Gulf Of Uncertainty
The BP oil spill in the Gulf of Mexico has been a bleeding wound that couldn't be stanched, threatening to drain the economic life of the region. For the folks who live in its wake, two words that frequently come to mind--besides "anger" and "sadness"--are "uncertainty" and "moratorium."

The latter refers to the Obama administration's proposed six-month halt of deepwater drilling projects in more than 500 feet of water, which residents worry could hurt the area economically. A U.S. District Court judge rejected the administration's measure in June, but the government is fighting that decision. 

"When I ask people down there what they're most concerned about, they say the uncertainty of the drilling moratorium more than the immediate impact of the oil spill," says Jude Boudreaux, director of financial planning at Bellingrath Wealth Management in New Orleans.

Boudreaux is from Lockport, a town of 2,600 people roughly an hour south of New Orleans. He says folks on the bayou aren't sure what to do because there's still too much uncertainty about both the drilling freeze and the ultimate environmental damage and its potential impact on the region's fishing industry and way of life.

"There's nothing really profound I can tell people until we really know what'll happen from a settlement standpoint," Boudreaux says. "At least with [Hurricane] Katrina there was a lot of pro bono work to be done to help people file for claims. With flood insurance, there was a playbook."

Boudreaux says the $20 billion oil spill fund created to compensate Gulf Coast oil victims could itself cause uncertainty. "My concern is that a lot of people down there do a lot of cash business and might not have receipts to prove past sales numbers," he says. "A lot of business is done on handshakes and trust on the bayou."

Boudreaux says the millionaire-next-door syndrome applies to a number of people in southern Louisiana thanks to the regional economy's twin pillars--oil and gas on the one hand and fishing on the other. "There might be second- or third-generation family businesses and they run a couple of boats. It might not look like much because they aren't showy about their money. There is some substantial wealth down there, but it's a different kind of world. The concern is whether those jobs and a way of life will go away."

John Sirois, a financial planner with Raymond James in Houma, La., worries that the drilling suspension would slam the finances of Terrebonne and Lafourche parishes, along with local governments in the region. Houma is home to a lot of oil and gas drilling-related operations, from large players such as BP, Schlumberger and Halliburton to numerous small and midsize local companies that furnish goods and services to the offshore industry.

Recently, Sirois got a client referral-a "high-end" BP employee-who wasn't planning to retire for another few years but who is now concerned his pension would be affected if the company files for bankruptcy. He's meeting with Sirois to discuss his options, including early retirement.

Ultimately, the oil spill's impact could be broad. According to a Wall Street Journal article, it's estimated there will be 16,500 fewer jobs in the fourth quarter along the five Gulf states because of the spill.

The Gulf of Mexico Alliance, a partnership of those five states, says the region contributes $3 billion annually to the U.S. economy. That includes more than 40% of the nation's domestically produced crude oil and natural gas, as well as roughly 70% of U.S.-caught shrimp and oysters.

In addition, the Mississippi basin provides food, shelter and breeding grounds for about 40% of North America's duck, goose, swan and eagle populations, according to the alliance. And it's the winter home for much of the continent's waterfowl.
Brad Fortier, a financial planner affiliated with LPL Financial Inc. in New Orleans, says one of the lessons from the spill is that some of his clients could use business interruption insurance.

Small Broker-Dealer Market Shrinking
(Dow Jones) The lingering downturn is slimming the ranks of smaller and less sound regional and independent broker-dealers.
Like other industries, the broker-dealer business is experiencing "a low-end washout," says Bing Waldert, a director at consultancy Cerulli Associates. "Tough times are tough on those who aren't financially sound."

While no one tracks the number of regional or independent broker-dealers that have gone out of business, analysts who track the industry say that at least a dozen have closed their doors because of insufficient capital or issues with complex investments like private placement in just the last six months.

Overall, the industry has shrunk, but much of that has resulted from consolidation. The Financial Industry Regulatory Authority oversaw 4,676 brokerage firms in May 2010, down from 5,005 in 2007, according to the regulator's Web site. Those numbers include various types of brokerages.

Among the struggling firms is Jesup & Lamont Inc., which in June said it would terminate all nonessential personnel with the exception of a few executives and some other limited staffers. FINRA ordered the small investment bank and brokerage firm, which has 200 total employees, to cease its securities business, except for the liquidation of transactions, because of its failure to meet net capital requirements.

Another small broker-dealer, Chicago Investment Group, is merging with Newbridge Securities Corp., said Bob Acri, a former president of the firm who stepped down about a year ago. The issues facing the company-which had about 60 advisors a year ago-were similar to those Jesup & Lamont faced, Acri said. "There was a requirement to boost up capital," he said, "and the merger was the best way to do it."

Acri now is president of Chicago-based Kenilworth Asset Management, a registered investment advisor. He believes a combination of factors is putting pressure on smaller broker-dealers, including the economic downturn, an increased focus by regulators on broker-dealers' net capital positions and more coordination between regulators.

His firm just had its first audit by Finra and about three-quarters of the time was spent on documents related to the company's net capital, he said.

