Is The Broker Protocol Being Eroded?

In 2004, three wirehouse firms forged a "good faith" pact among themselves to put a kibosh on the lawsuits and temporary restraining orders hurled against each other whenever one of their registered reps jumped ship to join a rival firm.

That pact, known as the "Protocol for Broker Recruiting," was a deal between Citigroup's Smith Barney unit, Merrill Lynch and UBS Financial Services. Its purpose was to enable reps to change firms and take basic client information--name, address, phone number, e-mail address and account title--with them without fear of retaliation. The protocol, which contains other guidelines, now has more than 650 signatories ranging from broker-dealers and banks to investment managers and financial advisory firms.

But recent events have raised doubts about the protocol's basic protections, says Patrick Burns, a Beverly Hills, Calif.-based securities industry attorney. In a white paper he wrote on the topic and in a separate interview, Burns specifically points to two cases involving Bank of America and its Merrill Lynch division.

The first involves last year's well-publicized legal tussle between Bank of America and four former employees of its U.S. Trust unit who bolted to Dynasty Financial Partners, a wealth manager and provider of investment and technology platforms for independent financial advisors. The bank claimed the group improperly took client records with them when they left. The former employees said they were registered to Merrill Lynch, a protocol member. But prior to this incident, Bank of America, which isn't a protocol member, circulated a letter among protocol firms saying it didn't consider private wealth managers at its Merrill Lynch and U.S. Trust divisions to be covered by the protocol. The lawsuit was settled in January, but terms weren't disclosed.

Burns says Bank of America's efforts to weaken protocol protection for its Merrill employees are troubling. "There's nothing in the protocol that mentions steps to take if you want a carve-out, or even if you're able to do that at all," Burns says.

After the lawsuit settlement, Bank of America instituted a so-called "Garden Leave" policy on U.S. Trust employees requiring them to give 60 days' notice before they leave the company, versus the prior two-week notice. They're also prohibited from soliciting clients for eight months, according to reports. The belief is that this policy is meant to prevent another multi-billion-dollar defection by top producers.

Burns says many U.S. Trust advisors maintain their securities license through Merrill Lynch, but as with the Dynasty-related case, Bank of America says the protocol doesn't apply to them.

Burns says he doesn't foresee a lot of copycat activity by other protocol signatories. He notes that one of the protocol's unforeseen consequences was enabling registered reps to leave the wirehouse channel and join the independent advisory space. The wirehouses would love to stanch the flow, and Burns says the idea has been floated to create a new protocol just for the wirehouses. But he doesn't believe those efforts will fly. "I don't think they can legally do that in light of antitrust laws," he says. "You can't prohibit others from achieving a level playing field through open and fair competition."

Burns also says wirehouse attempts to clamp down on the protocol would hamper their recruiting efforts with other wirehouse reps. "It would be an admission that they basically have to slam the door shut to keep people from leaving," he says.


Pay Decreased, But Satisfaction Still Strong Among Financial Planners
Despite the hit that financial planners took to their wallets due to the recent turmoil in the financial markets and its impact on their practices, 94% of financial planners say they are either satisfied or very satisfied with their financial planning careers, according to a recent study by the College for Financial Planning.

The 2011 Survey of Trends in Financial Planning, published this spring by the Greenwood Village, Colo.-based provider of financial industry education programs, provides a snapshot of compensation, business models, age demographics and other tidbits among 345 total respondents, all of whom hold the CFP designation.

In the satisfaction department, 59% of respondents said they were very satisfied with their careers, while 35% were plain satisfied. The four biggest drivers of satisfaction were helping clients improve their lives, tackling the challenge of solving client problems, interacting with clients, and being an entrepreneur. The least satisfying aspects of their jobs were new business prospecting and professional liability.

Regarding compensation, the survey found that average annual gross earnings among planners fell to $190,922 from $215,345 in 2009 (the most recent survey) and $195,394 in 2008. The shortfall is attributed in large part to decreased revenues during the downturn as asset values in many client portfolios dropped in tandem with the markets.

But during each of the past three surveys gross earnings rose significantly in the year after someone earned their CFP marks.
Among other findings, the survey shows a shift from a fee-only business model (17%, down from 26% in 2009 and 30% in 2008 ) to a fee and commission approach (60%, down from 62% in 2009 but up from 43% in 2008). Among respondents, the commission-only model registered just 7%, down from 10% and 11% the past two survey years, respectively.

