F.A. Confidential 

The Dodd-Frank Wall Street Reform and Consumer Protection Act granted the SEC authority to boost rewards for whistleblowers, and the agency responded in late May by upping its payout to people who report financial misdeeds. The upshot is that it might require additional training for compliance officers and employees at broker-dealer and investment advisor firms, although it's too early to say how things will shake out, says Philip Stanton, an attorney with Greensfelder, Hemker & Gale P.C., a St. Louis-based law firm that represents Edward Jones.  

Under prior rules, awards were capped at 10% of collected money and limited to insider trading cases. The new rules, implemented under Section 922 of the Dodd-Frank Act, say whistleblowers who provide "original information" that leads to a successful SEC enforcement are eligible for rewards, or bounties, of between 10% and 30% of any recovered money of more than $1 million. And they don't require that whistleblowers go to the company first before going to the SEC (as existed previously), although the whistleblower may be entitled to a larger percentage of the recovered money if he or she goes to the compliance officer with the company before approaching the SEC.

The SEC now gives the whistleblower 120 days from the time he or she goes to the compliance officer to then report to the SEC if no action is taken by the company, and still be eligible for the reward.

In addition, the new SEC rules also prohibit the company from retaliating against any employee who reports suspected wrongdoing to the SEC, including if the employee bypasses the company compliance officer. Whistle blowing in the past was protected if the employee went to the company. But what constitutes retaliation is often unclear, Stanton says, even though the broad contours of retaliation have been developed under Sarbanes-Oxley and various state laws.

Stanton adds it's also unclear what happens if an employee violates a confidentiality agreement by going to a third party--such as a friend--and tells of the suspected wrong doing, and the friend then reports it to the SEC. Companies are prohibited from threatening to enforce confidentially agreements to stop a whistleblower from communicating with the SEC.

The uncertainty is apparent in this hypothetical situation because the firm cannot take action against the third party for violating a confidentiality agreement and it is unclear whether it could do so against the employee, if he or she refused to cooperate with the SEC investigation that is then prompted by the third party's complaint.

Stanton notes many companies, including most brokerage firms, make employees sign confidentiality agreements as a condition of employment for competitive reasons.

"All publicly traded firms need to understand how these rules will affect confidentiality agreements and conditions of employment," Stanton says. "Employee training and human resource guidelines need to be updated to protect companies under the new regulations."

In a press release announcing the new whistleblower rules, SEC chairwoman Mary Schapiro said the program was critical for "an agency with limited resources like the SEC" to leverage the resources of people who might have first-hand information about securities law violations. As part of Dodd-Frank, the SEC earlier had created an Office of the Whistleblower, which is led by Sean McKessy.
-Karen DeMasters

Panel: Fears Of Muni Meltdown Are Overblown

Remember when people thought investing in municipal bonds was as safe as being in your mother's arms? Seems like a quaint concept now, doesn't it? The muni world was rocked when the markets went kablooey in '08-'09 because investors feared an economic meltdown-and corresponding tax revenue decrease-would hinder municipalities' ability to pay their debts. That resulted in depressed muni prices that boosted yields to levels higher than Treasury yields, a rare occurrence. (Munis took a hit for other reasons, too, such as the demise of AAA-rated bond insurers, and hedge funds and other institutions dumping munis to raise cash during the crisis.)

From a p.r. perspective, things still look dicey in muni land due to continued concerns over budget shortfalls in state and local governments across the country, along with headline grabbing doom-and-gloom scenarios such as analyst Meredith Whitney's prediction last December that hundreds of municipalities will default on hundreds of billions of dollars of debt in 2011.

But according to a panel focused on municipal bonds at last month's Morningstar investment conference in Chicago, the muni market isn't about to implode. Instead, they said, there are signs of improvement, and places to make money if you know where to invest and what to avoid.

"We're only about halfway back in terms of state tax revenue, so we have a long way to go," said Michael Brooks, senior portfolio manager at AllianceBernstein. He and other panelists didn't dispute Whitney's contention that many government entities face budget crunches; they disagree with her sweeping conclusions.

"She did a couple of things, such as kill a lot of trees because we all made a lot of presentations to show she wasn't necessarily correct," said John Cummings, head of Pimco's municipal bond desk.

