Is Your Client's Private Info Secure?
A new Massachusetts law aimed at protecting personal information went into effect last month and could ultimately require financial advisors to boost their security measures to protect client data.

The law, Massachusetts 201 CMR 17.00, establishes minimum standards for safeguarding personal information contained in both paper and electronic records. The law applies to any business or entity that owns or licenses, receives, stores, maintains, processes or otherwise has access to personal information.

And that includes any broker-dealer or RIA with one or more clients in Massachusetts. "The law deals with issues our industry has been skirting for the past couple of years such as personal privacy, encryption and processes," says Joel Bruckenstein, an industry consultant on technology issues. "My opinion is they'll serve as a template for the rest of the country."

Some advisory firms have taken action, and plan to take more action down the road. Securities America Inc., for example, has rolled out technology solutions for its reps with Massachusetts clients. "We have plans to roll it out to all of our reps in a second phase later this year," says Kevin Miller, Securities America's chief compliance officer.

According to the law, personal information is defined as a person's first and last names, or first initial and last name in combination with any one or more of the following: Social Security number; driver's license or state-issued ID card numbers; financial account numbers; and credit or debit card numbers.

Among other things, the law requires entities that control personal information to designate one or more persons to oversee a comprehensive security program; identify foreseeable internal and external security risks; devise policies regarding employee access to client personal information outside the business premises; and have reasonable restrictions for physically accessing records.

In addition, companies must secure user IDs and other identifiers, and have a reasonably secure method of assigning and selecting passwords or else using identifier technologies such as biometrics or token devices. They must also restrict access to records and files containing personal information only to those who need that information, assign unique identifications plus passwords that aren't vendor-supplied default passwords, and encrypt all transmitted records containing personal information that travel across public networks.

And there's much more. The maximum fine per violation is $5,000.

In practical terms, the law means affected advisors will have to do a lot more encryption, be more creative and vigilant about passwords, and even carefully vet the people who clean the office.

"Potentially there's personal information in both an e-mail and an attachment, so both need to be encrypted," says Warren Mackensen, a certified financial planner in Hampton, N.H., and president of Pro Tracker Software, a provider of practice management software for financial planners.
Mackensen says people need to put more thought into creating passwords because hackers using software readily available online can quickly crack simple password codes of fewer than eight digits.

"Think about old sayings, or non-English by shortening the spelling of words or using symbols for letters such as '@,'" Mackensen says.

Advisors also should check the backgrounds of the outside people who have access to their office. Some advisors say they've scored points with FINRA examiners by double-checking office cleaners.

"Certainly, it's a good sign if a firm has vetted outside contractors such as cleaning crews, people who deliver office supplies or who do maintenance services--anyone who could have access to areas with computers and files," says a FINRA spokesman. "Under our rules, firms have an obligation to make sure their private information is secure."

Hybrid Brokerages Shine Light On New Space
(Dow Jones) A new brokerage model combining aspects of a big wirehouse and an independent registered investment advisory has caught the industry's attention as it tempts brokers looking for a new place to work.

While dwarfed in size by traditional brokerages, firms like SeaCrest Wealth Management and HighTower Advisors see their hybrid brokerage approach as a way to recruit advisors from bulge brackets.

"There are so many people watching these firms to see how they do, and they are doing well," says Bing Waldert, research director at Cerulli Associates. He says changes at the big traditional brokerages have made it easier to lure away advisors. "I think we'll see a lot more of these non-traditional options."

The two firms launched in mid- to late-2008, a period when the biggest companies were shaken by the market meltdown, and only four wirehouses were left in the mix: Merrill Lynch Wealth Management, Wells Fargo Advisors, UBS Wealth Management and Morgan Stanley Smith Barney.

HighTower and SeaCrest executives believe their model is attractive to brokers who want less bureaucracy than they find at the four wirehouses, but who don't want all of the responsibilities of managing a business.

"From a regulatory perspective we are an RIA, in that we are fiduciaries, but from an infrastructure perspective, we look like a brokerage," says Elliot Weissbluth, chief executive of HighTower Advisors.

