Advisor, Consumer Groups Urge SEC to Regulate Brokers
A broad coalition of financial advisor and consumer groups is trying to renew an effort to strengthen the regulation of brokers who act as investment advisors. In a letter to Securities and Exchange Commission Chairman William Donaldson, the groups ask that the SEC update its rules to ensure that brokers acting as advisors face similar regulations as do investment advisors and, in doing so, level the playing field.
"Everyone in the financial services industry is calling themselves financial planners," says Duane Thompson, director of government affairs for the Financial Planning Association (FPA). "There's nothing bad about that, as long as they work under the right standards."
The groups specifically want the SEC to reject a rule proposal it made in 1999 that allows brokers to offer advice, while exempting them from investment advisor regulation, as long as they offer the advice on a nondiscretionary basis and disclose the account is a brokerage account. The rule also allows brokers to offer fee-based services without a change in their regulatory status.
The coalition consists of the FPA, the National Association of Personal Financial Planners (NAPFA), the Certified Financial Planner Board of Standards, the Investment Counsel Association of America, the National Association of Personal Financial Advisors, the Consumer Federation of America and Fund Democracy. The breadth and depth of the coalition should increase its chances of success, as should the wave of scandals and subsequent settlements that have engulfed Wall Street's largest firms since the rule was first proposed under former Chairman Arthur Levitt in 1999.
Critics of the rule maintain that it allows brokers to offer consumers investment advice without falling under the Investment Advisers Act, which stipulates that advisors must act as fiduciaries in the best interest of clients and disclose any potential conflicts of interest.
"How is the average investor supposed to make a distinction between these types of professionals?" asks Barbara Roper, director of investor protection for the Consumer Federation of America. "How does it make sense to have two different regulatory schemes for people who are indistinguishable to the average investor?"
Not that the advocates for tougher regulations don't understand why the SEC has taken so long to make a final decision on the rule proposal. They noted that the September 11 terrorist attacks, the collapse of Enron and a spate of accounting scandals have kept regulators busy the past several years. The SEC has also undergone three changes in chairmen along the way.
"There's been a perfectly legitimate excuse as to why this hasn't been on the top of their agenda since then," Roper says "But as we move on, this is one of the issues they need to take up."
Americans Worried About Adequacy Of Incomes
Events over the past few years have given Americans reason to worry about everything from terrorism to corporate scandal. Now a new study says there's something else more people are worrying about: their personal finances.
The survey, commissioned by the Financial Planning Association and the Consumer Federation of America, found that 12% of Americans are extremely or very worried about the adequacy of their incomes-up from 7% just slightly more than a year ago.
Likewise, those worried about their consumer debt went from 6% to 10%, and the percentage of those concerned about their savings went from 13% to 16%, according to the survey of 1,011 adult Americans in April.
The survey also showed more Americans are looking toward financial planners for help. It found only 46% of respondents had developed a personal financial plan. Among those without a one, 28% say they plan to prepare one over the next year. And 78% of those with a plan say they feel it's important to keep it updated.
"Over the past decade, financial planning has grown in importance for individuals and families," says FPA President David Yeske. "We are encouraged that most Americans recognize the importance of financial planning."
Electronic Check Conversion May Cancel All Checks
Using canceled checks as proof of payment for everything from financial advisor fees to income taxes may be going the way of the Edsel. If American Express' action to use electronic check conversion is any indication of the future, no one will receive canceled checks with their monthly bank statements.
With electronic check conversion, you don't get a canceled check-or image of it-back with your monthly checking account statement. Instead, the information from the check is entered by the merchant electronically. The transaction is listed on your checking account statement not as a check, but as an automatic debit.
Electronic check conversion is said to lower check-processing costs. "Fewer people are coming into contact with the information," says Michael Herd, spokesperson for NACHA, formerly the National Automated Clearing House Association, Herndon, Va. Industry pundits say it also is a faster and more secure way to do business.
However, Andrew Dresner, vice president of First Manhattan Consulting Group, New York, says American Express may be among the first users of electronic check conversion with no way for consumers to opt out. American Express card members who don't like check conversion can pay by phone or computer, although the company was working on an opt-out program, acknowledges American Express spokeswoman Desiree Fish.
In the meantime, what if there's a fraud or error? What if you need to document payment of the bill?
Mark Budnitz, professor at Georgia State University College of Law in Atlanta, says that under federal law you have certain protections with automatic debits. If you have an electronic transfer error in your checking account statement, you can write a letter within 60 days after the date the bank sent your statement, explaining the error, date, amount and problem, to implement a resolution procedure.
"The problem is you can complain to the bank. If the bank says too bad, all you can do is sue," he says. "There probably is an arbitration clause with your credit card that says you can't go to court and sue."
In a loss or theft, the amount you can be held liable for depends on how quickly you notify your financial institution. Notify your bank within two business days of discovering the loss or theft and the limit is $50. Catch it within 60 days of the date of the mailing of your periodic statement that shows the problem, and the most you can owe is $500. Beyond 60 days, your liability is unlimited.
