Finra: We're Ready To Be Advisors' SRO
In Congressional testimony last month, the Financial Industry Regulatory Authority stated its case to be the agency of choice to oversee investment advisors registered with the Securities and Exchange Commission.
"We (Finra) would establish a separate entity with a separate board and committee governance to oversee any advisor work, and would plan to hire additional staff with expertise and leadership in the advisor area," Richard Ketchum, Finra's chairman and CEO, told the House Financial Services Committee hearing that discussed a bill proposed by Rep. Spencer Bachus, (R-Ala.), that would set up one or more self-regulatory organizations (SROs) for registered investment advisors (RIAs). Finra is the SRO overseeing roughly 4,500 brokerage firms and 633,000 registered reps.
William Dwyer, president of LPL Financial and chairman of the Financial Services Institute, exhorted the SEC to establish a uniform fiduciary standard and to retain Finra as an SRO to oversee RIAs. But the latter concept is anathema to industry groups representing investment advisors, who prefer the status quo of being regulated by the SEC and oppose outsourcing that role to another organization.
"[The SEC is] a single, governmental regulator accountable to Congress and the public that has investors' protection as its paramount mission," said David Tittsworth, executive director and executive vice president of the Investment Advisor Association. "We've noted various concerns about Finra and self-regulatory organizations, including their lack of accountability, their lack of transparency, questionable track record, excessive costs and their bias favoring the broker-dealer regulatory model."
The Financial Planning Coalition, in a statement provided to the committee, said creating a new SRO to monitor investment advisors isn't needed. "At a time when the Administration and Congress are working to find ways to create jobs, stimulate economic growth and cut red tape, the creation of a new SRO is an overly broad approach to correcting the narrow problem of the inadequate frequency of examinations of SEC-registered investment advisers," the statement said. The coalition believes that supporting enhanced SEC oversight is the most appropriate solution.
Under a draft bill by Bachus, the committee chairman, one or more SROs would oversee the nation's 11,500 registered investment advisors. Bachus introduced his bill to the committee on Sept. 8. He has stated that under the SEC's current monitoring system, investors who use independent financial advisors may not be sure they're getting certified and qualified financial investment advice because the SEC, on average, reviews such advisors only once every ten years.
The Bachus bill proposes that the SEC have the power to hire a group to monitor, evaluate and certify advisors. His draft says that independent advisors would have to be members of a SRO that would report directly to the SEC.
Last year's Dodd-Frank Act directed the SEC to look into the practices of financial advisors in the wake of the 2008 credit crisis and high-profile frauds such as the Bernard Madoff Ponzi scheme.
The SEC's study concluded that it needs to fix its inability to inspect a sufficient number of investment advisors on a regular basis. The report presented a few options, including using new SEC fees to pay for an expanded inspections program or moving investment advisors under a SRO.
The House isn't done deliberating on the SRO issue and the Senate has yet to address the topic, so don't expect a resolution any time soon.
- Jim McConville
Independent Advisors On The Rise
As part of a continuing trend, financial advisors increasingly are bolting from traditional Wall Street brokerage firms and other financial service employers to become independent broker-dealers and advisors, according to Cerulli Associates.
The number of employee advisors (i.e., those employed by wirehouses, banks, insurance companies) as a share of the overall financial advisory marketplace shrank from 63% of the workforce in 2004 to 59% at year-end 2010, says Cerulli, a Boston-based consultancy. Meanwhile, the market share for independent advisors (both at broker-dealers and RIAs) rose from 37% to 41% during that period.
"We are still projecting this move toward independent advisory firms to continue with 50- to 150-basis point shifts in market share a year," says Bing Waldert, a Cerulli director.
Similar trends are expected when it comes to assets under management. The percentage of industry assets held by employee advisors dipped from 70% in 2007 to nearly 66% last year. During that same period, AUM controlled by independent advisors rose from nearly 30% to more than 34%.
When it comes to head count, the industry's employment picture as a whole is sloping downward. Cerulli's research found that the number of financial advisors serving retail clients across all channels fell by almost 14,000 workers in 2010. That left about 320,000 total advisors at the end of last year, and Cerulli's model projects a decrease of another 8,000 advisors by 2015.
The industry's demographics play a role, as more advisors reach retirement age and not enough new blood takes their place. Meanwhile, the financial crisis of '08-'09 and its lingering aftermath have forced less robust advisory practices to close shop.
