Advisory Industry Faces Talent Shortage
As an industry, the financial advisory business is relatively young. But its practitioners aren't. Cerulli Associates recently threw out some numbers to chew on-the average age of financial advisors is a shade under 49 years, and about 14% of those in its workforce are north of 60 years. More important, less than 25% of all advisors are age 40 and younger. And one final number to consider: Just 5.6% of advisors are age 30 or younger.

The industry needs new blood to replenish itself at a time when aging baby boomer clients will be putting greater demands on their advisors (many of whom themselves will be shifting into retirement mode). But an influx of reinforcements doesn't seem to be happening.

"This is essentially a stagnating industry, and at some point it could be a real problem," says Bing Waldert, a director at Cerulli, a Boston-based consultancy. Cerulli found there were roughly 334,000 advisors across all channels in 2009, down more than 1% from 2004.

According to a Cerulli report, "Hire, Train or Else," one of the challenges of attracting-and keeping-new recruits is the increasing sophistication of the advisory industry as it shifts from a commission-based transaction model to more complex financial planning with a fee-based model. Although it was never easy to start a career the old-fashioned, cold-calling way with a telephone and the white pages, Cerulli posits that the industry's increasing sophistication makes it even harder for newbies to hang their shingle.

"Investors don't just want to be pitched stocks," Waldert says. "They want to understand the recommendations within the framework of their overall goals. It's tougher for someone in their 20s to come in and earn a person's trust because clients' expectations for advisors are much higher."

Cerulli says there are no silver bullet cures for the talent shortage problem, but it does offer some possible solutions. One entails bringing novice advisors into existing advisory teams, which can provide a supportive environment for new hires. But rather than just dumping all the mundane work in their laps, senior advisors should set them up with a sense of the duties that will eventually be transferred to the junior advisors. Often, these new advisors fill a role within a team, as an investment or financial planning specialist, for instance.

Another way to successfully integrate new advisors into the fold is to let them cultivate clients with fewer assets, so that hopefully these pairings will grow together as the client attains more wealth later. This enables senior advisors to focus on bigger clients.

At least initially, says Cerulli, junior advisors should act as a support person rather than a business development resource because the sales-oriented aspects of the profession turn off many young professionals. Those new advisors with a go-getter sales mentality are more likely to want to start their new practice from scratch.

The Cerulli report found the bank channel has the largest numbers of under-40 and under-30 advisors in the industry, at least in percentage terms. And on the whole, it sports the youngest average age per advisor at 45.3 years. Two other channels-insurance advisors and dually registered advisors-shared the highest average age of 49.6 years.

The business development hurdle isn't as high in the bank channel, Waldert says, because advisors can work with tellers to spot potentially profitable customers and build business through referrals. "They can forge relationships with bank customers, which is an easier way to start a business from scratch," he says.

Rule Change Could Crimp Alternative-Oriented '40 Act Funds
As managed futures get more attention from alternatives investors, a growing number of investment companies are rolling out mutual funds that replicate these strategies by using futures and commodities-related instruments. But a petition from the National Futures Association (NFA) to the Commodity Futures Trading Commission (CFTC) might change the way a fund that uses futures operates.

Traditional managed futures programs and '40 Act funds (regulated by the Investment Company Act of 1940) are different animals. The former are managed by commodity trading advisors (CTAs), who invest in a range of global futures markets and get paid for advising others about buying or selling futures contracts or commodity options. They're regulated by both the CFTC (with which they register) and the NFA, the self-regulatory organization of the futures industry. Many CTAs operate as, or are part of, commodity pool operators. These are often organized as limited partnerships and are also CFTC-regulated.

CTAs are an opaque niche where the top managers typically charge a 2% management fee, plus a 20% performance fee based on any new profits. And investment minimums are generally substantial.

Those fund structures bound by the 1940 act, meanwhile, help democratize managed futures strategies by making them available in SEC-registered funds that have much lower investment minimums, use less leverage, have greater transparency and entail easier tax reporting.

In 2003, an amendment to CFTC Regulation 4.5 governing commodity pool operators allowed registered investment companies-including mutual funds and exchange-traded funds-to engage in futures transactions without the previous requirements they be limited to legitimate hedging purposes and very minor amounts.

For fund companies to trade commodity futures, they have to create offshore entities called controlled foreign corporations-often based in the Cayman Islands-to hold their commodity futures-related income so they can still qualify for favorable U.S. tax treatment.
But the NFA is worried that certain entities are trying to take advantage of the exemption by creating mutual funds for retail investors that are being marketed as commodity futures investments and are, in essence, commodity pools. "If they're holding themselves out as a commodity pool, then they should be registered as a commodity pool operator," says NFA spokesman Larry Dyekman.

"There's concern more of these types of funds of CTAs will pop up [as mutual funds]," says Nadia Papagiannis, Morningstar's alternative investments strategist.

If the CFTC agrees to the NFA's petition to reinstate the earlier restrictions on futures trading in Rule 4.5, that could mean investment companies trading commodity futures or options could be regulated by both the CFTC and the SEC, says Michael Piracci, an attorney in the investment management practice at Morgan, Lewis & Bockius.

