SRO Proposal: Quixotic Or Galvanizing?
If anything, last month's announcement that two University of Mississippi law students and one of their professors planned to create a self-regulatory organization for independent RIAs electrified the industry. Is this proposal from Oxford, Miss., far from the regulatory epicenter of the nation's capital, laughable or legitimate?

"It's pretty tough to compare a couple of college students to Finra and its long-term experiences as a regulator," says Duane Thompson, a policy consultant at Potomac Strategies LLC, referring to the broker-dealer SRO. "On the other hand, Finra doesn't have any experience regulating fiduciary advisors, either."

The two students, T.J. Collins and Tyler Roberts, came up with the idea for the Self-Regulatory Organization for Independent Investment Advisers, or SROIIA (pronounced "sir-oy-uh") as part of a project with the Business Law Society (BLS), an organization of Ole Miss law students started by professor Mercer Bullard, a former SEC assistant chief counsel and longtime advocate on securities and compliance issues. According to Bullard, BLS was established to enable law students to tackle projects involving interesting current events and give them practical experience with real-world applications. "When T.J. came to me with the SRO project, I warned him this was a major issue and that it would probably get attention," Bullard says.

But this is serious business and not just an academic exercise meant to be résumé fodder for the students, insists Bullard, who says industry groups such as the CFP Board of Standards, the Financial Planning Association and the Investment Advisers Association are sticking their heads in the sand regarding the SRO issue. The SEC admits it lacks the resources to adequately examine RIAs under its domain, and the industry groups want the agency to get sufficient funding so it can do its job rather than have an SRO oversee their members. But such funding is unlikely in the current political climate. Meanwhile, the SEC has recommended that Congress consider authorizing the creation of an SRO for investment advisors.

"I think the odds are there will be an SRO for investment advisors," he says. "Then there's the question of whether non-dual-registrant RIAs would be happy having to join Finra, which is what they'll be stuck with if there's no alternative."

Collins and Roberts planned to survey at least 500 investment advisors on their views on how the industry should be regulated. But running an SRO isn't cheap, with rough estimates to oversee all RIAs costing in the tens of millions of dollars, if not more. Bullard counters SROIIA would examine only independent RIAs. And besides, he adds, "anyone at Finra will tell you that the cost of compliance oversight of fee-only, non-custody financial planners are infinitely less than for full-blown broker-dealers." A Finra spokesperson declined to comment.

Bullard and his students have no illusions it'll take significant resources to make SROIIA operational, and they're talking with strategic partners and developing the framework to get it up and running. Ultimately, it would have to rely on membership dues. Bullard estimates that SROIIA won't have a proper foundation laid until at least autumn. "There are far too many aspects that need to come together before I can say there's critical mass," he says.

It's a bold idea that faces long odds, but at the very least it might fast-forward the SRO process for RIAs. "It could be that taking this kind of radical action by a law school professor and a couple of students could galvanize the bigger players into action," Thompson says.

Refereeing Games, Quarterbacking Clients
Like a lot of guys, John Parry spends his autumn Sundays watching football games. But rather than sitting on the couch with a beer in hand, he's on the gridiron with a whistle in hand as a National Football League referee crew chief. Come Monday, he's back at his day job as as an independent financial planner in Tallmadge, Ohio, near Akron.

The fall is a very busy time for Parry, 45, [pictured, in white cap] who's been an NFL referee since 2000. He and his crew work 15 of the 17 scheduled NFL Sundays, and during the week he crams in NFL-related chores between client work.

"My dad officiated for many years, so I suppose it runs in the blood," says Parry, whose father recently retired as national coordinator of college football officials.

Parry started officiating local sports in high school in Michigan City, Ind., and kept at it doing intramural sports while majoring in aviation technology at Purdue. He was a corporate pilot for 18 years and kept working his way up the football ladder by officiating Conference USA, Big Ten and Arena Football League games.

Over time, forces converged to prompt a career change from piloting to planning. He and his wife plowed money into their 401(k)s

and IRAs with no guidance, and as Parry educated himself on risk management, asset allocation and other financial topics, he took a shine to researching investments. His brother-in-law was a financial advisor, and Parry says he peppered him with so many questions he told Parry that maybe he should become an advisor.

The idea was appealing. His interest in money was growing, as was his football career, his young family, and the number of overnight flights required by his pilot job. The idea of being self-employed sounded good. He got his securities licenses in 2005, hung up his pilot wings and hung out a shingle as a financial advisor. "I wish I had done it sooner," says Parry, noting that it works well with his football schedule and family life.

"As a planner, I'm a long-term, asset allocation, risk management type of guy who's quarterbacking households to make sure they have the assets to retire," he says with no pun intended. Parry has about 350 clients with roughly $20 million in assets. "I don't advertise; it's all word-of-mouth," he says.

Parry's office has a minimum of football memorabilia, and he downplays his weekend job. "My focus when in the office during normal working hours is on finance and my clients," he says.