As for age demographics, 28.9% were ages 50 to 59 years, followed by ages 40 to 49 (24.3%) and ages 30 to 39 (22.8%). People in the 60 to 69 age bracket comprised 16% of responses, while planners who are 70 years or older were 1.9%. And to highlight the concern about the lack of new blood in a graying industry, just 6.1% of respondents were between the ages of 21 and 29.

Fiduciary Can Be Marketing Tool To Get HNW Clients
According to a recent survey, half of financial advisors who say they act as fiduciaries for their clients believe that having that standard of care in their corner helps them stand apart and attract new clients. Yet at the same time, roughly a quarter of them don't promote that angle in their marketing materials.

ByAllAccounts, the provider of account aggregation services that conducted the survey of 250 advisors, says that's a missed opportunity to attract new clients. The survey found roughly 53% of respondents agree that being associated with having fiduciary ethics is either an "extremely big" or "very big" differentiator for their practice. But about 27% of them don't mention their fiduciary bona fides when they promote their business.

"Why wouldn't you [promote it]?" asks Cynthia Stephens, vice president of marketing at ByAllAccounts. She says the survey didn't ask any open-ended questions, so she didn't have an answer to her question. But Stephens says advisors who act as fiduciaries shouldn't be shy about blowing their own horns about it. "Explaining in clear terms what it means for your clients that you have fiduciary responsibility provides a marketing opportunity for savvy advisors to attract HNW clients and increase AUM."

Americans Unconfident About Their Retirement
A recent survey of American attitudes about their retirement preparedness revealed a bad news/good news/bad news scenario. The first bad news is that workers' confidence in their ability to fund a comfortable retirement, as measured by an annual survey conducted by the Employee Benefit Research Institute, sank to the most pessimistic level in the survey's 21-year history. The good news is that more people have got their heads out of the sand and recognize their plight. The second bit of bad news is that too many people still aren't doing anything about it.

In January, EBRI, a nonprofit research group in Washington, D.C., along with Mathew Greenwald & Associates Inc., a Washington, D.C.-based market research firm, gauged the attitudes and actions regarding the retirement of 1,258 Americans aged 25 and older. Among the findings: 13% of workers said they're "very confident" of a comfortable retirement, which ties the 2009 survey as the lowest in survey history. And 27% said they're "not at all confident" about retirement, up from 22% the prior year and also the highest level recorded by EBRI's annual survey.

Not helping matters is that 34% of workers said they had to tap into an IRA, 401(k), savings or investment accounts--or had to take a loan against those accounts--to pay basic expenses. And there are other stark findings, such as 56% of respondents who said they have less than $25,000 in savings and investments (excluding their primary residence and any pension plans), and 29% who say they have less than $1,000. In addition, 42% of respondents said they calculated their retirement needs by guessing.

Granted, people with more than $100,000 in financial assets registered better confidence numbers. "Unfortunately, even those levels of accumulation will not allow many of them to maintain the lifestyle they want, or in perhaps many cases, even feel is acceptable," Mathew Greenwald said during a press conference announcing the survey results. "But by and large, these higher accumulators have not come to grips with that yet."

In an interview, EBRI research director Jack VanDerhei says he actually took some comfort from the survey's findings. "We've been doing this survey for 21 years, and it's been like watching a glacier move over time in that very little has happened" on people addressing their retirement shortcomings, he says. People who had little or no money saved or pension plans to fall back on have remained confident about their retirement prospects, he adds.

"When I drilled down to look at what groups of individuals had lower confidence levels between 2010 and 2011, the good news is that they were the people who should never have been confident in the first place," VanDerhei says. "The confidence didn't change among people who are empirically on track."

Ideally, people in retirement dire straits will now get it in gear and do something to help improve their lot. "Hopefully, there's a two-step process to correcting this," VanDerhei says. "The first is to realize you've got a problem, the second is to do something about it. They're not yet at step two because they haven't increased their savings."

Given the predicament, it's not surprising the survey found 36% of respondents expect to retire after age 65, a number that has gradually increased from the 11% registered in the initial survey in 1991. In that vein, 74% said they plan to work in retirement, which is far more than the 23% of retirees surveyed who actually worked for pay in retirement.

