Independent B-Ds Inside
Independent broker-dealers think they have a good business model that works in the best interests of their clients. But does the general investing public even know what independent B-Ds are, what they do and why they're different from other people who call themselves advisors?

That was the gist of a well-attended session at the Financial Services Institute's national conference in New Orleans in late January. Entitled "This Is Our Time: Branding the Independent Channel," the session's premise was that the independent B-D and advisor channel might be "the best-kept secret of the last 40 years."

And given the upheaval in the wirehouse space during the past couple of years, now's as good a time as any to grab the bullhorn and tell the world what the channel is all about and what it has to offer both to investors and to advisors dissatisfied with the wirehouse model.

But first the industry needs to answer the existential question: What's the independent broker-dealer all about? The industry generally wins favor, said the panelists, for its objectivity, its integrity, the choice it offers clients through non-proprietary products and the personal service it offers. On the other hand, the industry comprises small players and is too local, and it's not considered the place to go for high-net-worth clients.

"According to investors, independence means not being affiliated with any brand name," said panelist Ruth Papazian, executive vice president and chief marketing officer at LPL Financial.

But at the same time, she said, investors also perceive strength in a brand name. "This need and desire for a brand, perhaps a brand of a different type, is what our opportunity is all about."

The key elements of a brand include a strong value proposition, visual identity and a simple, crisp and consistent message. The panelists mentioned some branding concepts that proved immensely successful, from the "Intel Inside" campaign, which boosted the credibility of smaller computer makers associated with that brand, to the Independent Insurance Agent logo that provided identity to smaller insurance brokers back in the day.

Eric Schwartz, the CEO of Cambridge Investment Research, said that an independent B-D brand could appeal to both clients and advisors disaffected with the wirehouse model and attract them to the B-D firms.
Another benefit of branding, he said, is that it would help regulators better understand what the independent B-D business model is about and create better regulations.

"This is what FSI is trying to do," said Schwartz, a member of the organization's executive committee.

One audience member asked about the costs involved in launching a major national brand-awareness campaign. Schwartz said the intent is to do something on a grassroots level. For example, he said, if the collective FSI membership chipped in even just a couple of dollars per member, it could build the foundation for an effective awareness-raising campaign.

"It's about getting materials in the hands of our 150,000 members," Schwartz said. With these, he said, members can talk about it with local newspapers or put the information in brochures. "This kind of viral marketing could be a starting point."
Still, FSI members often sell proprietary products, even though they are independent, and care must be given to make the overall message consistent.

"Those are the subtleties on what exactly does 'independent' mean," Schwartz said. "If we can agree on certain basic things, every rep is free to modify the basics to whatever suits them."

States Gear Up To Examine More Advisors
(Dow Jones) As U.S. lawmakers redraw the map of financial regulation, state securities regulators from Texas to New Jersey are eyeing a plan to examine thousands of additional advisors. The question is if they can afford it.

Prompted by the wave of investment fraud exposed during the financial crisis, lawmakers and state securities regulators are pushing to assume oversight of many investment advisors now under the eye of the Securities and Exchange Commission. About 4,000 advisors managing between $25 million and $100 million in assets would shift from federal to state supervision under proposals in Congress, according to the North American Securities Administrators Association, or NASAA, an organization of state regulators.

States are better equipped to dig into local matters and can examine advisory firms more frequently than the SEC, says Denise Crawford, NASAA president.

Currently, the SEC says it inspects 9% to 12% of the 11,000 advisory firms it oversees. Regulators from the various states are in the process of signing an agreement to cooperate with one another in policing additional advisors if the proposal becomes law.

But the movement is occurring as states are struggling with drops in tax revenue and widening budget gaps. Those shortfalls approach a combined $180 billion for 48 states, according to the Center of Budget and Policy Priorities.

Some $40 billion in federal assistance will help, says Nicholas Johnson, director of the group's State Fiscal Project. He points out that states can still make regulation a priority. In California, for example, a fee-based system has insulated securities regulation from the state's $20 billion budget gap.