Regarding his NFL job, the cycle begins in March with a battery of physical tests he and his colleagues take to clear them for the upcoming season. Starting in mid-May, they take a series of written and video exams dealing with play scenarios and penalty calling. In July, there's a four-day clinic in Dallas to go over rules changes and such. In late July and early August, referees split up and are sent to various team training camps for several days to present new rule changes and interpretations to players and coaches. Then comes three or four preseason games in August, followed by the four-month regular season.

Parry's nine-man crew works mainly east of the Mississippi River, but they call a few West Coast games each season. Typically, he'll fly into a city by noon on Saturday, and then meet his crew that afternoon for a pregame meeting, a weekly test given by the league, and a video session with tapes of the prior weekend games involving the two teams they'll officiate the next day. Dinner is usually at the Marriott, the official hotel of NFL officiating crews.

For a 1 p.m. game, the crew gets to the stadium by 9:30 a.m. Once there, Parry is in nonstop meetings with the television production crew and broadcasters (as crew chief, he controls the game's 25 TV commercial breaks), as well as with local security officials,  the chain crew, the ball boys, the teams' PR people, and both coaches. He also checks to make sure the microphone and clocks work properly.

"Eventually, there is a game that breaks out at one o'clock," he jokes. After the game, he and his crew fill out paperwork regarding penalties called, time-outs taken, replay scenarios and the like. Then it's off to the airport, and Parry usually gets home around midnight. For late-afternoon games, especially those on the West Coast, that means taking the red-eye home.

Parry is in the office 5 a.m. on Monday for a couple of hours to finish his NFL-related paperwork, goes home a mile away to help get his kids ready for school, and then he's back in the office doing client work. "Through the week, I try to find hours to make sure I'm ready for the next game," Parry says. That includes reviewing the teams he'll be officiating and getting his travel plans in order. "It's a very long fall, but it's a labor of love," he says of both jobs.

Refereeing entails a ton of paperwork, he says, "but at 1:02 on a Sunday afternoon, it's the best gig in the world." NFL officials and crews are graded on a merit system to qualify for postseason work, and Parry's crew worked one of this year's playoff games. Thus far, the highlight of his career was being a side judge for Super Bowl XLI in February 2007, when the Indianapolis Colts beat the Chicago Bears.

"I'm competing with 16 other referees every week to hopefully work after the season and late into the playoffs," says Parry, noting that the conference championship games, the Super Bowl and the Pro Bowl assignments are based on individual rankings. "As a referee, my goal is to referee a Super Bowl."

Musical Chairs Envelopes B-D World
The upheaval in the independent broker-dealer world caused by the recession and financial scandals had already claimed several small- and medium-sized independent broker-dealers before this past winter, when more IBDs fell by the wayside. Specifically, Ensemble Financial Services Inc. and QA3 Financial Group announced plans to shutter their businesses because they couldn't meet capital requirements due to legal battles and compliance issues. As a result, scores of financial advisors have been cut adrift and left to fend for themselves.

With Ensemble Financial Services' independent broker-dealer business on the way out, its 85 registered representatives are slated to move to Invest Financial Corp., a broker-dealer owned by Jackson National Life Insurance Co. Meanwhile, Pittsford, N.Y.-based Ensemble's registered investment advisory division, Tompkins Financial Advisors, will reportedly remain open.
With the news of QA3 Financial Group's demise, FSC Securities Corp., an affiliate of Sun American Financial Group, grabbed 35 of QA3's reps and advisors who collectively produce $7.5 million in annual fees and commissions.

"What's really important to independent financial advisors today is the financial strength of their broker-dealer, which equals staying power, and that means being in business another 50 years," says Mark J. Schlafly, president and CEO of FSC Securities Corp., based in Atlanta.

Another estimated 40 reps from QA3 went to Financial Network Investment Corp., now part of Cetera Financial Group. Both the parent and Financial Network are headquartered in El Segundo, Calif. Financial Network has over 2,000 reps split into 32 regions. 

Dave Hubbard, president of one of the regional offices, Exemplar Financial Network in Crystal Lake, Ill., says a lot of its reps work with attorneys, accountants, and other advisors as a team. "The QA3 reps we brought on board liked that," he says.
Finra statistics point to the industry's consolidation trend: The agency had 5,029 member firms and 658,173 registered reps under its domain in 2006 versus 4,555 firms and 630,816 reps as of February 2011.

Finra Upped Enforcement Actions In '10
The number of Finra disciplinary actions rose more than 13% last year, even as the amount of fines decreased from the prior year, according to an annual study of Finra sanctions by the law firm Sutherland Asbill & Brennan LLP.

The study found Finra disciplinary actions jumped to 1,310 cases versus 1,158 in 2009, marking the second consecutive year that sanctions have risen after a three-year slowdown between 2006 and 2008. Still, the number of disciplinary actions in 2010 trailed the pace from 2005, when 1,412 actions were filed.

Also last year, Finra fined broker-dealers and individual reps about $45 million, which trailed the $50 million in fines levied in 2009. And that amount significantly trailed the $184 million in fines collected in 2005. One reason for the lagging fine totals last year were a fewer number of supersized fines of $1 million or more, says Brian Rubin, a partner in Sutherland's Washington, D.C., office and a former deputy chief counsel at NASD, one of Finra's two predecessor agencies. He notes those types of fines entail egregious conduct causing customer or regulatory harm.

