Threshold Rising
There's been much talk about raising the asset threshold separating state- and SEC-registered investment advisors. Looks like it might finally happen.

As the debate over financial services reform raged on as of press time, both the House and Senate versions contained proposals to boost the threshold for SEC registration from $25 million to $100 million. If enacted, this would shift oversight responsibility for 4,200 SEC-registered advisors to the states. That's 40% of the total number of advisors currently registered with the SEC.

The rationale is that putting more advisors under the states' purview would free up the SEC to go after bigger fish. At the same time, investment advisors with less than the $100 million in assets would be examined more frequently by the states than they have been under the SEC.
While the number of RIAs has increased over the past five years by 33%, from 8,623 to 11,500, the staff dedicated to examining advisors and mutual funds has decreased over the same period by 13%, from 489 to 425, according to the SEC. That means only a small number of advisors get examined every year.

In a letter sent last month to Sen. Christopher Dodd (D-Conn.), chairman of the Senate Committee on Banking, Housing and Urban Affairs, SEC Commissioner Mary Schapiro said the measure "could substantially improve the examination and oversight" of the advisors the SEC oversees.
But Schapiro cautioned that regulatory responsibility would shift regardless of whether a state actually registered or examined advisors, creating gaps that could be exploited.

Perhaps she was referring to New York state, which doesn't have an investment advisor examination program (though it does have attorneys general who aggressively go after financial services industry miscreants).

"I find it interesting that the SEC would send that letter knowing full well that there are more than 3,000 investment advisor firms they've never examined," says Denise Voigt Crawford, Texas securities commissioner and president of the North American Securities Administrators Association (NASAA). "I think the states can do better than that."

But critics contend that cash-strapped states don't have the resources to boost their examination staffs to handle the increased workload.
Crawford acknowledges this, but says states could raise fees to provide more resources to do the job. In addition, she says states with larger examination resources-such as Texas-can share resources with less-endowed states. Texas has 14 full-time examiners for both investment advisors and broker-dealers, and Crawford says a rider in her agency's appropriation lets it hire up to ten additional examiners if the threshold limit is raised.

Crawford says NASAA earlier this year rolled out a memorandum of understanding to address the regulation and examination of RIAs by state examiners. Among other things, it encourages states with larger examination staffs to share resources with smaller states.

Zachary Gronich of RIA in a Box, a New York City-based RIA consulting company, believes geographical proximity makes state examiners better equipped to oversee  smaller firms, which is better than flying in examiners from SEC headquarters in Washington, D.C.

If the threshold change becomes law, Ron Pearson of Beach Financial Advisory Service in Virginia Beach, Va., a firm with roughly $50 million AUM, will be happy to leave the SEC's grasp. "I can't wait till they raise the limit and I can go back to Virginia," he says.

Pearson says that state examiners-at least in Virginia-are easier to work with and are more helpful in correcting deficiencies than SEC examiners, who he believes take more of a guilty-till-proved-innocent approach.

Staying Healthy May Cost You In Retirement
(Dow Jones) Keeping healthy and fit when you retire should result in lower health-care costs, right? A new report says it's not so.

While it's true that the annual health-care costs of healthy retirees are lower than those in poor health--$6,500 versus $8,000 for those ages 65 to 69--the healthy face higher lifetime health-care costs, according to a report this week from Boston College's Center of Retirement Research.

Over a lifetime, healthy retirees may pay as much as $105,000 more than those in poor health, according to the report, which was sponsored by Prudential Financial.

Why is that?

"First, those in good health can expect to live significantly longer," the report said. "At age 80, people in healthy households have a remaining life expectancy that is 29% longer than people in unhealthy households, and therefore are at risk of incurring health-care costs over more years."
Second, the report said many of those currently free of chronic diseases will succumb to them. In running a simulation, Boston College found that individuals who are free of any chronic diseases at age 80 can expect to spend one-third of their remaining life suffering from one or more of them.

Third, the report said people in healthy households face a higher lifetime risk of requiring nursing-home care than those who are unhealthy. That reflects their greater risk of surviving to advanced old age, when the need for such care is highest.