Many wirehouse advisors have a mix of fee-based and transaction-based business, but registered investment advisors, or RIAs, are typically only fee-based. SeaCrest and High-Tower cater to both types of business.

RIAs may boast that they rise to fiduciary standards, but they tend not to have the level of back-office support that wirehouse advisors get from their companies. The firms in the hybrid model, however, offer technology, legal support, office space and equipment, among other business needs. And the advisors maintain ownership of their book of business as an independent advisor would.

SeaCrest keeps a percentage of advisors' production, while HighTower pays advisors for their practice's contribution to the firm rather than sales production. The new hybrids could be attractive to advisors at some RIAs looking for more business support, but HighTower and SeaCrest are both set up to recruit primarily from the wirehouse world.

"It's the best of both worlds," says one longtime wirehouse advisor who is now at Merrill Lynch. "But I have to think about what makes my clients happy, and right now, that is to be at a large institution." He says that even with the damage that has been done to the wirehouses' reputations, there is still a benefit to being with a brand people know.

Edward Sullivan, president and managing partner at SeaCrest, was an executive VP at Morgan Stanley before he and his three colleagues left in 2006. He says he sees the wirehouse industry as "a shrinking marketplace."

Both SeaCrest and HighTower are looking for advisors with several years' experience and several hundred million in client assets-"guys with options. Not the guys who are being pushed out," Weissbluth says.

While HighTower is offering a cash signing bonus similar to those at traditional brokerages, SeaCrest doesn't. Instead, it touts its payout-which can double what an advisor gets at a wirehouse-to attract new recruits. Both firms also offer an equity stake to new advisors.

Last month, Morgan Stanley Smith Barney filed a New York state lawsuit against five resigning top advisors to keep them from joining HighTower, accusing the former advisors of violating their contractual commitments and fiduciary duties.

HighTower now has 24 advisors, a number it plans to double by year's end. It is aiming for a total of $40 billion to $50 billion in client assets in the next couple of years.

SeaCrest has 16 advisors in six offices, and says it is willing to expand in any area of the country where advisors are interested.
HighTower, which prides itself on its strategy of being multiple custodians and multiple clearing firms, expects other businesses to follow in its footsteps. "And that would be good for the industry," Weissbluth says. "Anytime you can increase transparency and competition, it will be good for the individual investor."
Copyright © 2010 Dow Jones & Company Inc.

CFP Aspirants Need A Plan
By autumn 2011, anyone who wants to earn the certified financial planner designation will have to prepare a written, comprehensive financial plan as part of the established curriculum. The Certified Financial Planner Board of Standards Inc. last month announced it had adopted the requirement as a way to better assess the ability of its applicants to deliver the financial planning goods to the public.

"Through this additional course, which is designed to bridge the gap between theory and practice, aspiring CFP professionals will put to work the full financial planning process and demonstrate their ability to communicate effectively and meet the needs of their clients," CFP Board CEO Kevin Keller said in a statement.

The student-prepared financial plans will be evaluated by CFP Board-registered program faculty and instructors.

The new financial plan development course requirement, which was several years in the making, was released last summer for a 60-day public comment period that ended on October 2. Inspiration for the proposal came after the CFP Board's international cousin, the Financial Planning Standards Board Ltd., added a comprehensive case study component to its curriculum.

The CFP Board's education standards require coursework in the major financial planning areas including the general principles of financial planning, insurance planning and risk management, employee benefits planning, investment planning, income tax planning, retirement planning and estate planning.

A total of 348 educational programs at 221 institutions in the U.S. offer financial planning curricula registered with the CFP Board. Individuals who satisfy the coursework component of the certification can apply to take the CFP certification exam.

Wanted: Silver Bullet For Retirement Income
The world of retirement income products and providers is a "rudderless" market lacking any clear choices for investors or their financial advisors, says a recent survey of retirees and pre-retirees conducted by Cogent Research.

Survey respondents said they're most interested in managing their retirement income through CDs or bond laddering strategies they can do either by themselves or through their advisors. Variable annuities were the second most popular option, while target payout and absolute return funds generated a collective yawn from those surveyed.

Among product providers, no company was recognized by more than 10% of the respondents as the "best" provider, and the largest percentage of people (26%) said they "don't know" who's the best provider."