For now, fund companies such as Rydex|SGI, which offers four funds with trading strategies that require a controlled foreign corporation, can only wait to see what the CFTC does. "We will make sure that all of our funds are in compliance with any new legislation that passes," says Ryan Harder, a portfolio manager at Rydex|SGI. He adds there are other available strategies not requiring a controlled foreign corporation.

Some observers think toughening up Rule 4.5 could put a chill on future '40 Act funds in the managed futures space. "Where this goes will determine if the mutual fund approach will be viable for folks who want a managed futures strategy in a vehicle with a different regulatory oversight structure, distribution approach and tax approach," says John Grady, chief operating officer and general counsel at Steben & Co., a Rockville, Md.-based company that provides individual and institutional investors with access to CTAs.

Says Papagiannis, "To make general, sweeping regulations that either force dual registration on all '40 Act funds trading any kind of futures, or bar them from any futures trading, would be bad for retail investors because managed futures strategies are a really good diversification tool for virtually any portfolio."

FPA Announces Heart Of Financial Planning Award Winners
Eight people who have shown exceptional leadership in the field of financial planning will be honored as the Financial Planning Association's 2010 Heart of Financial Planning Award winners at the FPA annual conference in Denver in October.

The awards recognize individual professionals, financial planning firms, FPA chapters or organizations that contribute to the financial planning community and the public. Recipients represent the FPA's core values of competence, integrity, relationships and stewardship.
Don Blandin, president and CEO of the nonprofit Investor Protection Trust, is being recognized for his leadership in developing the "How Can I Afford Retirement?" investor education program, as well as his close work with securities regulators, FPA chapters, and libraries across the country.

Mark Clark is being honored for his commitment to teaching financial education skills to youth through nonprofit agencies and organizations in Northern California.

Saundra Davis is receiving the award for providing high-quality pro bono financial planning to the working poor, and for volunteering thousands of hours as a key leader for the FPA of San Francisco Pro Bono Committee.

Michael Kitces, CFP, is being recognized for his commitment to education in the financial planning industry and for his work as co-founder of the FPA NexGen.

Keith Loveland is a practicing attorney in securities law and compliance and is being honored for his pro bono and ethics work and for his work ensuring a client-centered, ethical financial planning process.

Brent Neiser, CFP, is receiving the award for his commitment to financial literacy by educating the public in all areas of personal finance. He is the director of strategic programs and alliances for the National Endowment for Financial Education.

Don Pitti, who died in December, received the award posthumously. He had dedicated years to helping advance the financial planning profession and was one of the founding members of the International Association for Financial Planning, a predecessor organization of FPA.

Karin Price Mueller is a journalist who delivers financial planning information to the public through various media outlets. Mueller co-authored financial literacy guides to educate immigrants and the underserved about how they can improve their financial situation in the U.S.

Advisory Groups To Hold Fiduciary Forum
The debate over the fiduciary standard is far from over. For starters, the Securities and Exchange Commission in late July published a request for a 30-day public comment period on the standard of care obligations of broker-dealers and investment advisors.

And through the rest of this year, the SEC will be immersed in a six-month study on the issue as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Meanwhile, a group of four financial advisor organizations with skin in the game, along with the Committee for the Fiduciary Standard, will jointly sponsor a forum September 24 in Washington that will provide input into the SEC study. The event site was pending as of press time.

In addition to the Committee for the Fiduciary Standard, the event co-sponsors are the Certified Financial Planner Board of Standards, The Financial Planning Association, The Financial Services Institute and The National Association of Personal Financial Advisors.
Speakers will include various academic and policy research experts.

"As the first major review with prospective rulemaking on the duties of brokers and advisors in 70 years, and on the heels of the financial crisis, to say that the SEC's work here is vital to investors is an understatement," said Knut A. Rostad, chairman of the Committee for the Fiduciary Standard.

Plan To Curb Mutual Fund Fees Has Critics
(Dow Jones) The Securities and Exchange Commission on July 21 revealed its proposals to change fund fee structures, in particular capping how much mutual funds can charge customers for the costs associated with selling their products.

But the plans don't address revenue sharing between funds and brokerage firms, an area of the industry with very little disclosure. That's a problem, some say.

"If you put a cap on how much can be paid out to distribute funds, and that cap doesn't satisfy the market, the market will figure out other ways to get paid," said Barry Barbash, a lawyer at Willkie Farr & Gallagher who was head of the SEC's investment-management division for five years in the 1990s.

Concerns that firms will compensate for reduced distribution fees by using revenue-sharing agreements add to a growing list of criticism about the proposals, which were years in the making.

The SEC plans, which are subject to a 90-day comment period before they can become official, would see changes to 12b-1 fees and sales loads. Sales loads are fees charged by funds but paid to brokers who sell the funds, while 12b-1 fees can be used to help pay for the marketing and distribution of a fund, which can include payments to brokers.