Also, those who are healthy now but delay buying Medigap or long-term-care insurance could face higher premiums later on, according to Malcolm
Cheung, a vice president in Prudential's long-term-care division.

So, what to do with this information?

"It sounds like we are all 'damned if we do, damned if we don't,'" said Chris Cooper, a certified financial planner and president of Chris Cooper & Company Inc. and ElderCare Advocates Inc.

The expected present value of lifetime health-care costs for a couple turning 65 in 2009 in which one or both spouses suffer from a chronic disease is $220,000, including insurance premiums and the cost of nursing-home care. Plus, there's a 5% chance they can expect to spend more than $465,000.

The comparable numbers for couples free of chronic disease, meanwhile, are substantially higher, at $260,000 and $570,000, respectively.
In addition, the Boston College report found that households that delay purchasing insurance until their health declines not only run the risk of higher premiums, but risk being denied coverage altogether.

Cheung said people need to consider buying a long-term-care insurance policy and Medigap insurance and factor such costs into their budget. He added that long-term-care insurance should be viewed more like auto or home owner's insurance and less like life insurance. Few consider those other types of insurance as a waste of money if they never have to use it. Instead, it's the price one pays to insure against the risk of fire or accidents. Same goes for long-term-care insurance; it's the price one pays to insure against the risk of needing long-term care.

But then there's the problem of trying to get a handle on long-term-care insurance costs and which policy is right for you. That's no easy task. Premiums for a long-term-care insurance policy run the gamut, according Jesse Slome, executive director of the American Association for Long-Term Care Insurance.

For those ages 50 to 54, the average premium is $2,236 per year, but premiums range from a low of $694 to $9,650. For those ages 55 to 59, the average premium is $2,372, but premiums range from a low of $794 to a high of $8,824.
Copyright © 2010 Dow Jones & Company Inc.

SEC Looks To Update ADV Part II
Form ADV, the core disclosure document for every RIA, needs some updating according Luis Aguilar, a commissioner of the Securities and Exchange Commission. That means the form will likely be on the SEC's radar in the near future.

"The need to update Part II has been clear for over a decade," Aguilar said in a speech at the Investment Adviser Association's annual conference in late April.

The SEC proposed comprehensive amendments to Part I and II of Form ADV in April 2000, Aguilar said. At that time, the agency adopted amendments to Part I, but the ones related to Part II went nowhere, and Aguilar indicated that the SEC might soon revisit the issue.

In March 2008, the SEC reproposed various amendments so that the form would give clients plain-English disclosures about advisors. Part II offers clients key information about an advisor's services, applicable fees, conflicts of interests and other information. It's the main document investors can tap for information about advisors they might want to hire.

"Unfortunately," said Aguilar, "the current form is sadly antiquated and a modern-day advisor's services may not correspond well to the limited number of options on the form. As a result, the resulting disclosure may not describe the advisor's business or conflicts in a way that investors can readily understand."

Aguilar zeroed in on the brochure supplement, which gives investors information about a firm's executives, but little or nothing about an advisor's educational background or disciplinary action. Aguilar said he wants to change that.

"I believe that clients would benefit greatly from the information to be conveyed through the proposed supplement-particularly where the advisory personnel has a disciplinary history," he said.

IRS Sets Sights On The Very Wealthy
Following the trend in other major developed countries, the IRS has created a division dedicated to parsing the finances of very wealthy individuals to make sure they pay their fair share in taxes.

Last autumn, the IRS formed the Global High Wealth Industry within the existing Large and Mid-Size Business Division, its large corporate tax return group. Agents, analysts and managers within this unit--so-called "wealth squads"--are focused on gauging the tax compliance levels of high-net-worth people on all of their income regardless of its source or country of origin.

An IRS spokesman says it's an effort to make it harder for the wealthy to skirt taxes by hiding behind complex Form 1040 schedules; aggressive tax planning; or complicated partnerships, trusts and business investments.