"One of things gleaned from the report is that investors don't believe there's a silver bullet," says Christy White, a Cogent principal and co-founder. "People view this as a process, not a product, and advisors are ideally situated to help them execute that process."
White says the survey finds that consumers don't have enough knowledge about various retirement income products, and that they tend to favor products they're already familiar with such as CDs and bonds.

Again, that plays into the education role of advisors. "One of the things we found in the study is just giving people simple facts about retirement income products causes interest in them to double," White says. "It's a great opportunity to build stronger relationships with clients and to help them solve a looming challenge."

Part of the problem, says White, is that some retirement income products-particularly variable annuities-are complex beasts that many consumers find confusing and some advisors find irksome. "Advisors tell us they don't have time to keep up with all of the bells and whistles," she says.

But there has been a lot of innovation in the retirement income products space, White says. Some products, like target payout and absolute return funds, haven't caught on yet. Meanwhile, Cogent finds that variable annuity providers are coming out with simpler pricing and features.

Cogent's In-Retirement Income 2010 report surveyed 961 retirees and pre-retirees with at least $100,000 in investable assets.

Middle Boomers In The Middle Of Lots Of Things
In the world of the baby boomers, there are young, middle and older boomers who grew up in different times, were shaped by different influences and are in different stages of their lives.

The so-called middle boomers--those who are now 52 to 58 years old--have a lot on their plates. "On the financial planning continuum, this group, in their 50s, are very likely to be balancing significant family financial obligations with the need to plan for their own retirement," says Sandra Timmermann, director of the MetLife Mature Market Institute, which recently came out with a study on middle boomers.

The MetLife study found two-thirds of middle boomers have at least one living parent, and that 14% are providing care to an older parent. At the same time, half of them report having children still living at home. And 72% say they've been providing financial assistance to their children and grandchildren to the tune of some $38,000, on average, during the past five years.

On the assets front, middle boomers are in their peak earning years, but more than half (54%) say they're behind in their retirement savings goals. Timmermann says they're at an age when the need to grow their assets must be balanced against taking on too much risk.

Among the things financial planners can do, she says, is help these people find solutions-such as rebalancing their portfolios, for instance, or encouraging them to max out on their 401(k) plan even if other expenses seem to get in the way. Advisors can also help them choose financial products-annuities for example-that can shield them from market volatility.

"Advisors need to work with this group to make sure they are being realistic and are not in denial about the realities of a long life and the need to generate income for many years," Timmermann says.

Firms Struggle When Workers Don't Retire
(Dow Jones) As older workers cling to their jobs longer to make up for shrunken savings, employers are facing a new set of management problems-like how to make room for new talent.

"A lot of companies are worried because there is no room to promote your up-and-coming employees," says Robyn Credico, senior retirement consultant at Towers Watson. "There is no infusion of new, less expensive people doing the work."

A report by the Employee Benefit Research Institute found that, while Americans' confidence in their ability to retire is stabilizing, more people plan to work longer.

More than 30% of workers now say they expect to retire after age 65, compared to 24% in 2005 and 15% in 1995, according to the 2010 Retirement Confidence Survey.

The not-yet-public (as of mid-March) Transamerica Retirement Survey found that 40% of the baby boomers it surveyed plan to work past age 70 or simply to not retire.

Rick Guzzo, a partner at consulting firm Mercer, says companies are seeing significant declines in voluntary attrition. The full impact of delayed retirement could take time to materialize, he says, but some implications seem clear.

"If people can't job hop, that's not creating opportunities" for lower level workers looking to move up.

Many companies were caught off guard last year, and were obliged to resort to more layoffs because they hadn't adjusted their hiring plans to reflect lower retirement and turnover rates, says Byron Beebe, U.S. retirement market leader at consulting firm Hewitt Associates. He says companies are making the adjustment this year. 

In the past, companies often offered enhanced pension benefits to induce workers to retire, but "that's harder to do when pensions aren't well-funded," he says. Stock market losses and low interest rates have left most pension plans significantly underfunded.   
Copyright © 2010 Dow Jones & Company Inc.