Portfolios-To-Go May Be Wall Street's Next Thundering Herd
(Bloomberg News) The next thundering herd on Wall Street may be the ranks of low-cost portfolio managers such as MarketRiders and Folio Investing, which cater to self-directed investors. Sites that sell prepackaged portfolios have attracted more than $3 billion in assets over the last three years as more investors leave their full-service brokers.  "Individual investors have started to realize they can actually do some things as self-directed investors reasonably well if they're given a platform that allows them to invest more intelligently," said Steven Wallman, chief executive officer of Folio Investing, where investors can purchase predesigned and customized index portfolios for $29 a month.

Some of the firms, such as Flat Fee Portfolios, are too new to have any performance history. MarketRiders can't track the actual performance of its customers' accounts, since it doesn't have custody of their assets. Covestor and Wealthfront Inc., which give users access to third-party investors, publish performance history for the managers they work with on their sites.

"Who are the people that are advising me when I'm going to a faceless Web site?" said Chris Walters, head of wealth management for Pasadena, Calif.-based CitizensTrust. He said investors should be concerned by the lack of performance history available from some of the firms.  Traditional brokerages are focusing more on their wealthiest clients in an effort to improve profitability, so the customers leaving these firms tend to be the ones with the smallest accounts, and those investors are potential customers for services such as Flat Fee Portfolios, which began opening accounts in February. Clients with assets of less than $250,000 are offered several predesigned portfolios with an annual review for a fee of $129 a month.  At Hedgeable Inc., investors can choose from among 20 different exchange-traded fund or stock model portfolios. Fees for the service, which began opening accounts through its Web site in December, range from 0.75% to 1.5%.

Prepackaged portfolios from Folio Investing may contain individual stocks, mutual funds or exchange-traded funds.
Covestor, which began managing money in November 2009, tracks the portfolios of about 30,000 users who choose to make their investment actions viewable to others on the site, and users may have their accounts track the trades of about 150 pre-screened managers on the site.  "It's like an open-source hedge fund," said Perry Blacher, chief executive officer of London-based Covestor.

Some of the managers on the Covestor site are professional investment advisors registered with the SEC and some aren't. The managers range from Atlas Capital Advisors, a San Francisco-based registered investment advisor that manages $175 million for high-net-worth investors, to "an ophthalmologist in Wisconsin," Blacher said.  Wealthfront, which started in October 2009, lets users invest as little as $10,000 among 40 different registered investment advisors who normally have account minimums of $1 million. The firm has about $180 million in assets invested through its site.  Wealthfront managers returned an average of 30% from the site's start in October 2009 through February 18, compared with a 27% gain in the Standard & Poor's 500 index. The managers charge average fees of 1.3%.

These sites don't represent a competitive threat to traditional brokerages, said Jim Wiggins, a Morgan Stanley Smith Barney spokesman.

"People don't come to Morgan Stanley Smith Barney for discount trading," he said. "They come for professional money management and to access some of the products and services that are only available through a global investment bank."

UBS Fined $2.5 Million Over Structured Notes
(Bloomberg News)  UBS AG, Switzerland's largest bank, was ordered to pay investors $8.25 million and fined $2.5 million over sales of Lehman Brothers Holdings Inc. structured products, according to the Financial Industry Regulatory Authority.
UBS "effectively misled" some investors when selling the products, the industry-funded regulator's Web site says. The Zurich-based bank was ordered to repay some investors who bought Lehman structured notes after March 2008. The securities, which were called "100% Principal-Protection Notes," became almost worthless when Lehman filed for bankruptcy that September.

"In cases, UBS' financial advisors did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer's credit risk so investors would understand the magnitude of the potential losses," comments Brad Bennett, Finra's chief of enforcement, in a statement.

UBS' brokers sold $1 billion of the Lehman structured products to U.S. clients, spokesman Kris Kagel said in November. The investments, which are debt bundled with derivatives, were called principal-protected notes because they allowed investors to earn money when stocks rose without taking losses when they fell, as long as the issuer stayed solvent.

"The significant majority of UBS' Lehman structured product sales were conducted properly," says Allison Chin-Leong, a UBS spokeswoman. Any losses directly resulted from Lehman's "unprecedented and unexpected" failure, which hurt all bondholders, she says.

UBS has already paid about $14.5 million in settlements or arbitration awards to investors who bought Lehman notes from March to June 2008, according to a document posted on Finra's Web site. Last year, the Securities and Exchange Commission contacted several financial firms to discuss their use of the term principal-protected and whether it is misleading, according to people familiar with the matter who requested anonymity because the inquiry was informal.