"The budget shortfalls in our state are legendary at this point but our department's revenue stream is mainly self-funded," says Preston DuFauchard, California's corporations commissioner.

California would oversee about another 600 advisors under the plan, according to NASAA. The state is considering new fees to cover the costs of extra examinations. A $25 yearly renewal fee could generate up to $7.5 million from advisors, says DuFauchard. Still, right now California can handle only about 300 exams a year, he says. That translates to an average of one exam every ten years for advisors in the state.

New Jersey regulators are eager to expand oversight but fear the practical limitations of budget cuts. NASAA anticipates an additional 100 advisors would shift to New Jersey's watch.

The state's Bureau of Securities generates income from enforcement penalties and fines, which can vary each year, says bureau chief Marc Minor. It typically conducts exams that arise from complaints but wants to ramp up routine exams to help keep advisors in line.

States that rely on self-funding, such as Colorado and Illinois, say resources aren't an issue. But regulators whose budgets depend, entirely or in part, on state appropriations could feel the pinch.

Pennsylvania's estimated $3 billion budget shortfall could affect its securities commission, which is funded through both state revenues and the fines it collects. The commission would oversee about 140 more advisors under the plan, according to NASAA.  The commission would "love to hire people" but has lost nine positions in recent years, says Lewis Levin, Pennsylvania's director of enforcement, litigation and compliance.

Some states that rely on their legislature for funding aren't overly worried. Ronald Thomas, securities division director of Virginia's State Corporation Commission, doesn't anticipate problems with hiring two additional examiners to police about 120 more advisors.

A spokesman for Texas regulators says they're eligible for an extra $934,000 each year of the state's current two-year budget cycle if the agency's board determines the funds are necessary.

In New York, regulators would oversee about 350 additional advisors and say they are still monitoring the situation. Under a New York state law called the Martin Act, the state already has jurisdiction to go after larger firms in the instance of fraud, says a spokesman for New York State Attorney General Andrew Cuomo, whose office regulates investment advisors.
Copyright © 2010 Dow Jones & Company Inc.

IRS To Regulate All Tax Preparers
The Internal Revenue Service in January recommended new requirements aimed at regulating unlicensed tax-return preparers, defined as anyone who isn't a CPA, an attorney or an enrolled agent (who are federally authorized tax practitioners).

Under the IRS proposal, CFPs without such credentials would be required to register with the IRS as a preparer and pass a competency exam.

The IRS says the initiative aims to reduce misconduct and help consumers receive better service. The proposals would require anyone signing a federal tax return as a paid preparer to register with the IRS, pay an as-of-yet-unannounced user fee good for three years and have a preparer tax identification number, or PTIN. The registration would start September 1, 2010, and the agency hopes to have final regulations in place for next year's filing season. There is no grandfathering, and preparers who already have a PTIN must register as well. When they do, their current numbers will be reissued to them.

Preparers other than CPAs, attorneys and enrolled agents face new competency testing. These preparers will have three years from the testing implementation date to demonstrate competency on at least one of two tests-one of which covers individual returns with business income while the other covers non-business income. Individuals who pass the test will earn a new, yet-to-be-coined designation and will be allowed to represent taxpayers only in the IRS examinations of returns they prepared.
They'll also have to comply with the ethical guidelines of Treasury Department Circular 230 and complete 15 hours of annual continuing education that includes ethics.

The carve-outs that exempt some professionals have not gone unnoticed by the CFP Board of Standards. "We are analyzing the impact on CFP certificants and, if warranted, will be working to secure exemptions for CFP certificants similar to those for attorneys, CPAs, and enrolled agents," the organization said in a press release.

For more information, see the "Tax Professionals" page at www.irs.gov.
-Eric L. Reiner

Guggenheim To Buy Security Benefit
Guggenheim Partners LLC, a Chicago-based financial services company, has reached an agreement to purchase Security Benefit Corp., whose holdings include SGI|Security Global Investors and Rydex|SGI.