A Florida-based broker-dealer, GunnAllen Financial Inc., was shut down by FINRA earlier this year after it fell below mandatory net capital requirements. The firm later filed for bankruptcy. Great American Advisor, a subsidiary of Cincinnati-based Great American Financial Resources Inc., a member of the Great American Insurance Group, has also said it plans to exit the retail broker-dealer business next month to focus on its core insurance and annuity operations.

Some of the firms were operating close to the bone, with advisors managing as little as $4 million-hardly enough to draw a payout to live on, let alone cover firm expenses. "This isn't the cream of the crop we're losing here," Waldert said. "These aren't the big registered advisor firms shutting down."

Some broker-dealers have run into problems selling private placements that later turned out to be fraudulent. In one case, a court-appointed trustee last month sued more than 45 broker-dealers, several of which are now shut, to recover at least $251 million in damages plus interest and seek the return of all commissions received for the sale of Provident Royalties LLC private placements. The deal, which supposedly involved oil and gas royalties, was later exposed as an alleged fraud. The broker-dealers "permitted a massive financial injury to take place to debtors and thousands of individual investors," the suit says.
Copyright © 2010 Dow Jones & Co. Inc.

FINRA Issued More Fines, Disciplinary Actions in '09
FINRA reported modest increases in fines and disciplinary actions in 2009 versus the prior year, and the pace might increase going forward.

"I think there's a general upward trend," says Brian Rubin, a partner in the securities and litigation group at Sutherland Asbill & Brennan LLP's Washington, D.C., office. He expects both FINRA and the SEC to be more enforcement-minded in the wake of criticism they received during the market crisis.

FINRA issues monthly regulatory notices that lists each of the disciplinary actions it brings, and Rubin's firm puts all of that information on a spreadsheet and slices and dices it. Rubin says they found that while the amount of fines and disciplinary actions by FINRA was up year-over-year in 2009, the agency was less active than in prior years.

Rubin says FINRA fined firms and individuals roughly $50 million in 2009, almost twice as much as in 2008 (roughly $28 million).  During the 2005-2007 period, yearly fines totaled between $77 million and $184 million (which includes fines obtained by FINRA and its predecessors, the NASD and the New York Stock Exchange).

FINRA settled more disciplinary actions last year (1,090) versus the prior year (1,007), but neither number matched the totals racked up from 2005 through 2007.

Rubin says the top enforcement issues concerned mutual funds and the issue of suitability. Sometimes the two overlapped, such as with share-class cases. In some suitability cases, fines were imposed for excessive trading and unsuitable sales of various products, such as collateralized mortgage obligations, hedge funds, unit investment trusts and variable products.

 


Other top enforcement issues included licensing violations and advertising.

Analysis by Sutherland Asbill & Brennan found that traditional FINRA enforcement priorities such as sales to seniors and retirees, alternative investments, private placements and Ponzi schemes didn't make the top five list in 2009. But that trend might reverse in 2010, it says.

A FINRA spokesman says the agency's enforcement priorities this year include private placements, alternative investments such as structured products, and sales to seniors and retirees.

Advisors Expect Revenue Rise In '10
Revenue at independent registered investment advisors (RIAs) slumped last year from the year before, but advisors polled by Charles Schwab expect to see an uptick in 2010.

According to Schwab's annual RIA Benchmarking Study released last month, RIAs' reported revenue per client slumped 11% last year to $6,900, down from $7,800 in 2008. But advisors participating in the study estimate their revenue will rise 10% this year.

Among the growth factors, 77% of respondents cited maintaining quality and consistency in client service while adding new clients, and 74% said growth came from their ability to convert prospects into clients. Other growth drivers include delivering investment returns that help attract and retain clients (68%), implementing technologies to build scale (65%) and adapting operations and day-to-day procedures to accommodate growth and be efficient (62%).

Among growth roadblocks, 56% said the biggest impediment was devoting sufficient staff time to business development. Other potential barriers include developing and following a marketing strategy (44%), finding enough in the budget to invest in marketing (39%), identifying prospects (38%) and developing and implementing a growth plan for the firm (31%).

The study polled 870 firms managing more than $300 billion in combined assets, with 80 firms managing $1 billion or more. On average, participating firms have 380 clients, $470 million in assets under management and $2.6 million in revenue.

Are IPOs Really A Scary Investment?
IPOs aren't the lousy investment many investment pros say they are. So says a recent white paper from Renaissance Capital, the Greenwich, Conn.-based provider of IPO research that says IPOs actually outperform the broader markets.

Given that Renaissance maintains the FTSE Renaissance IPO Composite Index and is the advisor to the IPO Plus fund (IPOSX) focused solely on investing in IPOs, it has a vested interest in countering the argument made by the likes of Morningstar, Dimensional Fund Advisors and Wharton professor Jeremy Siegel that retail investors should be wary of--or avoid--IPOs.
According to Renaissance, IPOs got a bum rap after many retail investors chased unprofitable Internet companies and got burned during the '00-'02 tech wreck (major institutional investors make up the bulk of today's IPO market). Other perceived drawbacks include the lack of Wall Street coverage, untested corporate performance and a small shareholder base that can make IPOs more volatile than established equities.

