RIAs Transferred To States May Get Dual Exams
The Securities and Exchange Commission may continue to examine registered investment advisors that are being officially transferred to state jurisdiction--at least for a while, according to the SEC's compliance office.

The Dodd-Frank Wall Street Reform and Consumer Protection Act that became law this summer transfers investment advisors with less than $100 million in assets under management to state jurisdiction as of July 21, 2011. Now, the SEC monitors RIAs with $25 million or more in AUM.

John Walsh, chief counsel of the SEC Office of Compliance Inspections and Examinations, says the SEC and state regulators will work closely together during the transition period, which may mean dual exams by federal and state agencies in some cases. The agencies review the ADV forms filed by advisors.

The change supposedly will lessen the workload for the SEC, which was examining many firms only once every nine years, or had never examined many that fell under its jurisdiction.

"We may examine firms even if they're likely to leave our jurisdiction," Walsh says. In addition, the SEC may show up at a firm to do an examination and then may continue it along with the state regulators to conduct some joint exams, he says.

SEC spokesman John Heine says the goal is to provide a smooth transition from the old system to the one mandated by the Dodd-Frank law.
"During the transition period, our regulators will be consulting regularly with the state regulators and vice versa," Heine says. "This is to comply with the Dodd-Frank bill, but, even in the past, the two levels of regulations always worked together."

However, Walsh notes that joint reviews are very few and highly targeted and take place only where local exam managers and states believe they are appropriate. The joint work will continue through the transition, but Walsh did not put a time limit on how long it might last. 

SEC collaboration will not be limited to only those firms at or near $100 million in AUM. "We are urging all SEC registered advisors of all sizes to be vigilant in their compliance right up through the transition."

Walsh would not speculate on what a state regulator might be looking for or whether the two levels of examiners may be looking for different things.

Most of the estimated 4,200 financial advisors who will fall under state oversight are waiting until after January 1 to file ADVs at the state level, even though they could have started making the switch last July. The reason that most are waiting is most likely that they would have had to pay registration fees to both the state and SEC for the portion of 2010 when they fell under both jurisdictions, says Chris Winn of AdvisorAssist, a compliance consulting firm in Boston.

Compounding the expected late-stage rush is that the new filings have to be done by July 21, squeezing them into an eight-month time span, and that the number of new firms in the under-$100-million-AUM category continues to grow faster than other groups, says one expert.

Some people in the industry question whether state securities regulators in cash-strapped states will have the resources to do the job. However, the North American Securities Administrators Association, a membership group of state securities regulators, says some states are expanding the number of examiners on staff, and others are creating procedures to share resources to handle the expected rising workload.

Report Examines B-D Regulatory Hot Spots
As regulators sort through the regulatory mandates thrown on their laps by Congress courtesy of the Dodd-Frank Wall Street Reform and Consumer Protection Act that became law this summer, the financial advisory industry is waiting to see how it all shakes out.

A recent study commissioned by Albridge Solutions, a wealth management services and technology provider and a Pershing LLC affiliate, talked to broker-dealers and regulators alike to uncover compliance gaps and document best practices relating to broker-dealer compliance. It also revealed the regulatory hot spots for broker-dealers that regulators are focusing on.

Among them: how broker-dealers will handle client disclosures and education if the SEC mandates a uniform fiduciary standard of care for personal financial advice dispensed at the point-of-sale. Such a uniform compliance standard would embrace the notion that all investors get the same standard of care whether an investment is made through an SEC-registered investment advisor or a FINRA-regulated broker-dealer. Both SEC Chairwoman Mary Schapiro and FINRA CEO Rick Ketchum have publicly called for some type of uniform standard across the industry.

Investment advisors fear that would weaken the current fiduciary standard; broker-dealers worry it would create burdensome compliance costs. "I don't think it'll be a doomsday scenario [for broker-dealers]," says Marshall Levin, a partner at Beacon Strategies LLC, a consulting firm that conducted the Albridge study. "But it will be a pretty significant change."

Levin says broker-dealer compliance standards will likely mimic what RIAs do now, such as having the equivalent of an ADV where brokers would disclose their remuneration for different activities they do.

One of the study's conclusions is that broker-dealers will have to prove they communicated the pros, cons and costs for every recommendation they make, and they'll have to provide a reasonable belief that the investor understood the recommendation.

Furthermore, any conflicts of interest must be disclosed in plain English to convince regulators that the client had sufficient information to make an informed decision.

Chip Kispert, managing partner at Beacon Strategies, says the survey found a significant chasm between broker-dealers' ability to oversee their investment professionals and the likely regulatory demands coming down the pike. He notes one of the problems he finds is that only 30% of firms use automated compliance surveillance tools.

Marc Butler, managing director at Pershing, says it's hard to pinpoint how much compliance upgrades will cost. "The best we can do to help firms is to give them recommendations for the next step," he says.

