Is Too Much Disclosure A Bad Thing?
The disclosure on disclosure is this: It sometimes does more harm than good. At least, that's the view of some academics who've studied the relationship between conflicts of interest by professionals and disclosures they make to their clients. And the issue is more than academic for regulators studying potential new rules regarding the fiduciary standard of care, as well as working to increase the transparency of expenses and conflicts of interest in transactions involving investment services and products. And don't forget the rules passed last summer requiring investment advisors to give clients narrative brochures containing "plain English descriptions" of their businesses, services and conflicts of interest on Form ADV Part 2.

In deciding whether or not to impose a fiduciary duty upon broker-dealers comparable to what investment advisors currently abide by, the SEC must consider whether lesser steps--such as more disclosure by broker-dealers--would suffice, says Robert Prentiss, a business law professor at the University of Texas.

"The easiest thing for Congress and the SEC to do when they face a problem is to say, 'Let's just do more disclosure,'" says Prentiss, who wrote a paper on the limits of disclosure and has spoken on the topic at various forums. "It's not hard or expensive to do, and the notion is that getting more information to investors will solve the problem."

But Prentiss says increased disclosure doesn't solve the problem because it can overwhelm investors with information that is often beyond their ability to meaningfully comprehend. And, he wrote in his paper, studies of informed consent show people correctly remember only about a third of basic information conveyed to them.

Perhaps more important, Prentiss cites academic research that shows when a group of professionals (in this case, stockbrokers) disclosed a conflict of interest to their clients (i.e. they get paid by what investment they put the client in, and sometimes they can benefit financially from promoting a stock or other investment versus giving unbiased advice), it can give brokers the moral license to provide even more biased advice.

"It's sort of a caveat emptor," says Daylian Cain, a professor at the Yale School of Management who has researched the topic. "Even people who try to give their client the best advice may be unable to do so if they have a conflict of interest because years of research finds it's hard to be objective if their incentives go in the wrong direction."

Cain says one reason why disclosure is often an ineffective consumer protection tool is because people tend to trust their advisor (or doctor, lawyer, etc.) and don't believe they would steer them wrong. He says people need to realize that disclosure should warn them to be wary of not only "corrupt" information, but also unintentionally biased information.

"I don't think anyone would argue with the proposition that there are problems with disclosure," says David Tittsworth, executive director of the Investment Adviser Association. "There's a tension between how much disclosure is required and whether or not people will read it. But I think anyone who points out the deficiencies of disclosure needs to suggest a better approach."

Maybe the best approach is for Congress and regulators to tackle tough issues rather than punting by calling for more disclosures.

"The positive effects of disclosure are massively exaggerated," says Cain, who notes that additional disclosures can do indirect harm if they replace more effective measures. "I tell regulators that disclosures do a lot less than you think and that conflicts of interest are a much bigger problem than you think."

Health Savings Accounts Grow In Popularity
(Dow Jones) As high-deductible health insurance plans become offered by more and more companies, the tax-free Health Savings Accounts associated with them are gaining popularity.

Financial advisor Carolyn McClanahan in Jacksonville, Fla., encourages all her clients who are eligible to consider using the accounts. "If they have it as an option, I recommend it," she said.

McClanahan is also a physician, and many of her clients are young surgeons with big incomes and tax bills but relatively little in savings so far. She regularly recommends use of the high-deductible plans and HSAs to medical practices and other professional groups because of the tax benefits.

Michael Thompson, a principal and the NY-metro healthcare practice leader in PwC Human Resource Services, said he sees small firms of professionals using the plans, not just big companies trying to save on health-care plan costs. "High deductible plans have been around for a while, but they're becoming the primary plan for many, many more employers," he said. "It's one of the most tax-favored vehicles that exist today."

Companies like the lower premiums for the plans, which to be qualified as high-deductible in 2011 must have a minimum annual deductible of $1,200 for an individual and $2,400 for a family, as well as a maximum out-of-pocket limit for in-network expenses of $5,950 for an individual and $11,900 for a family. Companies with such plans are allowed to offer HSAs, so employees can make pre-tax contributions. No tax is paid if the savings are used for medical expenses.

Unlike the more prevalent flexible spending accounts associated with other health care plans, the money in HSAs does not have to be spent in the calendar year. Instead, it can build and be invested much like money in an Individual Retirement Account. Should it be used in retirement for non-medical expenses, it is taxed as ordinary income for those 65 and older.

Fidelity Investments estimated that a couple retiring in 2010 at age 65 could expect to pay $250,000 for Medicare premiums and out-of-pocket health care expenses. "The HSA should be the first place someone invests after they've contributed to the company 401(k) match," said Will Applegate, vice president of product management at Fidelity Investments.

He said about 30% of the people using the Fidelity HSAs are saving the entire contribution and instead using after-tax dollars to pay deductible health costs. About 80% to 90% are saving at least some of their contributions for the following year. Growth on the savings is also tax-free.

Applegate recommends that investors keep at least some of the assets in cash, if they expect to use it that year, but should otherwise invest the assets "consistent with other retirement funds."

Advisors can help investors make the decisions about HSAs, which unlike a flexible spending account, could be used decades from now for medical expenses and don't need to be kept in the employer plan, said Paul Fronstin, director of health research at the nonprofit Employee Benefit Research Institute.

High deductible plans are becoming an increasingly popular subset of the so-called consumer directed plans, which were up 6% in 2010, according to a survey by Towers Watson and the National Business Group on Health.
Copyright © 2011 Dow Jones & Co. Inc.

CFP Board Puts Spotlight On Bankruptcies
With the Certified Financial Planner Board of Standards Inc. this spring rolling out a national public awareness campaign to promote the message that CFP-certified financial planners should be the advisors of choice for the investing public, the organization will stress the need for certificants to live up to the billing.