The gist of Cerulli's analysis is that employer-based advisors are taking the biggest hit, especially at wirehouses where Cerulli expects the Big Four national brokerages-Morgan Stanley Smith Barney, Bank of America's Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas-to keep losing financial advisors who want higher payouts and greater control of their practices within the independent broker or RIA models.
Wirehouses will have to up the ante to retain their remaining advisors and entice new ones to join the fold, Waldert says. However, he adds that wirehouse defections haven't just been about making a dash for the cash. Rather, some advisors jump ship for the chance to own and operate their own business.
"It's the opportunity to build an enterprise of intrinsic value, and to start to have more freedom and flexibility to how you customize your service offering to clients," Waldert says.
But not all independents are feeling the love. Head count at independent broker-dealers has dropped almost 1% since 2007, mostly at smaller firms. Meanwhile, some larger outfits such as LPL Financial have thrived, partly by grabbing advisors from smaller independent broker-dealers.
The independent RIA channel has been an industry bright spot, with estimated 7% annual growth since 2007. RIAs are getting young talent who are attracted to the consultative side of the advisory business and are less inclined to take the traditional commission-based sales path embodied by the wirehouses.
But RIAs still represent a relatively small slice of the overall industry pie, and their gains are too small to stanch the overall decline in industrywide head count.
And, finally, technology is helping to fuel the independence movement by providing advisors with tools to set up shop virtually anywhere. "It's easier than ever for advisors to hang out their own shingle," Waldert says.
Uncertain Times For BofA Advisors
It's been a wild ride at Bank of America. First, Warren Buffett's Berkshire Hathaway gave the bank a vote of confidence in August when it invested $5 billion in preferred shares and warrants. Then all hell broke loose in September with the executive-level shake up that included the ouster of the wealth management unit's chief, Sallie Krawcheck, followed by the bank's bombshell announcement of plans to slash roughly 30,000 jobs during the next several years. Meanwhile, the company showed its support for its advisor business when it hired about 40 "financial solution" advisors in its mid-Atlantic region to serve clients with investable assets between $50,000 to $250,000.
The company's wealth management division is one of its profit centers, but the overall upheaval creates considerable uncertainty for Bank of America's Merrill Lynch advisors. Larry Papike, president of Cross-Search, an industry recruiting firm in Jamul, Calif., doesn't expect to see a lot of departures, at least among the top advisors there, because many of them scored lucrative, long-term deals to re-up or to join the firm during the recruiting free-for-all of the '08-'09 market crisis. "Most of those advisors are locked up unless another wirehouse picks up their note," he says.
Others aren't so sure. "They [advisors] were tied down, but they met their first marker, and the more a note goes down, the more chances of them bolting before a deal is up," says Carri Degenhardt-Burke, president of Degenhardt Consulting, an advisory search firm in Jersey City, N.J.
She says a lot of advisors were waiting to see what Krawcheck would do, but she was fired before she could leave a lasting imprint. Degenhardt-Burke adds that BofA advisors are getting more pressure to cross-sell in-house products, which doesn't sit well with some of them. "They're looking for possible opportunities where they're not forced to do that," she says.
What's My LTC Plan? Nothing!
Who wants to think about long-term-care planning? Evidently, not a lot of Americans. Not surprising, considering it's not a happy topic. But according to a recent survey by insurance company Sun Life Financial Inc., there's a huge chasm between what Americans perceive their long-term care needs will be in later years and what the reality will likely be.
For example, just 36% of the survey's 1,015 respondents think they will need long-term care. But according to the U.S. Department of Health and Human Services, 70% of people over the age of 65 will require it.
And then there's the cost issue. For starters, 84% of those surveyed said they don't feel financially prepared for long-term care. The same goes for 54% of affluent respondents (those with at least $500,000 in investable assets). That's bad enough, and yet the results might be understated because the majority of people seriously underestimate the projected rise in long-term care costs. The typical survey respondent thinks average nursing home costs will jump 56% by 2030. (And somehow, 18% don't think nursing home costs will rise at all.) But current average yearly nursing home costs of $85,000 are conservatively projected to rise 123% during that time, to $190,000, taking into account the 4.3% historical inflation rate of the Consumer Price Index's nursing home component.
Nursing homes are the most expensive-and least desirable-option for most people. In that vein, 90% of survey respondents said they'd prefer to receive long-term care at home, if provided by a professional caregiver. While it's much less costly, that service isn't cheap, either. It's something that should be part of a person's long-term financial planning, but the vast majority of people surveyed say they haven't discussed long-term care issues with either their financial or legal advisor.