You don't have these same federal protections when a check is processed. However, Budnitz notes, "you can stop payment on a check. You can't stop payment on an automatic debit." Plus with a forged check signature, the consumer would not be liable at all as long as he or she notified the bank.
Another problem with check conversion: You have both the check and the debit. What if both get processed? American Express' Fish says that her company retains the check for seven years, five years longer than NACHA rules require, and will provide a customer a copy of the check upon request at no extra charge. But merchant policies on check retention may vary.
Regulators advise that check conversion is a growing phenomenon, so you and your clients should watch for notices that merchants are required to provide-particularly if a canceled check may be needed for documentation.
Expect automatic check processing to become more widespread. "The Check Clear-ing for the 21st Century Act (House Bill 1474)" would create an infrastructure in which a copy of a check can be made and shipped electronically nationwide. The bill, designed to speed check processing and eliminate disruptions, such as those experienced after the September 11 terrorist attacks, could be approved in both houses before this congressional session ends in October, observers say.
Budnitz says the new bill creates the prospect of two checks in existence-the original and a substitute digitized check. A consumer could have a hard time proving a very good forgery with a reduced, digitized image, he fears. But unlike when a check is converted to an automatic debit, the proposed bill contains no special error dispute resolution procedure.
New Custodial Firm Focuses On Fee-Only Independents
Fee-only independent advisors have a new alternative when it comes to picking a brokerage and custodial firm. In a market that continues to go through upheaval, two former Jack White & Co. executives are getting ready to launch a new brokerage and asset custodial firm that is aimed specifically at fee-only independent advisors.
The firm, Shareholder Services Group Inc. of San Diego, expects to open for business in early June. "The relationship between the independent financial advisor and client should be respected and valued," says Peter Mangan, president and CEO of the new firm. "Since we will have no retail services, advisors can be assured that we will protect their client relationships."
Mangan and Robert O. Reed, the firm's executive vice president and chief operating officer, have more than 50 years combined experience in the brokerage industry. Reed was one of the founding executives of Jack White & Co. in 1978, and he was an executive vice president of the firm after it was bought by TD Waterhouse. Mangan, meanwhile, started Jack White's financial advisor division. Later he ran the TD Waterhouse advisor unit and subsequently oversaw its mutual fund operations.
As a startup, Shareholder Services Group enters a crowded market dominated by Charles Schwab, Fidelity and TD Waterhouse. Falling profits and revenues also have taken their toll on both the firms and their advisor clients. Schwab, for example, is planning to raise minimum account requirements and fees starting July 1. TD Waterhouse reportedly is up for sale, and Charles Schwab has expressed interest in being one of the bidders (see the article on page 111).
Executives at Shareholders Services, meanwhile, expect to attract advisory firms that have been jettisoned by the bigger players because of their small size or feel their practices and the retail activities of their custodians are in conflict. "We think we are in a prime position to service the accounts of advisors without any conflicts regarding a retail business," says company spokesman Barry Boyte, another former Jack White and TD Waterhouse executive.
The firm's fee schedule has not yet been released, but Boyte says it will be competitive with those of other firms in the market. Shareholder Services will not have minimum account requirements or any fees to hold accounts, Boyte says. The firm will use Bank of New York/Pershing as its clearing services provider. The bank's technology platform also will be used initially, but Shareholder Services plans to implement its own technology eventually, Boyte says.
Insurance Firms May Win More Retirement Dollars
Mutual funds could lose their stranglehold on the multi-trillion-dollar IRA market as more people near retirement age, says a new study by Conning Research in New York.
Insurance companies, according to the study, "Winning the Coming Battle for Retirement Assets-$11 Trillion Up for Grabs," are in a particularly attractive position to win this fierce competition for retirement dollars. Today, investment companies control nearly half of the IRA market, while banks and insurers control 11% and 8%, respectively. It should be noted that Conning is a brokerage firm specializing in the insurance industry and has close ties to many insurers.
"The stakes are quite large regardless of how one views it," says David Montgomery, vice president at Conning. The retirement market totals $11 trillion in assets, IRA assets total about $2.4 trillion, and assets transitioning out of qualified plans are approximately $300 billion annually, the report notes.
"Institutions which service retirement plans today may not necessarily be the same players tomorrow," the report says. "What's fascinating about the retirement market today is that even the market leaders, the leading mutual fund companies, are not capable of meeting the entire product and advice needs of retirees. This lays the groundwork for a dramatic change in the competitive landscape."
To be successful in today's market, financial services companies must offer more than investment management services, according to the report. They must cater to other financial needs, such as income and asset protection.
"Insurance companies are in good position to grab a large piece of the retirement pie," it says. "Insurers have more competitive strengths than mutual fund companies, brokerage firms and banks. Insurers can offer advice and structured products for retirement income, a wide range of insurance products as well as advice and structured products for estate planning."
To be competitive, financial services firms must change their business plan. Insurance companies are far less advanced technologically and have much greater expenses per dollar of assets than mutual fund companies. So reaching their potential may be harder to achieve than the Conning study maintains.
"Retirees want to buy products that will meet their income, insurance and asset protection requirements throughout retirement," Montgomery said.