The proposals suggest letting brokerages decide how much to charge for upfront sales loads in the hope of creating price competition, and would limit ongoing sales charges to the equivalent of the upfront sales charges, rather than let funds charge them for as long as an investor holds a fund's shares.

They would also cap 12b-1 fees at 0.25% of assets, and rename the fees as marketing and service fees.

But the plans do not cover revenue sharing-when a fund pays a percentage of its fees to a broker as part of the sales agreement. The details of such agreements are often very hard, if not impossible, to find beyond a general footnote in fund documents. The problem, say critics, is that if 12b-1 fees and sales loads are capped, then revenue-sharing agreements might be used to make up the difference.

"This issue reminds me of the game Whac-A-Mole," said Andy Rachleff, chief executive of kaChing, a Web site that matches investors with fund managers. "If they're going to cap 12b-1 fees, it's only going to mean [those charges] appear somewhere else."

Rachleff and others question why the SEC is taking steps to limit some fees and make them clearer to investors, but is leaving untouched one of the murkiest parts of fund fee charges.

The SEC isn't blind to the issue. In a footnote to its July 21 proposals, the agency admits that revenue sharing is a problem and that it's continuing to consider further rule amendments related to revenue sharing.

"Regulators are playing catch-up [with responsibilities imposed by the new rules] and they're trying to figure out how they can deal with them," said Barbash.

The result of this uncertainty is a set of proposals that attempts to improve the fee situation for investors, but which some argue doesn't do enough.

"This reform seems to approach the issue through the back door," Blaine Aikin, chief executive of Fiduciary360, said of the SEC's proposals.

Aikin said he would like to see full transparency and simplification of all types of fund fees. But even if the SEC had such a vision, he believes that the investment-management industry is too set against such a change.
Copyright © 2010 Dow Jones & Co. Inc.

Whither The Wilshire?
When it comes to equity market indexes, the Big Three are the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite. The Russell 2000 is another closely watched benchmark index. But why doesn't the Wilshire 5000 get more public attention? After all, this market cap-weighted index is the broadest available for the U.S. equity market, with far more names than the Dow, which represents a measly 30 companies, but is considered the public face of the U.S. markets.

"We'd love to see wider exposure," says David Hall, senior managing director at Wilshire Associates Inc., the Santa Monica, Calif.-based investment advisory and services company that created the index nearly 40 years ago. "We're a humble team of financial engineers here, and I don't think we could ever be accused of being a slick marketing machine."

The Wilshire 5000 got good play after Wilshire and Dow Jones & Co. formed a partnership in 2004. The latter handled the index's calculation and maintenance, and it was rebranded the Dow Jones Wilshire 5000. But Wilshire regained control of the index when that partnership ended in 2009 over what Hall calls a "philosophical divergence."

"Dow Jones was clearly interested in building the kinds of indexes that in our view aren't really benchmarks," Hall says, adding that the difference between an index and benchmark is that the former can sometimes be too narrow and serve no purpose other than to get people's attention.

Hall says the Wilshire 5000 is a very efficient benchmark used by a variety of institutions, including the Federal Reserve Board. "Whether or not we were in the index business for commercial purposes we'd have an index because it's at the heart of our consulting business with some of the largest institutional investors in the world," Hall says.

Beware Of Derivatives In Mutual Funds
The use of derivatives by banks was a hotly contested issue that Congress debated to the bitter end before passing the financial services reform package this summer. The use of derivatives by mutual funds may not be nearly as devisive an issue, yet in August the Securities and Exchange Commission sent a letter to the Investment Company Institute saying it's conducting a review to evaluate the use of derivatives by mutual funds, exchange-traded funds and other investment companies.

Specifically, the SEC is looking at whether existing prospectus disclosures adequately address the particular risks created by derivatives. It noted that some funds provide generic disclosures that are of limited use to investors, and that these disclosures can range from abbreviated comments to lengthy and technical explanations that don't clearly explain their relevance to the fund's operations.

The SEC makes the case that funds employing derivatives should supply disclosures using plain English that describe the amount of derivatives used and the purpose they're used for. The agency also says the risk disclosure in the prospectus should describe the fund's complete risk profile as a whole, including anticipated derivatives use.

A spokesperson for ICI, a trade group for mutual funds, ETFs and other investment companies, said the organization is reviewing the SEC's letter and will work with its members so they understand and comply with their disclosure obligations.

Todd Rosenbluth, mutual fund analyst at Standard & Poor's Equity Research, says some mutual funds actively use derivatives such as futures, call options and the like, and that many funds with overseas investments employ currency hedging for downside protection. "It's more prevalent than people think," he says, noting that Pimco is an example of a fund family that actively--and successfully--uses futures as part of its approach.

Rosenbluth says most people pick mutual funds based on their three-year track record, but they often don't know how exactly they achieved those results. "If the alpha is based on [the use of derivatives], it's up to individual investors to grasp that and decide if they're comfortable with that risk," he says, adding that the SEC's attempt to clarify disclosures is a positive step.