Yet some IPOs are for companies with disruptive technologies and business models that challenge the status quo and offer game-changing opportunities that can enable active money managers to generate alpha, says the white paper, "New Data Uncovers Hidden Truths about the IPO Market."

According to the FTSE Renaissance IPO Composite Index, IPOs have outperformed both the S&P 500 and the Russell 3000 for five of the past seven years, and were double the amount in 2009 (though IPOs' negative 50% return in 2008 was 11 percentage points less than both indexes). And Renaissance says that despite the inherent volatility of IPOs, the IPO index has produced better risk-adjusted returns than the other two indexes since year-end 2005 through this year's first quarter.

Morningstar IPO strategist Bill Buhr remains unconvinced. "You can find diamonds in the rough in some cases," he says, adding investors need to ask who's the IPO deal good for. "If it's good for the company, it's probably good for investors. If it's good for the founder and a couple of senior executives, do you want to buy in at their selling price?"

Annuities Could Gain Traction In 401(k) Plans
It's not exactly a groundswell, but more employers are thinking about offering annuities in company-sponsored 401(k) plans, according to a recent survey by the consulting company Towers Watson. While only 18% of employers either currently offer annuities or plan to do so next year, another 30% of the respondents said they were considering offering an annuity option for 401(k) investors.

"With the continuing shift in corporate America away from traditional defined benefit plans and toward account-based plans like 401(k) and cash balance pension plans, annuities and other distribution designs can provide a steady stream of retirement income and help retirees' nest eggs last through their lifetimes," said Robyn Credico, senior retirement consultant at Towers Watson. "But we're still not at the point where annuities are being widely used in 401(k) plans to bridge the gap between traditional-style pensions and defined contribution plans."

Indeed, among employers that offer annuities as an option, 79% said just 5% or less of plan participants choose them.
Among other survey findings, target-date funds are the most popular default investment option (72%), followed by balanced, or lifestyle, funds (13%). And 78% of plan participants who use target-date funds as their default option select funds not affiliated with their record keeper.

In addition, Towers Watson says 18% of respondents said they had either trimmed or suspended their employer matching contributions since September 2008. Of those, 49% haven't restored the match, but nearly all of them said they're considering reinstating all or part of it within the next 12 months.

The survey is based on responses from 334 large U.S. companies with at least 1,000 employees.

Survey: The Good (Advisors); The Bad (Financial Industry); And The Uncertain (Fiduciary Standard)
For the most part, advised investors like and trust their advisors, dislike the financial services industry and want the fiduciary standard even if they don't want it imposed from above, according to a recent survey of both investors and financial advisors by Envestnet, a provider of wealth management services to the advisory industry.

Among the investors surveyed who work with advisors, 80% said that professional advice is worth more than it costs and 87% said their financial advisor always acts with their best interests at heart. Just 12% said their advisor didn't properly explain market risks.

But 73% of investors said they're cynical about the financial industry, and they seem to hold conflicting views on advisor roles and obligations toward their clients, and how the debate over the fiduciary standard plays into this.

On the one hand, 98% of surveyed investors-65% answered "strongly"-said they would support regulation holding all advisors to the same standard of care. But 69% said that a fiduciary standard shouldn't be legislated. What gives?

"Investors aren't holding their collective breath waiting for new legislation, and they don't believe that new regulation is the only meaningful response to the issue of advisory responsibility," said Bill Crager, Envestnet president. "Fundamentally, investors believe that when it comes to encouraging confidence and trust, what occurs in the interaction between financial advisor and client is far more important than what a regulation says."

And even though the fiduciary standard has been one of the industry's hot-button issues, a surprising number of advisors are less-than-fully informed on the matter. To wit: 44% of advisors believe there's one standard of care for all advisors. (Among different channels, 63% of wirehouse advisors thought there was one standard versus 38% for regional independent broker-dealers and 29% among RIAs.) Of course, SEC-registered investment advisors are held to the fiduciary standard and FINRA-regulated brokers are held to the suitability standard.

The Envestnet survey polled 1,023 investors with at least $250,000 in assets, as well as 504 financial advisors across various channels. Based on the results, it appears investors and advisors aren't on the same page regarding perceptions of professional responsibility to clients.

In grading advisors on how well they explain their professional responsibility to clients, just 2% of investors gave them an "A," while 26% gave them a "B" and 52% a "C." The remaining were either "D," "F" or didn't know.

When asked to grade themselves on how well they explain their professional responsibility to clients, 42% of advisors gave themselves an "A," while 52% gave themselves a "B," 5% said "C" and 1% didn't know.

And while investors generally like the relationship they have with their advisor, a sizable number still want their advisors to be more transparent about fees. Specifically, 40% said their advisors are very clear on how they're compensated, while 37% said they should provide greater clarity about their compensation.

Of advisors, 74% said they make an active effort to discuss all costs and fees associated with an investment product. "Something is getting lost in the discussion between advisors and clients about fees and expenses," Crager said. "It's hard to build a foundation of trust if an investor feels that a financial advisor is withholding certain information."