LPL IPO: Whoopee Or Big Whoop?
Now that LPL Financial Corp. has formally launched its bid to become a publicly traded company, let the speculation begin on what-if anything-it means for the independent broker-dealer industry.

According to the S-1 filed last month by its Boston-based parent, LPL Financial Holdings Inc., the nation's largest independent broker-dealer plans to use proceeds from the anticipated initial public offering to repay debt. Beyond that, its public stock could provide currency for future expansion.

For now, mum's the word from LPL because it's in a quiet period following the filing with the SEC. Nevertheless, its move has created a huge buzz within the industry, even if not everyone is swept up in the hoopla.

"Honestly, I don't know what the story is other than the fact they've filed," says Larry Papike, president of Cross-Search, a broker placement firm. "Everyone knew they were going to do this offering."

Others, though, see it as a watershed for the independent broker-dealer space. "The LPL IPO serves to further legitimize the independent broker-dealer model as a force to be reckoned with, as several firms are clearly challenging the leadership position of the wirehouses, if not overtaking them altogether," says Dan Inveen, principal and research director at the consulting firm FA Insight.

Chip Roame, managing principal at Tiburon Strategic Advisors, says the IPO should boost LPL's already sizable standing within the brokerage community. "I think ten years ago, LPL only had 3,000 to 4,000 financial advisors and were looked down upon by many wirehouse financial advisors," he says. "That is changing, not fully changed, but more wirehouse brokers will respect the firm as a public company, and that may boost LPL recruiting of larger teams."

LPL, which also has corporate offices in San Diego and Charlotte, N.C., says it grew its advisor count from 3,569 in 2000 to 12,026 as of this year's first quarter. That's a compound annual growth rate of 14%.

The firm has formally begun the IPO process at a very uncertain time for IPOs and the markets in general. Yet observers believe the firm could be an attractive investment.

"I think LPL will do well as they have a story for the Street," Roame says. "They will be able to talk up their independent model at a time that Wall Street is perceived to have made mistakes."

Bing Waldert, a director at the consulting firm Cerulli Associates, agrees. "If you buy into two trends-that there's a demand for wealth management going forward due to the demographic wave of retiring baby boomers, and that there's a movement of financial advisors going independent-where else are you going to find that kind of pure-play wealth management stock?
"Charles Schwab and Raymond James might be the closest things out there to independent wealth management plays," he adds.

Schwab's share price was recently down roughly one-half from where it was ten years ago and has been relatively flat the past year. Raymond James' shares were up about threefold from ten years ago, and ad gained more than 50% the past year.

Depending on how it performs, LPL's stock could help grease the skids for future acquisitions. LPL has been acquisitive in the past, and Waldert says the company has made known its intention to add more advisory companies to the fold. For reps affiliated with LPL who own shares-and many do-the IPO could be a small bonanza. It remains to be seen, however, whether the firm will use its shares to attract new recruits in the future.

Folks born in 1947 could get screwed by Social Security and receive lower lifetime benefits, according to a report from the Center For Retirement Research at Boston College. The convergence of unusually high inflation in 2008 and the formula used to calculate Social Security benefits means that the benefits given to people born that year will be roughly 2.6% lower than the average benefits received by people born between 1930 and 1946, says the report.

For a typical retired couple with a monthly benefit of $2,374 (consisting of an average-wage husband and a lower-wage wife, as defined by the Social Security Administration), that 2.6% reduction would reduce benefits by about $750 a year. If they live to age 83 (the average life span for people who reach age 65), that would cut lifetime benefits by slightly more than $12,700. "The percentage reduction should be the same for everyone, so high earners would have a larger dollar loss," says Andrew Biggs, the report's author, who is also a resident scholar at the American Enterprise Institute and a research associate at the Center For Retirement Research.

The problem started with the spike in inflation through mid-2008 caused by high energy prices. In turn, that caused an unusually large 5.8% cost-of-living adjustment (COLA) in 2009 Social Security benefits (COLAs are calculated in October). That was the biggest increase since 1982. But prices dropped rapidly after the 2009 COLA was established, so buying power for existing beneficiaries rose significantly in last year's low-inflation environment.

