FPA Challenges NASD On Disclosure Proposal
The NASD's proposed rules that would force brokers to disclose when they get certain types of compensation for selling mutual funds are already under challenge. In particular, the Financial Planning Association (FPA) says the NASD needs to do more to clamp down on conflicts of interest in the brokerage industry.
"FPA believes this proposal is a modest, first small step by the brokerage industry to address conflicts of interest previously accepted as a way of doing business until Enron," says FPA President David Yeske. "But the NASD proposal falls short of meaningful disclosure to the investor. The disclosure is opaque at best."
The proposal, announced by the NASD on August 7, would require brokers to openly disclose when they have engaged in two common types of agreements that compensate them for the sale of mutual funds. The first consists of cash payments in return for giving a company's funds "shelf space" on the broker's sales platform. The second is payment of higher compensation to registered representatives for selling selected mutual funds. The Wall Street Journal recently reported that brokers at Morgan Stanley were told not to put anything in writing and keep quiet about a sales contest for proprietary funds in 2002.
The NASD's proposal would require brokerage firms to disclose the nature of these types of compensation agreements in writing when a customer opens an account or purchases mutual fund shares. Firms would also have to update this information twice a year and post it on their Web sites. "When buying mutual funds, investors have the need and right to know about incentive compensation received by a member firm and its registered representatives which often differs from fund to fund," says Robert R. Glauber, chairman and CEO of the NASD. "These important reforms will ensure that investors have this information before they invest."
The written rules are expected to be publicly released within the next two weeks, after which the NASD will accept public comment, says NASD spokesman Michael Shokouhi. "Until then, we don't comment on them," he adds.
The FPA, however, asserts that the proposal as described in the NASD release does not require brokers to reveal the dollar amount of compensation they receive from mutual fund companies. The proposal would only require brokers to disclose that they may receive "different rates of compensation" on the funds they sell, says Yeske. "We don't think the NASD proposal on its own is meaningful disclosure, nor does it reach other areas of brokerage conflicts," he says.
Among the other types of conflicts, he says, are "principal trade" conflicts, which include cases where broker-dealers implement sales incentives for their brokers to push certain stocks, including stocks owned by the broker-dealer that it wants to sell off-a practice that was common during the market "bubble" days of the 1990s. Yeske also notes that investment advisors are required to disclose "principal trades" and must get permission in advance from clients to carry them out. "The NASD should expand its disclosure requirements to the sale of all stocks to retail investors, not just the 20% that are held in mutual funds. Principal trade conflicts should be next in line."
Market For 529 Plans Remains Untapped
Although 529 college savings plans have been around a few years now, they still represent a significant untapped market for advisors, according to a new survey.
Only 14% of families currently invest or plan to invest in a 529 plan, according to the Sixth Annual College Financial Preparedness Survey, released by the retail mutual fund distribution unit of Alliance Capital Management. The survey also found that 64% of parents and 65% of grandparents are not familiar with 529 college savings plans, but that many are more inclined to use them once informed about their benefits.
"Our surveys continue to reveal awareness of 529 college savings plans among American families is relatively flat," says Richard A. Davies, executive vice president and marketing chief at AllianceBernstein Investment Research and Management, the fund-marketing arm of Alliance Capital. "It was particularly surprising this year given the fact that 529 plans have received more mainstream media coverage possibly than any other new consumer savings vehicle."
The survey suggests lack of information has been the main reason for lack of involvement in 529 plans. When asked why they were not using the savings plans, 44% cited lack of famliarity with them, 15% said it was because of not enough discretionary income and 10% said they were using another savings product.
The survey by Harris Interactive was conducted June 20-23 and consisted of telephone interviews with 1,010 adults nationwide, with a greater focus on 528 adults with children under age 18.
Investors Flock To Funds That Short Bonds
How worried are advisors and investors about rising interest rates and falling bond prices? Judging by the inflows into two specialty mutual funds, a lot.
Since January 1, assets in the Rydex Juno Fund have increased by more than eight times, to about $832 million from $100 million. Although it is smaller, ProFunds' Rising Rates Opportunity ProFund has seen its assets jump even more astronomically-by more than 16 times-to about $300 million from $18 million.
Both funds short the 30-year Treasury bond and therefore perform inversely to it. When the T-bond's price falls as interest rates and yields rise, the net asset values of these funds rise, too.
"Right now, people have a lot if interest-rate risk in their portfolios," says Chuck Tennes, director of portfolio for Rydex Funds in Rockville, Md. "Rydex Juno lets them hedge a little." In addition to hedging bond portfolios, some investors may be using the Rydex and ProFunds offerings to speculate on the direction of interest rates.
How good of a hedge will the funds be for an investor's bond holdings? It depends. "The closer the duration of the bond investment that you're trying to hedge is to the duration of the 30-year long bond, the better the hedge would be," says Michael Sapir, chairman and CEO of ProFunds, based in Bethesda, Md.
The duration of the 30-year Treasury bond is currently about 14, so its price will change by about 14% for every 1% change in yield. Since the Juno Fund's goal is to be 100% correlated to the inverse of the T-bond's daily performance, its value should change 14% for every 1% change in yield, net of expenses. ProFunds offering uses leverage, in the form of futures contracts and swap agreements, to provide a 125% correlation, making the fund more volatile. Its value should change 18% for every 1% change in yield.