A spotlight has been thrown on the issue with the discoveries of secret bank accounts in foreign countries, particularly the high-profile civil and criminal cases related to UBS clients and Swiss bank accounts.

According to Donald Rocen, a former deputy chief counsel of IRS operations and now a member at the law firm Miller & Chevalier in Washington, D.C., the IRS aims to do more "holistic" scrubbing of high-net-worth individuals' finances to connect the dots between a person's income sources.
Instead of just looking at the Form 1040 by itself, Rocen says, the teams are looking at what kind of entities are flowing into it.

There's no set income level that triggers heightened IRS scrutiny. But a study released last year on high-net-worth tax compliance by the Organisation of Economic Co-operation and Development (OECD) suggested a standard of $30 million.

The IRS says that's a comparable guide for what it is using.

Rocen says it will take time to get the new IRS model fully up and running. But "the likelihood of falling under the IRS' exam focus has been ratcheted up," he says. His advice: High-net-worth individuals should take a more proactive approach with their documentation so they can defend their actions if the agency comes knocking.

Segmentation And The Efficient Practice
It can be unwieldy and inefficient for advisors to try serving a wide variety of clients with different wealth levels and financial needs. According to a recent report by Cerulli Associates, one of the ways they can boost the efficiency and profitability of their practices is by carefully segmenting clients-identifying those who offer the most potential to grow the business over time.

Segmenting clients doesn't guarantee success, says Cerulli. But it should help advisors allocate appropriate resources to the most promising client groups.

According to Cerulli, 37% of all advisors across the RIA, independent B-D, wirehouse, regional and bank channels said they formally assigned clients into segmented groups. Advisors at regional firms (62%) and wirehouses (50%) did so the most, thanks to their home-office-backed business development programs and staff.

At the same time, 17% of all advisors said they currently don't segment clients or plan to do so. The RIA channel had the highest percentage in that category (34%), and RIAs did the least amount of segmenting (26%).

Cerulli found segmenting is most common among the advisors serving investors with a net worth of $5 million to $10 million (64%) or between $1 million and $5 million (48%).

The reason: Clients in these brackets have myriad needs requiring a range of products. According to the report, "The complex, disparately varied financial needs of these clients can drive an advisor to distraction."

For example, folks in the $5 million to $10 million category represent an inflection point where various concerns converge. An advisor serving too many demanding clients with dissimilar desires could become a jack of all trades and master of none, concludes Cerulli.

Segmentation enables advisors to pinpoint the best solutions for their clients' needs. For advisors, that means more efficiency, fewer costs and happier clients (and that could make advisors themselves happier).

Arbitration Awards Are Too Mysterious
(Dow Jones) Securities arbitration cases often involve a lot of complex questions and big sums of money. Judgments, however, come in very few words.

Most arbitration awards give no explanation of a decision. Whether the case involves an investor trying to recoup losses or a brokerage that wants to stop a departing broker from taking clients elsewhere, it often winds up with this sentence: "Claimant's statement of claim is dismissed (or granted)."

Arbitrators also award money--sometimes millions of dollars--with little or no explanation.

Many think this custom merits change.

In a recent survey of independent broker-dealers, nearly three out of four respondents either agreed or strongly agreed that awards should be explained (even as they overwhelmingly supported securities arbitration as an effective way of resolving disputes).

Explanations would help the industry and clients understand what kind of conduct is acceptable, says David Bellaire, general counsel for the Financial Services Institute, an Atlanta-based independent B-D trade group that sponsored the survey. The transparency would also show a greater sense of fairness in the process, he says.

In 2005, there was a proposal to require arbitrators to explain awards at the request of customers or brokers involved in industry disputes. Some financial services companies, including Charles Schwab & Co. Inc., argued against it, saying it would make the process more costly and less efficient, among other reasons, according to comment letters.

The current practice is "a matter of custom and expectation" that has evolved over the years, says Thomas Stipanowich, a dispute resolution expert at Pepperdine University School of Law in Malibu, Calif. He says it is common among arbitration forums for a range of industries, but a shift toward better explained awards may be coming.
Copyright © 2010 Dow Jones & Company Inc.