To compensate, Social Security said no COLA would be paid until the consumer price index (CPI) exceeds its prior high. That means no COLA in 2010, and probably ditto for 2011. That's the first time no COLA has been paid since automatic adjustments began in 1975. If prices rise as projected, a 1.4% COLA will resume in 2012.

Some Social Security beneficiaries have cried foul, but as Biggs points out, they were overly compensated in 2009. And that's better treatment than what people born in 1947 got. These folks turned 62 last year-the earliest age of eligibility to start collecting Social Security. Benefits are calculated by indexing pre-retirement earnings up to age 60 to make prior earnings comparable to earnings at age 60. And benefits are adjusted upward using COLAs beginning at age 62, whether or not a person has claimed them.

But because of a quirk in the formula, there's a gap in Social Security's inflation protection between the ages of 60 and 62. People born in 1947 were in that gap when inflation rose in 2008. That means they missed out on the windfall COLA paid in January 2009. And that, combined with the current COLA shutdown, can permanently reduce the purchasing power of subsequent retirement benefits.

According to Biggs, the Social Security formula doesn't have a way to make up for the lost purchasing power created in the non-COLA years of 2010-11. As a result, affected individuals can't escape the benefit shortfalls by holding off on benefit claims until COLA payments resume in 2012. No matter when benefits are claimed, says Biggs, they will have fallen in real terms because of inflation in the 2010-11 time frame. Hence, the lower relative payout for people born in 1947.

This isn't the first time a so-called "notch" has showed up in the Social Security entitlement system. Some years back, "notch babies" born between 1917 and 1921 raised a big stink that they had been shortchanged, making less in their monthly Social Security payments than people born before and after them. What happened is that Congress mangled an attempt in 1972 to adjust benefits for inflation, causing overly generous payments. They fixed it in 1977 with a formula that's basically still intact.

The result, say experts, is not that notch baby beneficiaries got lower benefits than were historically intended, but that the readjustments to the system during the transition period between the old and new formulas gave them lower benefits than those born before and after them.

Eliminating such problems is harder than it seems, Biggs says.

Doomsday Investing
Not to be paranoid, but can your clients' portfolios withstand a major unforeseen catastrophe? Given the current headline risks-the sovereign debt mess, geopolitical uncertainties, flash crashes, oil spills and whatever else has created the prevailing negative vibe-it's times like this that makes you ponder, "What if . . . "

"What you're dealing with is the difference between what's probable and what's possible," says Bob Jergovic, chief investment officer at CLS Investments in Omaha. "The possible is starting to trump the probable, and that's where investors are trying to find ways to hedge themselves."

If things get to the doomsday level, or at least look like they're about to really hit the fan, Jergovic suggests a portfolio consisting of 40% to 60% in U.S. Treasurys, 20% to 30% in gold and 20% to 30% in the dollar. "That's been a good allocation for the type of environment we've been in the past couple of years," he says.

Among the possible investment vehicles to implement this strategy are the iShares Barclays 7-10 Year Treasury (IEF), the SPDR Gold Trust (GLD) and the PowerShares DB Dollar Index Bullish (UUP) exchange-traded funds. Jergovic says such a portfolio has a very low correlation to equities and is a multi-pronged approach to risk aversion.

"If someone is looking for a doomsday portfolio, they are looking for more than just one asset," Jergovic says. 

Sometimes, a crisis comes in a flash. "Most people won't be able to react quickly enough in a crisis," says Keith Springer, president of Capital Financial Advisory Services in Sacramento, Calif. "The flash crash was a precursor. The big institutions stepped away in what looked like a concerted effort to avoid big losses. I think that'll be the future pattern."

Springer says he's scored big gains since the '08-'09 crash with a conservative style heavy on dividend and income stocks. "I want to get paid for taking risk," he says, adding he did well with master limited partnership and preferred stocks, as well as corporate bonds.