Brooks noted that there were roughly $600 million in defaults during the first 24 weeks of this year. For Whitney's forecast to come true, he said, there needs to be about $7 billion in defaults per week for the rest of 2011. The previous annual high for defaults was about $12 billion.

Defaults will happen, Brooks said, but they won't sweep the nation and "they won't decimate municipal bond portfolios of individuals and mutual funds."

Lyle Fitterer, leader of Wells Capital Management's tax-exempt fixed-income team, said the combination of expense cuts and year-over-year revenue increases among governments are gradually alleviating some municipal credit concerns. He expects defaults in the general obligation (G.O.) bond sector to be substantially below that of the essential service revenue bond sector, but added there's more volatility with the former because the latter have steadier financials. "That can lead to price fluctuations [among G.O. bonds]," he said. "But ironically, if you look at the numbers going back to the last year, the G.O sector has been one of the best performing parts in the space. There's been a lot of demand among individual investors for AA- and AAA-rated credits that come from the G.O. sector."

For his part, Brooks likes essential service revenue bonds--a group that includes water and sewer authorities, public power and transit organizations, and airports--because of their consistent revenue steams. He said AllianceBernstein has upped its portfolio holdings in this area from 19% in 2008 to 31% today. In turn, the company is underweight state and local G.O. bonds, as well as tobacco and health care bonds.

Brooks' advice to financial advisors who recommend munis to clients is to focus on duration (he advocates intermediate-term bonds) and evaluate bond funds for credit and volatility risk.

B-Ds, RIAs Ready To Boost Hiring

The nation's unemployment rate might be hovering in the 9% range, but three-quarters of U.S. broker-dealer and independent registered investment advisory firms plan to hire up to 30% more employees over the next 12 months, according to a recent Fidelity Investments survey.

The survey found that 43% of firm executives said the first staffing priority this year is to recruit advisors and brokers with existing books of business. Nineteen percent of executives plan to help existing staff to transition to a broker or advisor role. Nearly one third of broker-dealers and RIAs say that ongoing industry consolidation has made it easier to recruit, while 62% say it hasn't had any impact.

"A strong focus on recruitment, especially as a component of a broader client acquisition strategy, is extremely good news for the industry and speaks to an overall confidence for its continued growth success," said Scott W. Dell'Orfano, executive vice president and national sales manager of Fidelity Institutional Wealth Services.

Among other survey findings from among roughly 130 firm executive respondents, 53% of broker-dealer and RIA firms don't have a long-term succession plan, 30% have an agreed-upon plan to pass their business on to senior team members, and 15% are considering a merger.

Schwab To Sell Independent Franchises

Schwab is giving independent advisors the chance to franchise local Schwab branches. The "Independent Branch Services" program offers independent advisors a Schwab support package that includes a small list of starting clients, financial support and a turnkey technology program.

Schwab will also provide a "seed list" of 25 to 50 current Schwab clients and a revenue and expense sharing structure that offers support in the early years of the business. Other Schwab support includes a local marketing program in which Schwab will match advisor expenditures dollar for dollar, and customized training and support.

Independent advisors who are awarded franchises will pay Schwab an initial investment of between $25,000 and $50,000. Schwab plans to have five to ten franchise branches operating by the end of the year, and double that number in 2012. Schwab's goal is to double that figure in each of the next two years, said Andrew Salesky, senior vice president of Schwab's new Independent Branch Services program.

Salesky dismissed industry skepticism that Schwab's new franchise plan could hurt existing company affiliates. "Our view is that it will not," he said. "We're not changing our company strategy by opening up this opportunity to independent franchises. The mass affluent strategy that we use across our company-managed branches is the same strategy we'll use with these new locations."

Schwab first outlined its franchise plan at the company's analyst update meeting in February, Salesky said.

Franchise branches will offer the same products, pricing and services as the company-managed Schwab branches, with the same mass-affluent target market. The difference is that the branches will be advisor-operated and run as franchises, according to Schwab.

Schwab will evaluate locations to determine if they are financially attractive for opening a franchise, Salesky said. "Candidates will come to us and propose a market," he added. "It will be a market that they will have to be well connected to and have strong knowledge of."