According to the study, "Broker-Dealer Sales Practices Oversight: Secrets of Their Success," other areas broker-dealers will need to be aware of include sensitivity to fraud (that applies to advisors across all channels), increased protection for elderly investors, and the expectation that FINRA will propose a rule to give investors the right to dispute claims against broker-dealer firms and individual advisors through an all-public arbitration panel.

Regarding a possible uniform standard of care, Levin says the SEC is turning to FINRA to set the parameters for a single standard because the former has too many regulatory matters on its plate already. And that begs the question whether FINRA could eventually become the self-regulatory organization for RIAs, an issue that's anathema to many RIAs.

"The issue will be a political hot potato," Levin says.

Mock Audits Raise Disclosure Concerns
(Dow Jones) Mock compliance audits are a helpful tool, but some advisors worry whether conducting one could mean disclosing troublesome findings to regulators. The process, often conducted by professionals who are former regulators, aims to simulate an examination by the SEC and FINRA. It gives firms an opportunity to detect and fix compliance problems before the real regulators catch them.

Some advisors are concerned about their legal obligation to inform regulators of some of the problems that outside consultants detect, such as a firm principal who isn't conducting adequate suitability reviews.

Firms aren't required to report findings to regulators, said Amy Lynch, president of FrontLine Compliance LLC in Leesburg, Va. But they still may want to report certain material problems, such as a compliance lapse behind an error that significantly affected a customer account and, by extension, the firm. Regulators may learn of the problems anyway if they later conduct their own examination, she said.

In any event, firms should be prepared to speak up about compliance breaches and how they fixed them if regulators later decide to conduct their own examinations, said Lynch.

Many larger firms and sophisticated adviors try to protect the confidentiality of their information by retaining a lawyer who then contracts for mock audit services, said Barry Schwartz, a partner with ACA Compliance Group in Boca Raton, Fla. The lawyer can assert that the information is protected under attorney-client privilege.

Copyright © 2010 Dow Jones & Co. Inc.

Advisors Rate Edward Jones, Commonwealth Tops In Satisfaction
With the financial crisis increasingly in the rearview mirror, advisors at broker-dealers are reporting stronger satisfaction levels with their companies, according to an annual survey from J.D. Power and Associates.

The survey of more than 2,800 advisors holding a Series 7 license measured eight levels of employee satisfaction, and covered both advisors employed by their firms and independent advisors affiliated with a broker-dealer firm but operating independently.

In the employee group, Edward Jones finished first with a customer satisfaction index score of 876 on a 1,000-point scale. That was followed by Raymond James & Associates Inc., which scored 857. Employee advisors ranked their firms on eight key satisfaction drivers: firm performance; compensation; work environment; products/offerings; technology; job duties; contact; and people.

Edward Jones earned particular kudos in the areas of work environment and job duties. Raymond James did well in the compensation and firm performance categories.

Merrill Lynch ranked third with 710 points, and earned high marks in technology and products/offerings for its advisors.

In the independents category, advisors graded their firms on eight metrics comprising firm performance; people; technology; compensation; contact; job duties; products for clients; and offerings for advisors.

Among this group, Commonwealth Financial Network topped the charts with a score of 898. Advisors gave it high marks for perceptions of financial stability and operational and compliance support.

Cambridge Investment Research Advisors finished second, with a score of 848, and did well in products for clients and for providing advisors with flexibility in choosing products and services for clients. Raymond James appeared in this category, too, and finished third with a score of 845. Its strong suits included firm performance, products for clients and in-house investment research.

Advisors' satisfaction toward their employers and affiliated firms has picked up since the dark days of the market meltdown.

"As the financial troubles, compliance violations and merger and acquisition activity of some of the largest wealth management institutions begin to fade from memory, sentiment among financial advisors appears to be settling back in place," said David Lo, J.D. Power's director of investment services.

The Art Of The Referral
Client referrals are a natural way to generate growth, but why do so many advisors do a poor job in getting them? The answer, it seems, is that they don't really work at it.

"When you think about what a referral really is and how it can work, you'll understand why it's more complicated than it appears," says Julie Littlechild, president of Advisor Impact.

Many advisors evidently agree, which explains why two education sessions dedicated to the subject at the recent Schwab Impact conference were packed to the rafters.

The foundation for referrals, of course, comes from customer satisfaction. "It's not just focusing on the numbers, but on lives," says Littlechild, an industry researcher and consultant. That means broadening client service to include the softer issues that lead to deep conversations, stronger relationships and engaged clients. And according to Littlechild engaged clients provide up to five times more referrals.

Advisor Impact research found 91% of clients said they're comfortable providing a referral to their advisor, but only 29% of clients provided a referral. And industry research found just 4% of new clients came from referrals.

That speaks to a disconnect in the referral process at many advisor firms--both in terms of communicating with clients and with people on staff. Littlefield, for one, says advisors must be clear with existing clients about who their ideal client is and what their investment minimums are.

