Plain English Made Simple
New SEC requirements that financial advisors create a plain-English, narrative version of Form ADV Part 2 take effect on October 12, although the final compliance deadline isn't until March 31, 2011. Either way, some folks say it's time for advisors to brush up on their writing skills to avoid mistakes that could delay registrations or encourage increased scrutiny from regulatory examiners.

During the summer, the SEC adopted new rules for Form ADV, which is used by investment advisors when they register with both the SEC and state securities regulators. Part 1, which contains information about an advisor's education, business and disciplinary history during the past ten years and is filed electronically with regulators, will retain its check-the-box format.

But Part 2, or the advisor's brochure, provides more detailed information about an advisor's services, fees and investment strategies for both regulators and potential clients, and no longer will include the check-the-box and multiple-choice format. Instead, a two-part all-narrative brochure will be required. Part 2A is the firm's main brochure and contains 18 different disclosures about the advisory firm. Part 2B is the brochure supplement that provides specific information about the people at the firm who dispense investment advice.

Some advisors believe the new format is unnecessary, particularly since they already explain aspects of their business in narrative form on Schedule F of Form ADV. "Check boxes make it easy for people to understand things, and now they're taking that away and I don't think that's helpful," says Jennifer Cray, a partner at Investor's Capital Management LLC in Menlo Park, Calif. Nonetheless, she adds, the firm's outside consultant will do much of its ADV drafting. "I've delegated all of the worrying to him."

The SEC estimates the brochure will require 15 to 60 hours to complete and cost advisory firms using outside consultants between $3,000 and $5,000 to create. William Lutz, a retired English professor at Rutgers University who helped write the SEC's Plain English Handbook, believes the SEC's time estimate is underestimated. "You have to consider the various constituents who could get in there and muck it up," he says, referring to possible complications regarding legal and compliance departments.

But Zachary Gronich, CEO of RIA In A Box, a compliance consulting firm in New York City, says the financial costs might be overstated. He says his company charges $525 to draft Part 2A for each firm, and $95 for each Part 2B that covers affected individuals at a firm. "If you have a ten-person firm, that's only about $1,500," he says. 

Gronich expects all state securities boards to eventually adopt the new rules.

 Writing ADV Part 2 in plain English (Schedule F has been eliminated) is aimed at helping clients get a clearer picture of how advisory firms operate. But some consultants say not all advisors possess the knack for crisp, clean writing.

"When advisors do form ADVs by themselves, it's often raw and rough with bad grammar and silly typos," says Nancy Lininger, a compliance consultant at The Consortium in Camarillo, Calif. "And sometimes the answers are short and insufficient. Or they go the other way and get very technical into their philosophy and they talk in terminology that investors often don't understand.

Among other things, the Plain English Handbook suggests using the active voice with strong verbs, personal pronouns and short sentences, and omitting superfluous words and jargon. The phrase "modern portfolio theory uses plain English words," Lininger says. "But when you put them together, does the investor understand what that means?"

Fiduciary Standard Lobbying Season
First came this summer's Dodd-Frank Wall Street Reform and Consumer Protection Act which mandated the SEC to undertake a six-month study of the obligations and standards of care of broker-dealers and investment advisors who provide personalized investment advice about securities to retail investors.

Then came the one-month public comment period that ended in late August when more than 3,000 people put in their two cents to the SEC on where they stood on the issue--whether it be the pro-fiduciary standard espoused by investment advisors; the pro-suitability standard favored by broker-dealers and the insurance industry; or a so-called fiduciary "lite"standard that waters down the current standard governing investment advisors.

And now it's time to wait--and lobby--as the SEC studies the issue into the new year.

When the study period ends in late January, the SEC will likely be poised to do something. As stipulated by Congress, the agency will have the authority to write rules that would create a uniform standard of conduct for anyone who dispenses financial advice to individual investors. And the law says this standard must be "no less stringent" than the standard currently applicable to investment advisors.

SEC Chairman Mary Schapiro says she favors a uniform fiduciary standard. So does FINRA Chairman and CEO Rick Ketchum. SIFMA president and CEO Tim Ryan has called for a "universal standard of care that avoids the use of labels that tend to confuse the investing public."

What exactly does all of that mean? Who knows, which is why leading membership organizations with skin in the game will maintain their lobbying efforts and keep their public relations machines humming in the coming months.

"Our organization, like others involved in this issue, will seek to educate and influence the SEC as they conduct their study," says David Bellaire, general counsel at the Financial Services Institute, which represents independent broker-dealers and financial advisors. FSI opposes imposing the fiduciary standard that governs RIAs on the entire advisory industry.

"We want a standard that works for all business models and doesn't advantage or disadvantage one business model over another," Bellaire says.