And that's his game plan going forward because he believes the economy will get whacked as tepid consumer spending fails to pick up the slack when the federal stimulus goes away. "I'm getting more conservative by going shorter-term with my corporates because I think the next GDP comes in lighter than expected and that will precipitate the next crash," he says.
Lou Stanasolovich, CEO and president of Legend Financial Advisors in Pittsburgh, says his firm has created contingency portfolios for a range of adverse economic scenarios including hyperinflation, deflation, a dollar crash and extended periods of slow, dismal growth of zero to 2%. "We don't want to be caught flat-footed like we were in 2008 when it took us a couple of months to realize that what was happening was similar to the 1930s," he says.

Stanasolovich believes that managed futures are an all-weather option. "We think it's one of the few investments that works in all scenarios over a three- to five-year period."

Vitaliy Katsenelson, portfolio manager at Investment Management Associates in Denver, says tobacco giant Philip Morris International and booze maker Diageo are two examples of companies that can maintain their pricing power in either inflationary or deflationary environments. (After all, people smoke and hit the sauce more in stressful times.)

"If you're a long-term investor," Katsenelson says, "you have to ask whether a particular company would still have earnings power [if a crisis occurred], assuming we don't go back to the Stone Age."

Wirehouses Grab Fair Share Of Breakaway Brokers
The trend of brokers breaking away from wirehouses isn't stopping, but sometimes the biggest beneficiary of these movements is the wirehouse industry itself.

According to a study by Aite Group, a Boston-based consulting firm, an eye-popping 85% of wirehouse brokers say there's a chance they might leave their firm during the next 18 to 24 months. Though only 20% put that chance greater than 50%, it still means that only 15% of the brokers are planning to just stay put.

And yet, of those who might indeed fly the coop, roughly one-third from wirehouses and other captive brokerage firms said they would likely simply go to another wirehouse firm. Only about one-quarter said they'd go the independent route.

Aite says that the combined broker head count at the four remaining wirehouses (Bank of America Merrill Lynch, Morgan Stanley Smith Barney, Wells Fargo Advisors and UBS) shrank by more than 7,000 last year. Many of these brokers and broker teams have jumped ship and gone independent, teaming up with the likes of broker-dealers LPL Financial, Raymond James, Edward Jones and RBC Wealth Management, among others.

Brokers have been jumping ship for several reasons. Many seek higher payouts. Some are disaffected when they aren't offered a retention package. Others are chafing at the severely damaged brands of their brokerages, or otherwise feel they're getting insufficient operations support.

These broker migrations were thought to be in full gear during the depths of the financial crisis as Wall Street firms roiled. But then the companies began restructuring, jettisoning lower-producing brokers and offering top producers big retention packages. Aite says some wirehouses have offered huge sign-on bonuses-rumored to be about 300% of a broker's annual production-to poach top producers from rival firms.

While many brokers talk of going independent, the Aite study notes that they are wary of the attendant hassles and responsibilities for compliance, technology and administration if they go it alone. Companies that cater to RIAs or independent brokers have cashed in on that by boosting their support infrastructure for independents and thus making independence more feasible for breakaways.

But the wariness is also good for the wirehouses, as it could keep a large percentage of their teams in the fold. 

Canadian Advisors Ranked Low On Ethics
(Dow Jones) Financial advisors in Canada are not very well regarded when it comes to ethical reputation, according to a recent survey.

In the Canada 2010 Financial Market Integrity Index released by the CFA Institute, financial advisors received a 3.1 score for ethical behavior, which is seventh among nine groups of financial professionals. This year's score was a slight improvement from the 3.0 score in 2009 and 2008.

Canadian financial advisors received the same ethics score as their U.S. counterparts, except that the advisors on the other side of the border placed third from the top on ethical behavior of financial professionals.