Some advisors say successful recruiting stems from a concerted top-down, companywide approach. Ken Hart, president of Cornerstone Advisors in Bellevue, Wash., says his firm's catalyst to revamp its referral process came three years ago with the planned departure at year-end 2010 of its co-founder and chairman, who had been the company's rainmaker for a quarter century. "We realized it would take a team effort to replace him," he says.

He says leaders from various departments--client management, operations, investment management-are now involved with speaking to new prospects, and their teams are incentivized when prospects turn into clients. "It has increased the consistency of new prospects we're getting, and it's less feast or famine," Hart says.

Andrew Altfest, executive vice president of strategy and investments at Altfest Personal Wealth Management in New York City, says his firm created a program that aligns advisor compensation with referrals. But it entailed more than just throwing money at it. "We had to manage the program closely in the beginning to get people comfortable because there was some anxiety about asking people for referrals," he says.

With the help of ideas from the likes of Schwab and so-called referral gurus Bjorn Millom and Bill Cates, the firm created referral scripts that covered multiple scenarios on what can happen in client meetings when advisors ask for referrals--from best-case situations when clients know a friend nearing retirement who's dissatisfied with their advisor, to clients not being very receptive.

"When you prepare and address for possible outcomes, advisors are more comfortable having those conversations," Altfest says.

Altfest's firm implemented its referral program in May 2009. So far, he says, they've seen an incremental uptick in their referral rate and they expect better results going forward. "I think a big success has been getting advisors to actually ask the question and getting more involved in client acquisition," he notes Altfest says maintaining a regular schedule of client events is another good way to generate referrals. "Clients bring friends to these events, and our advisors are making sure they spend time with those friends," Altfest says.

Some advisors say they've gotten push-back from clients when they're asked for referrals because they fear dilution of service. "That's a legitimate concern," Hart says. He suggests advisors address the issue upfront. "For clients to get on board, firms must show they're staying ahead of the curve by making sure they have the staff and systems in place to maintain the same level of client service. Otherwise, it will demotivate clients to refer."

Piqued By Peak Oil
The concept of "Peak Oil" (i.e. the world has depleted more than half of its oil reserves, and production will dwindle going forward) has its supporters and detractors, but speakers at last month's Inside Commodities conference at the New York Stock Exchange firmly came down on the "peak" side.

Charles Maxwell, senior energy analyst at Weeden & Co., said a dozen leading non-OPEC producers have passed their peak, and they represent almost 60% of non-OPEC production. The list includes Russia, the U.S., Mexico, the U.K. and Norway.

The picture doesn't look too promising among OPEC nations, either. "The Saudis believe OPEC overstates the amount of its reserves," said Candice Beaumont, managing director at Lifschultz Investments, a family office with large energy positions in both public and private companies. She says Saudi Arabia's largest oil field, Ghawar, along with six giant fields in Iran, two super giant fields in Iraq, and general production in Kuwait, Syria, Yemen and Oman, are all in decline.

So, what are an oil-thirsty world-and energy investors, for that matter--to do? The time of "easy oil" is past even as global demand increases, Beaumont said. That's why nations such as Saudi Arabia are already looking to develop their heavy oil reserves, which is why she believes that country's light-oil fields are in decline.

And investors looking to cash in on this trend should turn to Canada, the Saudi Arabia of heavy oil thanks to its Athabasca tar sands reserves. "There are many companies operating there with 20 to 30 years of incremental growth ahead of them," Maxwell said. "Those will be the stars of the new energy era we're coming into."

Among his top choices are Suncor Energy and Cenovus Energy because of their hefty exposure to the tar sands region. Others that he named as tar sands plays--such as Shell Canada, Marathon and Conoco Phillips--have less exposure.

Morningstar Names Top 529 Plans
529 college-savings plans have come a long way, baby, but they're still a work in progress, according to research from Morningstar Inc. In a report issued this fall by Laura Pavlenko Lutton, an editorial director in the company's fund research group, Morningstar said 30 of the nation's 82 plans have cut fees. Additionally, some states have scotched unsuccessful plan options. That said, Lutton wrote, fees at many plans remain high and some of the investment choices aren't best of class.

As part of the report, Morningstar updated its list of the top five 529 plans. Among them are the T. Rowe Price College Savings Plan and Maryland College Investment Plan. Both funds are run by T. Rowe Price, and have similar asset allocation and underlying funds. The report says these funds are among the few direct-sold 529 plans.

The CollegeAdvantage 529 Savings Plan, managed by the Ohio Tuition Trust, wins kudos for its low-cost structure even though it runs multiple strategies operated by different companies.

Morningstar's list also includes the Vanguard 529 College Savings Plan sold through the state of Nevada. It has a $3,000 minimum investment. For investors looking for a smaller initial commitment, Morningstar suggests another Vanguard-run fund--New York's 529 College Savings Program (Direct) and its $25 minimum.

The last fund on the list, the Virginia-based College America fund, is the nation's largest 529 plan. The plan is backed by the full lineup from American Funds.