"I think our primary focus in 2011 will be on education," says Ed Mora, who in January begins his one-year stint as chairman of the CFP Board's Disciplinary and Ethics Commission (DEC). He said that means more webinars and speaking engagements to get the word out to certificants to make sure they understand the rules and process, especially in light of the new public awareness campaign.

"My understanding is that the campaign will highlight the fact we have high ethical standards and we vigorously enforce them," Mora said.

Mora is vice president and senior relationship manager for Bank of the West Wealth Management in Newport Beach, Calif. He replaces Trish Coriden, chief fiduciary officer at Central Trust & Investment Co., as the DEC chairperson. He has served on the DEC since 2008.

The nine-member DEC--seven are CFP professionals and two are public representatives--meets tri-annually to hear cases of possible infractions by CFP practitioners of the organization's conduct and ethics codes. The CFP Board says it has 400 active ongoing cases on average. Mora says the three main types of cases seen these days involve bankruptcy, Ponzi schemes and securities violation-type matters such as misappropriation of funds and poor record keeping.

Mora says bankruptcy cases have risen "dramatically" in recent years due to the economic downturn. "Most we see are personal in nature, not necessarily the practice going under," he notes.

A person can't be awarded the CFP marks if they've had a bankruptcy within the past five years, but Mora says the individual can appeal and the DEC will hear their case. "But once a person is a certificant we take bankruptcies very seriously because you want a CFP to manage their finances effectively if they're going to advise others," he says. "Bankruptcies come in many different flavors, and we look carefully at each situation on a case-by-case basis."

Addition Through Subtraction
A study of 15 wealth management firms with more than 15,000 advisors total found that all of them trimmed the number of small household accounts (less than $100,000) they serve by 3% to 14% in the one-year period ended August 2010, and that advisors boosted their annual revenues by $7,700 for every 1% reduction in these types of accounts.

PriceMetrix, the Toronto-based software company serving the financial advisor industry that conducted the study of North American wealth managers, concludes that household accounts of less than $100,000 don't justify the expense of servicing them in a traditional way because small households are 108 times more likely to leave an advisor than grow into a larger account.

Rather than deal with that growth impediment, PriceMetrix says large firms are developing ways to help advisors boost their productivity by eliminating small accounts. Some firms have created service centers with salaried professionals to support small households. One firm established a center with both salaried and variable compensation advisors who offer small households a limited product line that includes mutual funds, bonds, ETFs, money market funds and managed portfolios.

Other firms are using financial incentives or disincentives to get advisors to cut the number of $100,000-or-less accounts in their client base. For example, one firm decreed that revenue from small households wouldn't count in a bonus program where advisors can get a firm-compensated full-time sales assistant.

Survey Ranks Most Financially Literate States
Is there something about states with the word "New" in their name that makes their citizens financially savvy? According to a national survey that ranks the financial capability of the 50 states, the top three were New Jersey, New York and New Hampshire.

The survey, released in December, was a joint effort of the FINRA Investor Education Foundation, the U.S. Department of the Treasury and the President's Advisory Council on Financial Literacy. It measured five areas of financial capability: making ends meet; planning ahead; managing financial products; financial knowledge and decision making; and comparison shopping.
With making ends meet, the survey wanted to know if people were spending less than their household income, excluding big investments such as new home or car purchases. The national average of folks who spend less than their income was 41.6%. New Jersey scored best in this category (48.7%) and Montana fared the worst (30.1%).

In the category of planning ahead, the survey asked people if they had rainy day funds to cover expenses for three months in case of emergencies. Again, New Jersey did best, while Oklahoma had the least amount of respondents with rainy day funds.
Regarding managing financial products, this category looked at usage of non-bank borrowing such as taking an auto-title or payday loan, or using a pawn shop or rent-to-own store that typically charges high interest rates. Again, New Jersey did best in this category with the least amount of folks tapping into one or more non-bank borrowing methods. Montana had the highest percentage of people using these types of methods.

New Hampshirites scored best on a financial literacy test of five questions covering economics and finance expressed in everyday life, while people in Louisiana did the worst. And when it came to comparison shopping for credit cards, Rhode Island knows its plastic better than any state, while Missouri and North Carolina tied for the bottom ranking.

According to the survey, the states with the lowest overall financial capability were Kentucky and Montana.

The data came from an online survey of 28,146 people--roughly 500 per state--from June through October 2009. The data were weighted to match 2008 American Community Survey distributions on age category by gender, ethnicity and education. More information is available at www.usfinancialcapability.org.

Hawaii Has The Most Millionaires Per Capita
The state of Hawaii should throw itself a luau--paid for by its wealthier denizens--to celebrate its status as the state with the highest percentage of millionaires per capita. According to the latest national market sizing analysis and wealth rankings by Phoenix Marketing International, 6.93% of Hawaii's households are millionaires. That's the third consecutive year Hawaii has topped the list.

Phoenix defines millionaire households as those with at least $1 million in liquid assets, excluding sponsored retirement plans and real estate. Hawaii was followed in 2010 by Maryland (6.79%), New Jersey (6.69%) and Connecticut (6.65%). That marks the third straight year those states have maintained their order of ranking, and all four have placed in the top four since 2006 (New Jersey topped the list in 2007).

"Hawaii, Maryland, New Jersey and Connecticut all share some important distinctions: They are small states with large concentrations of highly educated professionals and business owners which are key ingredients to growing wealth," said David Thompson, managing director of the Phoenix Affluent Market.

Massachusetts rounded out the top five at 5.98%. Alaska, Virginia, New Hampshire, California and the District of Columbia completed the top ten. In descending order, the bottom five comprised Mississippi, Arkansas, West Virginia, Kentucky and North Dakota.