Rubin said one of the reasons 2005 was such a busy year was the numerous cases involving market timing and late trading, which he says were egregious cases that warranted hefty fines.

According to the study, advertising cases generated the largest amount of fines last year. That was followed by credit default swaps, which mainly dealt with improper communications about customers' proposed brokerage rate reductions in the wholesale CDS market. Third on the list were electronic communication cases, including 23 cases and more than $2.1 million in fines for firms not properly maintaining and preserving e-mails.

And more communications-related cases could be in the offing. Rubin says social media is one area where broker-dealers should tread carefully after both Finra and the SEC made it an area of focus, including Finra's recent announcement it would form a task force on the issue.

"We anticipate cases either this year or next in that area dealing with things like misleading statements, supervision and retention," Rubin says.

Pension Problems
Rising pension costs are shackling state governments and corporations with a heavy burden that some of them can't meet, which is fueling a potential pension funding crisis.  According to Cogent Research, only 20% of pension plans are financially prepared to meet their financial obligations to plan participants, which means having at least 95% of their funding obligations covered.

"Relatively speaking, corporate pensions are in better shape," says John Meunier, principal at Cogent, a Boston-based consultancy. For example, none of the corporate pensions examined by Cogent reported a funding status below 60%, while 16% of public pensions were below 60%. Additionally, "only" 20% of corporate pensions were funded between 60% to 79% versus 38% among public pensions.

All told, that means more than half of public pensions are less than 80% funded, a level deemed as substantially underfunded. The choices faced by these pensions, says Cogent in its recent Institutional Investor Brandscape report, include going to taxpayers to make up the difference, restructuring participation rules and payments, or going broke.

Meunier says Cogent's data was collected from the Money Market Directories, a Standard & Poor's unit that tracks pension fund sponsors and other segments of the financial services industry. "These numbers point to the increased need for consultants, including financial advisors who advise institutions, to help institutions make better choices around their investment selections and their choice of asset managers," he says.

A Taxing Matter
How are taxes in your state? A recent compilation of statistics from the Tax Foundation provides the skinny on 32 different measures of taxation and fiscal policy and ranks all 50 states accordingly. Not surprisingly, certain Northeastern states fared the worst in several key metrics.

The 2011 edition of Facts & Figures: How Does Your State Compare? covers a range of measures including individual and corporate tax rates, business tax climates, and state and local tax burdens, along with tax rates on consumer goods such as gas, smokes and booze. "Balancing budgets and fostering economic growth will depend on every state keeping an eye on how competitive its tax system is--regionally, nationally and even internationally," says Scott Hodge, president of Tax Foundation, a Washington, D.C.-based nonprofit group that monitors fiscal policy.

Among the findings, Connecticut ranked the worst in state and local tax burden per capita, as per fiscal year 2009. That was followed by the usual high-tax suspects, in order: New Jersey, New York and Massachusetts. Maryland ranked as fifth worst, and California placed sixth. On the flip side, Mississippi had the least burdensome state and local taxes per capita, followed by South Carolina, Tennessee, Alabama and Alaska.

The Tax Foundation's state business tax climate index, an overall gauge based on five measures as of July 1, 2010, placed South Dakota as tops on the list. The next most-favorable climates belonged to Alaska, Wyoming, Nevada and Florida. The least favorable? In descending order: New York, California, New Jersey, Connecticut and Ohio.

Among other tidbits, Alabama had the lowest property tax collections; Hawaii and Oregon tied for the highest individual income tax rate; Nebraska had the highest cell phone taxes; and California had the highest state sales tax rate. 

The Facts & Figures guidebook is available online at taxfoundation.org/publications/show/2181.html.

Why Millionaires Switch Advisors
The biggest pet peeve for most millionaire investors is advisors who don't call them back promptly, according to a study released Tuesday by the Spectrem Group.

Among the main reasons cited for leaving their financial advisor, 73% of respondents said the top reason was an advisor not returning phone calls in a timely manner. In that vein, other big reasons included unhappiness with slow e-mail response (57%) and an advisor who wasn't proactive in contacting them (56%). Surprisingly, these communication-related gripes seemed to hold equal or greater weight to bail on an advisor as failure to provide good ideas and advice (57%).

The Millionaire Investor 2010 study, which covered investors with a net worth between $1 million and $5 million, also found 72% of millionaires expect their advisor to call back within 12 hours. But that's not fast enough for some clients, as 26% expect a callback within two hours and 14% expect a response in one hour.

"Advisors who don't respond promptly to their millionaire clients' calls are playing with fire," says George H. Walper Jr., Spectrem Group's president.

Only 37% of respondents were satisfied with advisors responding to e-mail by the next day; 16% expect a response within two hours and 8% look for a reply within one hour.

Nearly all respondents listed honesty and trustworthiness as their top reason for choosing a new advisor, with 96% looking for an advisor who keeps clients informed of what they are doing and 90% seeking an advisor with a strong investment track record.