors, including investment advisors. RIAs equate a universal standard with a diluted standard that could lead to conflicts of interest.

To combat that, various organizations from across the financial spectrum last month penned a letter to leading members of the Senate Committee on Banking, Housing and Urban Affairs that asked them to resist efforts to weaken proposed legislation requiring all financial advisors to abide by the fiduciary standard.

In particular, the groups say that Section 913 of the "Restoring American Financial Stability Act of 2009" would provide "straightforward and sensible" consumer protection by eliminating the broker-dealer exemption from the Investment Advisers Act. That exclusion enables brokers to avoid registering as advisors if the advice they provide is incidental to selling securities.

"For too long, brokers have been free to market themselves as trusted advisers and offer extensive advisory services without having to meet the fiduciary standard appropriate to that role," the organizations said. The draft bill "eliminates the legislative loophole that has allowed this dual standard to persist."

The participating groups are the Consumer Federation of America, the North American Securities Administrators Association, Fund Democracy, the Investment Adviser Association, the CFP Board, FPA and the NAPFA.

The groups' letter included a fact sheet (or, as one critic called it, an opinion sheet) that attempts to debunk the perception put forth by some industry lobbyists that the proposed bill imposes a one-size-fits-all regulation on all people who provide investment advice, or that it would impose burdensome costs to advisors, or that applying the fiduciary standard across the board denies investors access to products and services.

The fact sheet also attempts to refute that the Senate bill would prevent firms from charging commissions, would impose a fiduciary standard on self-directed accounts, or wouldn't allow advisors to engage in principal trading (though the Investment Advisers Act does impose some limitations on that activity).

As for Blankfein's surprising support for the fiduciary standard, one wonders what exactly that means. According to Dow Jones Newswires, Blankfein was asked during the hearing whether Goldman's practice of betting against some of the subprime mortgage securities it sold to investors was a conflict of interest.

He replied that Goldman didn't have a legal obligation to disclose when it was betting against the securities it was selling. As of press time, it wasn't clear what form of fiduciary standard Blankfein favored.

Independent Contractor Status Under Review
Both houses of Congress are considering bills that could revoke the independent contractor status among advisors and make them employees of their affiliated firms.

The House version came last summer when Rep. Jim McDermott (D-Wash.) introduced legislation that would eliminate Section 530 of the Revenue Act of 1978, the so-called safe harbor provision that lets employers classify workers as independent contractors rather than employees as long as they meet specific criteria.

Critics contend the provision is a loophole used by some employers to avoid paying employment taxes and workers' compensation and benefits.

In December, Sen. John Kerry (D-Mass.) introduced his version of a bill that aims to kill Section 530, or at least make it more difficult and costly for businesses to incorrectly classify employees as independent contractors.

Some advisor groups boo these developments. "Independent contractors are small businesses, but because regulators make us pay them individually we have to issue them a [Form] 1099," says Steve Distante, chairman of the National Association of Independent Broker/Dealers. "We're caught in between in that we supervise small businesses but have to pay them individually."

Dale Brown, CEO and president of the Financial Services Institute (FSI), a membership group representing independent broker-dealers and advisors, says if independent advisors become classified as employees it could force broker-dealer firms to pay Social Security taxes, provide benefits and assume liabilities for these advisors. He adds it could mean additional personnel and compliance costs for many small and midsize independent broker-dealers.

Brown says FSI held talks with McDermott's staff in the autumn and got a commitment from his office to work with the industry to resolve the issue. "We emphasized that our business is already heavily regulated by federal and state authorities and the rules don't allow broker-dealers and advisors to do business in cash.  This means our business is easily audited and, therefore, tax compliance is not a concern," Brown said.

He said he also plans to meet with Kerry's staff in the coming weeks.

Retirement Planning Industry To Be A Top Performer In New Decade
Most people see cutting-edge tech as the growth area of the future. But according to industry research company IBISWorld, the retirement and pension plans category should be the second-best performing industry during the period of 2010-2019, with a total expected growth rate of nearly 138%.

The trust and estates industry ranks seventh on the decade performance list, with a projected growth rate of roughly 106%. IBISWorld analyzes 700 different industries that make up the nation's gross domestic product, and rates them based on real revenue growth, or inflation-adjusted revenue.