The Guggenheim-led group will make an investment of approximately $400 million in Security Benefit. Additional terms of the transaction, expected to close by the summer, were not disclosed.

The acquisition melds three different firms. Guggenheim's holdings include a giant multi-family office typically serving families with more than $25 million; Rydex|SGI is an investment management firm specializing in risk management-oriented ETFs catering to financial advisors, and Security Benefit is an insurance company with a more traditional asset management arm.
Guggenheim Partners, whose legacy dates back to the Guggenheim dynasty, counts as one of its holdings multifamily office Guggenheim Investment Advisors.

Security Benefit's holdings include Security Financial Resources, a provider of retirement plan services for more than 135,000 accounts across the nation, primarily in the education marketplace; Security Benefit Life, a provider of fixed and variable annuities to about 200,000 policyholders; se2, a provider of administrative services for the insurance and financial services industry with more than 700,000 policies and $30 billion in third-party assets under administration; and SGI|Security Global Investors and Rydex|SGI, a $22 billion asset manager.

RIA M&A Activity Down In '09
Many financial advisors had their hands full recovering from the Great Swoon of '08 (and early '09), so it's no surprise that mergers and acquisitions among RIAs slumped last year.

According to Schwab Advisor Services, there were 71 M&A deals involving RIAs in 2009, down from 88 deals the prior year. The total dollar amount from last year's deals dipped nearly 25%, to $103 million from $137 million.

There were several reasons for the drop, says David DeVoe, managing director of strategic business development at Schwab Advisor Services. One, the recession had people running scared and feeling poorer, including many advisors whose practices were hammered by falling AUM, cash flows and revenue that compressed valuations at their firms.

Perhaps equally important was that most advisors were neck deep in client service-especially early last year-and didn't have time to deal with M&A matters.

Meanwhile, banks--both regional and national--have essentially become non-players in the RIA M&A space, particularly in 2009. "Acquisitions of RIAs by banks often didn't yield the hoped-for results," DeVoe says. "You often saw cultural frictions and challenges on the cross-selling side."

The biggest consolidators of RIA assets last year were RIAs themselves, a group that acquired 55% of the total AUM involved in M&A deals. That far outpaced the roughly 30% AUM share acquired by so-called consolidators such as Focus Financial Partners, United Capital Financial Advisers and others.

"Clearly, [the RIAs'] growing presence shows they're thinking strategically about M&A and how these transformational moves can enable them to achieve their overall goals," DeVoe says.

DeVoe, whose company benefits from increased M&A activity, believes the trend will pick up steam in 2010 with rising cash flows at advisory firms and with the growing interest of private equity firms that want to invest in the RIA space.

As for valuations, DeVoe says cash flow is one of the most important considerations in judging an advisory firm's worth. Firms must also have a sustainable growth story and a strong management team, and the next generation of strong management must be in place as well.

DeVoe says firms with less than $100 million generally sell for four to six times cash flow; firms with between $100 million and $500 million go for five to eight times cash flow; and firms larger than $500 million sell for more.

Majority Of Advisors See Growth In '10
Most advisors have an eye on business growth this year, but fewer have a plan in place to make it happen, according to a recent survey.

Curian Capital's survey of roughly 1,800 independent financial advisors, conducted last November, found that 68% of respondents describe their business mind-set this year as one of business acceleration and growth, but only 56% have a strategic plan in place for that growth.

Only 10% of advisors feel their business strategy is sound and doesn't need to change. One-third of advisors do know their business model needs to change, but they aren't sure how to get there.

According to the survey, marketing was considered the most important way to grow business, cited by 96% of respondents, while total account development and cross-selling was cited by 90% and business plan development was cited by 84%.

Among other findings from the survey: 72% of respondents said their clients were most concerned about protecting principal while 45% were most concerned about guaranteed income. Not surprisingly, advisors reported increased demand for more conservative products, including those offering guaranteed income. They also reported demand for products with tactical investment strategies designed to do well in topsy-turvy markets.