Among the survey's affluent advisors, 46% believe that long-term care is beyond their financial advisor's expertise. The upshot, says Sun Life, is that this is an issue where financial advisors can provide a value-add for their clients.
Gen Y Good Target For Advisors
Financial advisors have ample opportunity to attract investors from the Gen Y generation if they know how the age group thinks, according to a new survey of Gen Yers by MFS Investment Management, a global money management firm.
Gen Y investors, those born between the early 1980s and the mid-1990s, are more conservative than baby boomers. According to the MFS survey, these younger Americans feel more confident about their investing knowledge. At the same time, they use financial advisors more than any other age group.
The survey included 974 individuals with at least $100,000 in household investable assets. The results showed Gen Y is more amenable to talking with advisors than other generations. Of those who rebalanced or reviewed their investments in the last 12 months, 89% reported that an advisor played a key role. The second highest percentage was among Gen Xers, at 76%.
"It is a demographic imperative that the financial services industry embraces younger investors," says William Finnegan, a senior managing director of U.S. retail marketing for MFS. "We've identified challenges and opportunities for Gen Y investors that financial advisors are uniquely qualified to address.
"However, the advisors are operating in a business model geared toward serving older generations," he adds. Advisors' ultimate challenge, he says, is to change the way they engage younger generations and help Gen Yers turn from conservative savers into long-term investors.
Gen Yers feel more confident about their own investing than their baby boomer parents or grandparents: 39% said they are very knowledgeable or that they are expert investors, while only 28% of baby boomers said the same. And a majority of the Gen Y population (64%) is confident about the economy; 78% are confident about their own future for the next five years.
Yet, at the same time, 54% say they are more concerned than ever about being able to retire, despite the long-range time horizon they are looking at, and 44% say they have lowered their expectations about the quality of their life in retirement.
A large group of the Gen Y generation (40%) does not feel comfortable investing, and 54% say they feel overwhelmed by investment choices. A majority (59%) consider themselves to be savers more than investors.
Some 77 million Americans fit the description of a Gen Yer. This group has $1 trillion in spending power and many years to invest. They are the next large wave of investors, and that's an opportunity for financial advisors.
-Karen DeMasters
Jackson National Tops In VA Loyalty
On the one hand, annuities still get a bad rap among some financial advisors for their fee structure and complexity. On the other hand, they're increasingly seen as an income-generating substitute for the fading institution that is pension plans. For advisors who use annuities--specifically, variable annuities--some providers rate higher than others. According to a Cogent Research survey of 1,643 retail investment advisors across all major distribution channels, Jackson National Life Insurance now ranks first among variable annuity providers in advisor loyalty.
Jackson replaced Prudential for top position, one year after Prudential displaced Jackson for the top spot. Prudential is back in second, but both firms improved their overall loyalty scores as reported in the 2011 "Advisor Brandscape" report from Cogent, a Boston-based consultancy.
"But Prudential still dominates the competition in the single most important loyalty driver--range of VA product features," said John Meunier, Cogent principal and Brandscape report co-author.
Cogent says that Sun Life Financial and Allianz Life both made sizable gains in the past year to crack the top ten loyalty list.
After Jackson and Prudential, the rest of the top ten goes as follows: Lincoln National Life Insurance (Choice Plus); Ameriprise Financial/RiverSource Life Insurance; Nationwide Financial; MetLife; Ohio National Life Insurance; Sun Life; Allianz; and Aegon/TransAmerica.
The Need For Succession Planning
By Mike Byrnes
A recent study of 502 TD Ameritrade Institutional RIAs made it clear that advisors need to do a better job of planning for succession and grooming the future leaders of their firms. Of the respondents, 11% said they were concerned about succession planning, down from 15% the previous quarter. At the same time, only 40% said they have a plan in place. If that percentage holds true for the entire industry, that means that more than half of advisors do not have one. Plus, many that have outdated agreements need to re-evaluate their existing plans.
A positive note from the survey: More advisors are developing a plan, evidenced in the big jump from 4% to 22%
of responses.
The average age of the survey's respondents is 54 years. "However, the mindset of an advisor in his or her 50s is most likely on business building, not retirement," said Zohar Swaine, the managing director of product and strategy at TD Ameritrade Institutional. "Advisors are so focused on taking care of their clients and growing their business, they often give little thought to how they'll leave it and can be blindsided by the amount of time it takes to create and execute an effective succession plan. By starting early, advisors can create, finance and execute a successful succession plan."
Advisors without succession plans should ask themselves: Do I want my firm to outlive me? Do I want my employees to have a long-term home for their careers? What is the best thing for my clients and my own family?