Schwab will evaluate franchise market proposals to see if they meet its criteria, Salesky said.

Independent advisors are limited to opening only one franchise.
-Jim McConville

401(k) Consulting Boosts Small Firm's Revenue And Profile

When the principals at Greenspring Wealth Management mapped out the future for their new RIA, they saw the qualified plan space as a potential avenue for growth. Six years later, it's starting to pay off.

In April, the Towson, Md.-based firm finalized its purchase of the (k)larity Group, an Athens, Ga., retirement plan advisory firm focused mainly on small- to mid-sized 401(k) plans with an average size in the $10 million to $12 million range. In one fell swoop, Greenspring went from about $175 million in assets to more than $500 million. "Last year, we were at $89 million when we did our prior ADV," says Patrick Collins, 34, who started the fee-only firm in 2004 after he left Merrill Lynch. Joshua Itzoe, 36, left Morgan Stanley in 2005 to become an equal partner.

"It took us a few years to get the 401(k) business off the ground because we didn't understand the entire space, but we feel like we've got a niche in that area now," Collins says.

Collins' forte is on the private-client side, while Itzoe focuses on the company's retirement plan consulting business. Even after the (k)larity acquisition, the firm's revenue is still roughly split between the private client and retirement plan businesses. All told, Greenspring has roughly 135 private clients with about $120 million in assets, along with about 40 401(k) plans representing $425 million in assets.

In 2008, Itzoe published a book called Fixing the 401(k), which examines the role of plan fiduciaries and tackles issues relating to hidden costs, fee disclosure, conflicts of interest and other matters. Someone in the U.S. Airline Pilots Association read Itzoe's book, and the union contacted Greenspring about handling its nearly $500 million retirement plan for U.S. Airways pilots. Itzoe says the union had a new investment committee in place and wanted to make sure it implemented fiduciary best practices.

Greenspring trained the committee on the fiduciary side, and worked closely with the committee to develop and manage the request for proposal (RFP) process, evaluate potential investment consultants to the plan, and choose the eventual winner. "Usually when an advisor does an RFP, it's to find a provider like Fidelity or Vanguard," Itzoe says. "It's rare for an advisor to run an RFP to help hire someone who in many ways is a competitor to the advisor." But Greenspring knew they were too small to serve as the plan's investment consultant, and was happy to help on the RFP side.

Itzoe says the experience gave Greenspring exposure to a plan much larger than its normal fare and provided takeaway ideas to use with its core base of small- to mid-sized 401(k) clients. The engagement also laid the groundwork for future clients. "The pilot's union was a great referenceable client," Itzoe says.

Greenspring says it's firing on both cylinders these days. "We're maxing out on the private client side," says Collins, adding the firm now has six employees and needs to hire two more, one who'll be a 401(k) advisor. Last year they hired Nancy Bryant as president. Bryant previously ran her own fee-only wealth management firm.
But it's Greenspring's retirement plan work that's making a name for itself among its peers. "We're getting a lot of interest from other advisors who want to see what we're doing," Itzoe says. "They want to get into the space but don't know how to approach it."

Retirement State Of Mind

A recent MetLife report says clients will need to be hand held by their financial advisors to develop an entirely different financial mindset as they switch from being retirement savers to retirement income spenders.

The report, Engaging Clients in a New Way: Putting the Findings of Behavior Finance Strategies to Work, posits that advisors should consider a clients' emotional attitude and intellectual attitude toward their new role as manager in how they spend their retirement income.

"It becomes the task of the financial advisor to help understand and manage such behaviors, recognizing that their clients will base their decisions not only on what is sound, but also on how it makes them feel," says Joseph W. Jordan, MetLife's senior vice president of behavioral finance strategies. "In short, to grow and develop their businesses, advisors need to understand the clients' emotions, help them come to decisions on their own terms, and inspire confidence so their clients can act on their best intentions."

According to the study, financial advisors must bridge a retiree client's gap between knowing and understanding how their financial management role is changed. A large percentage of retirees do not comprehend the concept of "retirement income."

"Financial advisors need to help clients understand that the financial mindset they possessed while saving for retirement does not translate when they have to become their own income provider during retirement," Jordan says. "There's a delicate balance of logic, emotions, experience and intuition that advisors today must incorporate into their practices to inspire action and confidence in their retiree clients so they can act."