It expects voice over Internet protocol (VoIP) providers--services such as Skype that enable phone calls over broadband Internet connections--to have the best growth rate, at almost 150%. VoIP, which started to earn revenue in 2002, was the last decade's biggest growth industry at an astronomical rate of 179,000%. Conversely, it expects wired telecom carriers to be the worst performing industry this decade.

Retirement and pension plans include IRAs, 401(k)s, funds and private and public retirement plans. IBISWorld also has a financial planning and advisory category, but it didn't make the forecasted ten-year list. That's because the retirement and pension plans category is seen as fast-growing while the financial planning and advisory category is viewed as more mature because of the  consolidation among the industry's biggest players.

That said, the predicted average annual revenue growth in the financial planning and advisory industry for the next five years is a solid 11.5%. "Relative to any GDP measure other than China, that's pretty impressive," says IBISWorld analyst George Van Horn.

Van Horn expects the trust and estates industry to be a big grower because it caters to the ultra-wealthy. "Rules and business environments can change," he says, "but over time, the wealthiest have the best chance of maintaining or growing wealth than does the general population," he says.

Raymond James Poised For Big Year
In May this year, Raymond James Financial President Paul Reilly will succeed Thomas James as CEO of the St. Petersburg, Fla., financial services firm. After 40 years running the diversified financial business, James is becoming executive chairman.

According to Reilly, the 67-year-old James is hoping to cut his workweek down to about 40 hours. But the real story may be that the firm is positioned to have a surprisingly strong year in 2010.

Many independent brokerages have thought Raymond James' recruiting strategies overemphasize wirehouse brokers. But the firm may turn out to be the biggest beneficiary of the 2008-2009 exodus from Wall Street.

Last year, the firm recorded a net increase of 750 advisors, bringing its total to about 5,300. More significantly, Bill Van Law, senior vice president of business development, says the number of new advisors affiliating with Raymond James who are generating more than $1 million in asset management fees and commissions tripled in 2009, as it also did the previous year.

Neither Reilly nor Van Law expect the pace of recruiting to continue expanding at that rate in 2010, although they say the pipeline remains strong. If the markets don't collapse, Raymond James could enjoy impressive top-line growth.

Still, Chet Helck, the firm's chief operating officer, voices concern about the lingering impact of the financial crisis in clients' trust and confidence in financial institutions. But he adds that all the research he has seen shows that most affluent Americans trust the integrity of their financial advisors, and the crisis has increased the demand for financial planning among all Americans.

ETFs Are Booming, But Examine Their Quirks
Exchange-traded products offer investors an entrée into sophisticated strategies and are increasingly popular portfolio management tools with financial advisors. Currently, there are 552 ETFs in registration, though experts acknowledge that some may never make it to market, while others may fold, as 50 did last year.

The product explosion is one reason why advisors need to look under the hood and understand how they're structured before selecting them for clients.

Those were underlying themes heard at last month's sold-out Inside ETFs Conference at the Boca Raton Resort & Club in Florida, which was co-produced by Financial Advisor magazine and ETFR.

The exchange-traded fund universe now comprises roughly 1,000 funds and more than $1.3 trillion in assets. Morningstar estimates they account for more than 30% of the trading volume on the New York Stock Exchange.

Many ETFs' underlying strategies are more complicated than simply tracking the S&P 500 index. Ken Volpert, principal and head of Vanguard's taxable bond group, said that when liquidity dried up the bond markets in 2008, there were large price gaps between the market price of the bond ETFs and the price of the underlying basket of bonds. That said, ETFs were one of the few places investors could engage in price discovery in late 2008.

Other conference speakers cautioned about the use of exchange-traded notes (ETNs), which often are promises by banks to give you the return of an index, less expenses. These relatively new instruments come with credit risk, counterparty risk and spread risk for shareholders.

James McGowan, senior ETF product manager for J.P. Morgan, noted there are potential tax risks with certain ETFs. For example, futures-based ETFs are treated like a partnership and require an IRS K-1 form. Capital gains are taxed at 40% short-term and 60% long-term rates. Commodity ETFs are taxed as grantor trusts and their tax rate can be as high as a 28%.

And beware of closure risk-more than 100 ETFs have closed since 1993, and 50 closed last year alone. Closures can force a client to realize unexpected, and potentially large, taxable events.
 -Alan Lavine and Gail Liberman