Says Barbara Roper, director of investor protection at the Consumer Federation of America, "I've let the SEC know they should expect to hear from me early and often."

Roper, a proponent of the fiduciary standard, says there are a couple of rounds left to go on this issue. "The SEC will have to report to Congress, so we'll have something to say on the report when it's done, as well as on some of the things industry members will put forward we think are incorrect," she says.

David Tittsworth, executive director of the Investment Adviser Association, says lobbying the SEC and lobbying Congress are two different animals. "[The SEC] is a more technical venue than Capitol Hill in that you have people who know a lot about very discrete subjects and have a tremendous amount of expertise," he says. "Whereas on Capitol Hill, it's hard to find members of Congress who know the basic difference between investment advisors and broker-dealers, much less their staffers."

Agreed, says Roper. "There's a limit to what you can do from a lobbying perspective because this isn't the traditional process. There's a study that has to be done and we hope it will be a fact-based exercise. We're of the position that the facts clearly support the fiduciary standard."

Others, of course, disagree.

And they will also do their best to make their views known in the coming months.

Does Schwab's Purchase Of An RIA Portend A New Trend?
In a major move to offer institutional and retail clients more investment solutions, Charles Schwab Corp. announced at summer's end it is acquiring Windward Investment Management for $150 million.

The acquisition of the Boston-based independent RIA represents a departure for Schwab, which is the largest provider of custodial services to independent RIAs. Schwab chiefly focuses on organic growth and the few acquisitions it has made in recent years-U.S. Trust in 2000 and the private asset management business of State Street Corp. in 2003, for example-have typically involved large institutional businesses.

Windward relies on a quantitative, risk-controlled strategy to manage $3.9 billion in assets--primarily ETFs--for individuals, other RIAs, non-profit organizations, and retirement plans. The high premium that Schwab paid clearly reflects the firm's 56% annual growth rate over the past five years.

"When viewed just on assets and revenue, the valuation might be considered rich," says David Selig, CEO of Advice Dynamics Partners, an M&A consulting firm in Mill Valley, Calif. "But when you look at the intellectual property and goodwill with this acquisition, clearly Schwab saw value."

Windward blends active and passive management in search of risk-adjusted returns with an emphasis on downside protection. The approach employs a broad range of global markets and assets, including equities, fixed income, hard assets, real estate and currencies. The company rebalances its portfolios three times a year (sometimes more, depending on market conditions), and invests in indexes through low-cost exchange-traded funds, exchange-traded notes and registered funds. It might use individual securities, such as money market funds when it holds cash as an asset.

The firm's founder and chief investment officer, Stephen Cucchiaro, and his investment team will remain at the firm. Schwab is clearly betting that it can continue to drive Windward's growth by offering its services to independent RIAs at a lower cost, as well as to retail investors through its managed account platform.  Schwab CEO Walt Bettinger remarked that the emphasis that Windward's investment style places on risk management is "an ideal approach for today's world."

The acquisition of Windward comes at a time when Schwab is ramping up the breadth of ETF strategies it offers advisors and retail clients. Bernie Clark, executive vice president for Charles Schwab Advisor Services, said in an interview that Windward uses 40 different asset classes packaged into three different categories: diversified conservative, diversified growth and diversified aggressive. "It's a strategy that performs well to the down side as well as the up side," Clark said.

He added that future acquisitions were a possibility. "We're looking for solutions for advisors--scalable open architecture answers for all our clients," Clark said. "We are going to buy sometimes [to accomplish that]."

Selig wonders if Schwab's purchase of an RIA like Windward signals a new trend among custodians, who "always seem to be in an arms race over something," he says. Selig notes that the Big Four custodians--Schwab, Fidelity, Pershing and TD Ameritrade--have been focused on beefing up their practice management areas and boosting their technology offerings.
"This might be an opening salvo for a new battleground of providing a specific type of asset management system that a custodian's client base can take advantage of," Selig says.
Windward's investment products will be offered through Schwab's advisor and retail platforms. Windward will no longer market investments directly to retail investors, according to Schwab. The deal is expected to close in the fourth quarter.

RIAs Say AUM Is Up; Revenue Still Off  '07 High
The strong rebound from the market lows of March 2009 has produced record-high AUM levels for RIAs, but higher costs mean revenue is still lagging, according to the latest Rydex|SGI AdvisorBenchmarking study.

The average advisory firm saw assets under management rise 28% last year, to $174 million from $136 million in 2008. That percentage increase is the highest in the survey's 11-year history. 

The survey of 427 RIA firms found 42% expect their AUM to grow another 11% to 20% during the next five years. It also found that 79% of advisors expect growth to come from referrals from existing clients.

That said, survey respondents said expenses were slightly more--and revenue slightly less--than peak levels from 2007. Last year's median profit margin of 19% equaled the prior year's, but that still trails levels from five years ago.