"Buyers are always looking for ways to discount the multiple, like saying the book has an aging population," said George Tamer, TD Ameritrade's director of strategic relationships. He noted that TD Ameritrade has had situations where an advisor will pass away and it is too late to create a succession plan. "At that point, we are helping the staff or the widow wind down the business," he said. "At that point, it is too late [for the family to step in], as we have to take the instructions from the end client. We can't take instructions from the widow, if she is not listed in the business."
The survey found that 50% of respondents anticipate implementing an internal successor; 11% plan to sell the businesses; 8% will look to merge with another firm; and 30% are still undecided. The biggest reason there is no succession plan in place is that no clear successor has been identified (according to more than half of those surveyed).
Most RIAs need to find the right person in the near future to bring into the firm, but almost half believe there is a talent shortage in the industry. The good news for job seekers is that RIAs are looking to add to staff in several areas with specific talents. The bad news is that only 7% of the respondents had formal mentor programs, leaving it up to the youth to network, take professional development and training programs and job shadow.
In short, advisors need to do a better job of preparing the next generation for leadership. After all, advisors are not getting any younger.
--Mike Byrnes founded Byrnes Consulting to provide consulting services to help advisors become even more successful. His expertise is in business planning, marketing strategy, business development, client service and management effectiveness, along with several other areas. Read more at www.byrnesconsulting.com.
Hedge Funds Face Succession Challenge
(Bloomberg News) Bruce Kovner is betting he can pull off what eluded Stanley Druckenmiller and Julian Robertson: keeping his hedge fund alive after retiring from trading client money.
Kovner last month named chief investment officer Andrew Law, 45, to run his $10 billion Caxton Associates LP.
Kovner, 66, who started the New York-based firm in 1983, told clients in a letter that he will retire by the end of the year to pursue personal interests. Peter D'Angelo, 64, the firm's president and co-founder, will also step aside.
Caxton is confronting a difficult challenge for a growing number of hedge funds: managing succession in a business where success is built on the founders' trading skill and reputation. Unlike private-equity firms such as Blackstone Group LP, which transformed themselves from private investment partnerships into public, diversified asset managers, top hedge funds from Robertson's Tiger Management LLC to Druckenmiller's Duquesne Capital Management LLC returned investor money after the founders stepped back.
"Hedge funds haven't done a great job at succession planning," said Myron Kaplan, a partner at New York law firm Kleinberg, Kaplan, Wolff & Cohen PC who advises hedge funds. "The key is to institutionalize the firm and change investors' perceptions of the fund as a single guru's shop."
In the past year, at least three top hedge-fund managers ceased investing client money. George Soros, the 81-year-old billionaire, told investors in July that he would turn New York-based Soros Fund Management LLC into a family office. Chris Shumway, 45, founder of Shumway Capital Partners LLC in Greenwich, Conn., said in February that he would return capital to clients. Druckenmiller, 58, shuttered his New York hedge fund in August 2010.
Hedge-fund legends including Robertson, 79, and Michael Steinhardt, 70, returned client money in 2000 and 1995 respectively.
"It's a shame that franchise value is being dissipated and not realized by all the people involved, be it the founder, his employees and investors," said Kaplan. In contrast, the founders of the largest private-equity firms, many of whom are in their sixties, have diversified their businesses and sold shares to the public as part of their efforts to ensure the long-term survival of their companies.
Blackstone, the biggest private-equity firm, and Fortress Investment Group LLC went public in 2007. KKR & Co. gained a New York listing last year, and Apollo Global Management LLC did the same in March. Carlyle Group this month filed for an initial public offering.
At KKR in New York, co-chairmen Henry Kravis and George Roberts set up a management committee where they share oversight of the firm with younger executives who may one day run the business. Kravis, 67, said at the firm's investor day in March that succession is on his and Roberts' minds.
"Succession is one of the things where private equity is ahead of hedge funds," said Daniel Celeghin, a partner at Casey, Quirk & Associates LLC in Darien, Conn., which advises asset-management firms. "They have an advantage because the nature of their businesses is more collaborative.Decision-making is shared among teams."
For succession to work at hedge funds, the founders must delegate responsibilities, communicate that to investors and ensure those with added responsibilities are more visible as well as recognized for their contributions, according to Eric Weinstein, who runs the $4 billion fund-of-hedge-funds business at Neuberger Berman Group LLC in New York.
"This must happen incrementally over a period of years or investors will take their money out following a change of control that can be viewed as sudden," he said.