Part of an advisor's role, Jordan says, is to help retiree clients come to decisions on their own terms and to inspire confidence so their clients can act on their best intentions.

"Our research and industry research show that when consumers are part of the process, they are much more likely to feel informed and empowered to take action to address their retirement income needs," Jordan says.
--Jim McConville

Productivity Tablet

According to a survey from ByAllAccounts, advisors are increasingly turning to tablet computers as a tool to boost their business efficiency and keep abreast of market news. Among surveyed advisors, nearly 42% report owning tablets, with the majority purchasing them in recent months. The fast growth of tablet usage make them the fifth-most prevalent gadget used by advisors, trailing laptops (87%), smart phones (86%), MP3 players (46%) and GPS devices (43%).

Among tablets, the iPad seems to be the weapon of choice, with the vast majority saying that was their brand. The survey found that nearly 84% of advisors use their iPad to stay connected while out of the office and almost 60% said they use it to access applicable educational materials, while 52% said it helped move them to a paperless office. Another 50% said the iPad enhances client meetings, and 49% said it increases their responsiveness to clients.

But Cynthia Stephens, ByAllAccounts' marketing vice president, noted the latter two numbers indicated that advisors still aren't using tablets to their full potential on the client service side. "Over time I would expect to see growth in the number of advisors also using them to enhance interactions with clients and potential clients," she said.

ByAllAccounts, an account aggregator for the advisor market, surveyed more than 250 advisors this spring.

A New Approach To The Retirement Transition Phase

Instead of working longer or retiring on time with less money than anticipated, there may be a third alternative that financial advisors can show their clients that may give them the best of both worlds. An alternative may be to continue working full or part time and use money that had been going into savings to begin enjoying "retirement activities" before actually retiring.

"It is a case of balancing time and money," says Christine Fahlund, senior financial planner at T. Rowe Price, which recently studied the alternatives available to those nearing retirement who do not like the two standard options. They advocate a new transitional strategy where working longer can provide more discretionary income during these transition years so folks can start pursuing their retirement aspirations earlier. As part of that process, advisors need to be well versed on the possibilities and on the advantages of delaying taking Social Security benefits, she says.

A number of variations of the T. Rowe Price plan can be initiated, but a standard example might be a 62-year-old couple making $100,000 who want to retire. Receiving Social Security benefits of $30,800, plus withdrawing $21,100 from retirement savings gives them only 52% of their preretirement income, less than the 75% recommended by T. Rowe Price. In addition, their $500,000 in savings would only grow to $526,000 by age 70. (All figures are expressed in today's dollars, using a 3% discount rate.)

They decide to keep working, but discontinue making contributions to their retirement plan, which gives them an additional $15,000 to pay for some enjoyable activities. Each year they wait to start taking Social Security benefits, their initial benefits increase approximately 8%, based on Social Security formulas-regardless of what the market does.

In addition, if they do not tap into their retirement savings prior to their fully retiring, their investment portfolio will have increased as well. If they retire at 70, withdrawing $34,900 from savings and collecting combined Social Security benefits of $54,100, they have a total retirement income of $89,000 and their retirement nest egg would have grown to $775,000 by age 70, according to T. Rowe Price calculations. That's almost a 90% replacement rate, rather than the 52% replacement income percentage the couple that retires at age 62 realizes.

Being able to use some of their time and money earlier to live out their retirement dreams might make working longer less onerous. Basically, their salaries would be funding their fun. T. Rowe Price recommends using this transition phase to pay off debts, including mortgages.

"People have to make a decision whether they want to continue working, at least part time, or if having more free time trumps the extra money they would have in salary as well as later in retirement," Fahlund says.

"Unfortunately, given today's economy, not everyone is in a position to consider these options," she notes. "However, T. Rowe Price believes that even if you both work part-time in your 60s while you begin playing, the financial benefits may be significant, or, in some cases a couple may choose to have one spouse retire while the other continues working.

Fahlund adds that this approach to retirement may be appealing to some financial advisor clients--especially those who have not yet saved enough and those who may have saved but are not emotionally prepared to leave the work force.