In addition, the survey found that 31% of advisors cut back on principal compensation in favor of investing that money back into their practice. At the same time, just 8% of advisors trimmed compensation for administrative and support staff.

The chief concerns cited by advisors were finding new clients (79%), too much government regulation (71%) and the need to boost technology investment (68%).

Advisors on average spent 10% of their time on client service last year versus 15% in 2008, and 22% are offering investment management services to other advisors.

Rich Americans Save Tax Cut Instead Of Spending It
(Bloomberg) Hand the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody's Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

The findings may weaken arguments by Republicans and some Democrats in Congress who say allowing the Bush-era tax cuts for the wealthiest Americans to lapse will prompt them to reduce their spending, harming the economy. President Barack Obama wants to extend the cuts for individuals earning less than $200,000 and couples earning less than $250,000 while ending them for those who earn more.

"I would tend to wonder how much the tax cut actually influences spending behavior," said Chris Cornell, an economist who mined government reports back to 1989 for West Chester, Pa.-based Moody's Analytics. "Spending by the top 5% of households seems much more closely tied to business-cycle issues than it does to tax-cut issues."

The Moody's research covering couples earning more than $210,000 found that spending by the wealthy is more likely to be influenced by the ups and downs of the stock market than changes in income-tax rates.

Stock-market performance is the "primary factor that is driving the savings of the top 5% of households," said Mustafa Akcay, economist and co-researcher of the savings data.

When tax legislation was signed by Clinton in 1993-raising the top tax rate to 39.6% from 31%-the saving rate fell from 12.1% in the second quarter to 9.5% in the first quarter of 1994. The Standard & Poor's 500 Index rose 1.9% from July through September, after little change the previous three months.

When the first Bush tax cuts were signed into law in June 2001, pushing the top rate down to 35%, the wealthy boosted savings. The saving rate climbed to 2.8% in the first quarter of 2002 from minus 2% in the second quarter of 2001. The increased savings coincided with a 1.1% decline in the S&P 500 index.

Advisor ETF Users Most Loyal To Vanguard Brand
Investment advisors are using more exchange-traded funds in their client portfolios and, evidently, they're more apt to use Vanguard's ETFs than its rivals', according to a Cogent Research report.

Cogent's survey of 1,560 investment advisors found that Vanguard was tops in advisor loyalty among ETF providers, surpassing the former leader, iShares. And increased loyalty translates into greater use of Vanguard ETFs--the average amount of assets Vanguard captured among advisors it serves zoomed from $2.3 million per user last year to $5.5 million in 2010. That still trails iShares' recent total of $5.7 million, which was up only slightly from $5.3 million last year.

Cogent's Advisor Brandscape: 2010 report found the percentage of advisors using ETFs has risen from 46% in 2007 to 60% this year. The proportion of their book of business allocated to ETFs has increased from 5% to 8% during the past three years, although the latest figure is the same as last year's.

The report's findings are based on a Net Promoter Score, a standardized loyalty metric developed by Bain & Co. and commonly used in marketing research, says Meredith Lloyd Rice, Cogent's senior project director. Vanguard finished first in nine of ten areas of client experience and service, and its score of 33% was a ten-point gain over last year. iShares, a division of BlackRock, saw an eight-point drop.

That tied it with Spider/State Street. PIMCO was fourth, with a score of 12%. None of the other ETF providers Cogent rated had a positive score. The overall industry average was 2%.

"Advisors using Vanguard today are even more likely to use it as a primary provider," Rice says. "Vanguard is also doing a great job targeting advisors who tend to manage large books of business."

Consumers In Worse Shape ThIt would be nice to report some good news about the economy, but at least according to one organization that counsels folks on their finances, the news isn't getting any better.

The Association of Independent Consumer Credit Counseling Agencies (AICCCA) reports that its members have seen an increase in demand for their services of about 20% over the past 18 months. This year alone, demand is up 13%.

That said, the Fairfax, Va.-based organization says the ability of its members to help these people with debt management plans has actually decreased because a greater number of people coming to see them are in worse financial shape than before. In 2009, AICCCA members were able to help roughly 19% of people seeking their assistance. This year, that rate is projected to dip to about 12%.

AICCCA President Dave Jones cites several reasons. First, the housing market remains an issue because of foreclosures and people's difficulty in obtaining home equity loans. Second, unemployment remains stubbornly high. And, generally speaking, some people are waiting too long to seek help.

"If they wait too long, there's nothing we can do," Jones says. "If they get behind more than 120 days on their bills, their creditors don't want to talk to them."

Jones says one of the disturbing trends is the growing number of people willing to walk away from home mortgages and car loans.
"A lot of people don't care anymore and say 'Let people sue us, what are they going to get?'" Jones says. an Last Year