So how have these funds performed as interest rates have moved up and bond prices have moved down? According to Morningstar, as of August 12, the Juno Fund rose 5% in the prior four weeks, 8.7% in the prior three months and 4.2% year-to-date. ProFunds Rising Rates Opportunity Fund rose 6.3% for the four weeks, 10.5% for the three months and 4.1% year-to-date.
StatementOne Partners With Morningstar, NaviPlan
StatementOne, the enterprise financial data consolidation and performance reporting company, is launching a Web-based platform for its clients.
The company says the Web solution, called "Web Services," will allow advisors to more easily integrate StatementOne data with other popular software tools and services.
Among the companies looking to integrate its products with StatementOne's Web-based platform are Morningstar Inc.; EISI, the developer of NaviPlan financial planning software; and Pacific Select Distributors Inc., the underwriter and distributor of Pacific Life's variable products and Pacific Funds' mutual funds.
StatementOne, based in Lawrence-ville, N.J., manages account data for more than 50 financial institutions, comprising more than $300 billion in assets, tens of thousands of advisors and millions of individual accounts. "Web Services is a groundbreaking platform that will allow our broker-dealer clients and their advisors to further leverage their Statement-One consolidated data," says Jakob Rohn, Statement-One's senior vice president of product development.
The companies partnering with StatementOne say the Web integration will provide greater efficiencies for advisors. NaviPlan officials, for example, say it will allow the automation of data input into its financial planning software. Morningstar says the new endeavor will provide advisors with a direct interface between Morningstar Advisor Workstation and StatementOne.
Pacific Select Distributors is using the platform as part of its own initiative to give advisors a comprehensive Web-based software solution.
"This technology will eliminate a significant amount of data entry for our advisors' practices," says Michael Graham, director of financial advisor technology at Pacific Select Distributors.
Advisors Continue To Invest In Personnel
Financial planning firms are continuing to beef up their full-time staffs and raise salaries despite a sputtering economy, according to a new study.
The study found that firms have increased salaries 15% over the past two years, and raised total compensation across most full-time positions, according to the 2003 FPA Compensation & Staffing Study.
"This year's study emphasizes how important people practices are becoming to financial planning firms," says Mark Tibergien of Moss Adams LLP, a management consultant in Seattle that produced the study for the Financial Planning Association (FPA) and SEI Investments. "Owners of financial planning firms are focusing more on human resources, recruiting and retaining staff."
The study, however, did reveal some evidence of backpedaling in the face of the difficult economy. While salaries were up the past two years, the survey found that bonuses declined. About 53% of employees got bonuses in the 2003 survey, compared with 76% in the 2001 study.
The study indicated that firms are becoming more sophisticated in how they recruit employees, and in their efforts to retain them. The study found that 69.9% of firms offer a 401(k) plan, compared with 52.1% in 2001. Education expense reimbursements are provided by 86.2% of firms, and 78.4% conduct employee evaluations. More than half of the multi-professional ensemble firms surveyed, 51.9%, use tests to screen prospective employees.
The participants in the study consisted of 512 financial advisory firms with 3,200 people and a cumulative payroll of nearly $20 million in 2002.
New Fidelity Funds Are Designed For Diversity
Fidelity Investments has launched several new funds that it says are specifically geared to advisors looking to diversify and minimize risk in their portfolios.
The new funds include the Fidelity Advisor Freedom Funds, a group of five funds designed to taper off risk as they approach different target dates. The company has also introduced the Fidelity Advisor New Insights Fund, which bills itself as a product that is not constrained by any particular investment style.
The Freedom Funds are funds of funds that will invest in 13 different Fidelity Advisor Funds and Fidelity Cash Reserves, the company says. Four of the funds will invest with an eye toward the target dates of 2010, 2020, 2030 and 2040. The fifth is designed for clients who have already reached their target date and are more interested in the preservation of their income and assets.
The funds, co-managed by Ren Cheng and Johathan Shelon, are designed to become more conservative in their approach over time, the company says. "Investors want their assets to be there when they need them-no matter what the goal," says Joseph P. LoRusso, president of Fidelity Investments Institutional Services Company Inc. "Advisors are increasingly looking for a single-fund option that delivers appropriate diversification and can be managed to meet a client's specific time frame."
The New Insights Fund, managed by 17-year Fidelity veteran William Danoff, describes itself as a fund that will invest in common stocks of companies whose value "is not fully recognized by the public, and may include companies experiencing positive fundamental change that may lead to accelerating earnings-per-share growth," the company says. It will use the S&P 500 index as its benchmark.
"Having the ability to invest in all market capitalizations across 'growth,' 'value,' or a combination of the two, allows the new fund to take advantage of emerging growth opportunities, while also potentially avoiding areas of the market that may be out of favor," says Marty Willis, executive vice president of Fidelity Investments Institutional Services Company.
LPL Adds New Tools To Advisor Platform
LPL Financial Services, the nation's largest independent broker-dealer, has added a line of debt and liability management tools to its advisors' technology platform.
The company announced recently that it has struck a deal to add FinancialCircuit Inc.'s MoneyFind, a product launched in May that helps advisors analyze, plan and execute liability solutions for clients on a Web-based platform. Among the features of the product is real-time data, including the best-available interest rates on refinancing plans.
LPL advisors will also have access to a processing center that assists in the execution of mortgage and liability restructuring plans.
"FinancialCircuit's solutions can help our representatives grow their businesses by providing valuable independent debt and liability management, and advice based on real-time market data," says Mark Casady, president and chief operating officer of LPL.