Among the other financial professionals surveyed in Canada, pension-fund managers got the highest score, at 3.9; buy-side analysts scored 3.6; corporate boards of public companies, 3.4; mutual-fund managers, 3.4; executive management of public companies, 3.3; private equity managers, 3.2; sell-side analysts, 3.0; and hedge-fund managers, 2.8, which was the lowest.
The survey in Canada was answered by 576 Canadian market players in the financial sector, 5% of whom are financial advisors.

The comments on retail brokers' ethics ranged from a lack of training or knowledge to inherent conflicts of interest, particularly the inability of advisors to balance profit motives with clients' interests.

"We've heard similar comments in other markets," said Matthew Orsagh, director of capital markets for the CFA Institute.
Copyright © 2010 Dow Jones & Co. Inc.

Retirement Shortfall Expected
Will most folks have enough money to retire comfortably? Will employer-sponsored retirement plans help do the trick?
Probably not. A recent report from human resources consulting company Hewitt Associates found that just 18% of employees will have enough money to meet their retirement needs-even if they work a full career of at least 30 years and contribute to their employer savings plans during that time.

According to Hewitt's "Real Deal" report on retirement income adequacy at large companies, the average employee contributing to a company-sponsored defined-contribution plan during his career can expect to accumulate retirement resources at 13.3 times his final pay at retirement. The problem, Hewitt says, is that it expects people to need 15.7 times the pay for the retiree to maintain his pre-retirement lifestyle. That's a 15% shortfall.

Of that 15.7, Social Security is expected to provide 4.7 times final pay. Employees need to get the remaining 11 times final pay from such sources as company-provided plans and personal savings. The 15.7 figure assumes that annual inflation will be 3% and that rising medical costs will be greater than the overall inflation rate. It also assumes people want to maintain their pre-retirement lifestyle.

"You have to be careful about defining 'having enough' [money]," says Rob Reiskytl, who leads Hewitt's retirement plan strategy and design team. "That can be debatable on an individual level."

That said, Hewitt's study taps into a growing body of studies suggesting that too many Americans will be financially ill-prepared for retirement.

Hewitt's study comprises 2.1 million employees at 84 large companies. The study anticipates a life span of 86 years for females and 84 for males when calculating whether these employees would have enough resources to meet their retirement needs. That means a person with a longer life would need more than 15.7 times his pay at pre-retirement, Reiskytl says.

He notes that people can help their cause by saving earlier, boosting contributions to employer-sponsored retirement plans and working longer. The benefits of working longer include extra savings and increased Social Security benefits.

"There are several mathematical solutions to this problem," Reiskytl says. "But it may be difficult in practical terms for many Americans to eliminate or reduce the [retirement savings] shortfall."

North America Millionaire Growth Rate Stagnates
(Dow Jones) While global wealth has returned to where it was before the financial crisis in 2008 and the number of the world's millionaires grew 14%, North America has lagged other regions and remained at 2006 levels, according to the latest wealth report by research firm Boston Consulting Group.

"It was a very asymmetrical destruction of wealth as well as creation," says Bruce Holley, a BCG senior partner and co-author of the report.

North America posted the greatest absolute gain in wealth at $4.6 trillion and remained the region with the greatest number of millionaires-4.7 million. This was almost four times the number in Japan, which ranked second.

Yet the financial crisis left people reeling from stock investments, and those who bailed out missed last year's dramatic market upswing. As a result, North America was the only region, besides Japan, to remain below where it was before the crisis in terms of wealth, BCG's study found.

With the heaviest investment exposure to stocks, North America was the most vulnerable to the market shocks of 2008. A steep 47% of the region's assets were invested in stocks before the crisis, while just 34% was in cash and deposits-the least among all regions.

Meanwhile, the Asia-Pacific egion, excluding Japan, held ore than half its assets in cash and deposits.

Singapore and Hong Kong still had the highest density of millionaires at 11.4% and 8.8%, respectively. China was home to the third highest number of millionaires after North America and Japan, with 670,000 millionaire households. This is up 31% from 2008, and the highest among the top ten countries, the report found.
Copyright © 2010 Dow Jones  Co. Inc.