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates.

Investors Might Like Annuities More If ...
The gist of a recent survey of financial advisors from Sun Life Financial, a purveyor of annuity and other products, was to gauge investor attitudes toward variable annuities. Among the findings, advisors said more clients who could benefit from these retirement income vehicles would partake if they had lower fees, were easier to understand, clients felt very confident about the issuing company, and if both clients and advisors had better education about these products.

That's a lot of obstacles. Advisors surveyed said the need for lower fees was the top reason (43%) why clients balk at buying annuities, followed by the need for more client education and for greater product simplicity (both 38%). 

"In the past, the insurance industry have made annuities very technical, have used jargon and have made it very difficult for people to understand annuities," says Barbara Hume, Sun Life's assistant vice president of annuity marketing. "They're not as complicated as they're made out to be."

For its part, Hume says Sun Life has given its sales process a makeover with redesigned marketing materials, charts and client statements--along with an eight-minute video--to demystify the annuity world. "We'd like to put more fun into annuities, which nobody has been able to do yet," Hume says.

Hume sees more consumer-friendly times ahead for the annuity space. "I think we'll see the whole industry try to come out with more simplified annuities that make it easier for people to know what they're buying as a base product, and then they can add on different features for their different life stages," she says. "I think that's the wave of the future."

As part of Sun Life's survey of 477 advisors that didn't deal with annuities directly, 92% of respondents said clients alter their retirement income plans after retiring, mainly to avoid running out of money or to meet nondiscretionary costs. A smaller number of clients change their plans because they want more money for discretionary spending.

IRS Renews Focus On Offshore Accounts
The IRS has implemented a new voluntary disclosure program to motivate investors hiding money in offshore accounts to come clean-or else. The program follows a similar effort in 2009 that went down after a whistle-blower said the Swiss bank UBS held billions of dollars for U.S. customers in secret bank accounts.

The U.S. government sued UBS and sought the names of 52,000 American depositors with secret accounts at the bank (4,500 were eventually handed over). The IRS offered amnesty to people who fessed up about their secret accounts and paid back taxes, accrued interest and penalties. Those who didn't-and got caught-paid hefty penalties and in some cases faced criminal prosecution.

According to the IRS, roughly 15,000 people voluntarily disclosed offshore accounts from all over the globe before the program ended in October 2009, bringing in undisclosed yet "significant amounts" of unpaid tax. Now the IRS has rolled out a new voluntary disclosure effort that ends August 31.

"All the major accounting and legal organizations wrote letters to the IRS asking to bring back the program because they [the IRS] would make a lot of money if they did," says Robert McKenzie, a partner in the white-collar criminal defense and tax practice at the Chicago-based firm Arnstein & Lehr. He adds that he has clients who wanted to confess but held back because they didn't know what the terms would be.

Among the terms of the 2011 Offshore Voluntary Disclosure Initiative, McKenzie says participants with at least $75,000 in unreported offshore money pay a penalty of up to 25% of the highest aggregate balance over the past eight years in a foreign bank account or entity. For accounts less than $75,000, the penalty is 12.5% of the highest balance over the same time period. These are stiffer terms than in 2009, and failure to comply could mean criminal prosecution.

The goal, according to Lawrence Brown, a tax litigation attorney in Fort Worth, Texas, is to encourage taxpayers to come forward but not reward those who sat out the prior disclosure program. He says the IRS typically won't prosecute if a person voluntarily discloses their offshore accounts.

The IRS has beefed up efforts to nab undisclosed offshore accounts by hiring more staff for international tax investigations and getting more cooperation from foreign banks that might've helped U.S. citizens hide assets. "There's been a great deal of pressure put on tax haven countries," Mc­Kenzie says, noting that Switzerland and the Cayman Islands are among the countries being more cooperative with the IRS.

"It's still legal for Americans to put money into foreign accounts," McKenzie says, adding that financial advisors have an obligation to remind clients with overseas funds that they have to disclose and pay tax on that income. That includes filing a Foreign Bank and Financial Account Report, or FBAR, for overseas accounts worth more than $10,000 by June 30. Penalties for willful failure to file an FBAR can be the greater of a $100,000 fine or 50% of the total foreign account. There may be other forms to file, and accompanying penalties if they're not.

If the client willfully failed to report the income and the IRS nabs them, the advisor who didn't put his legally defensible advice in writing could get dragged into the case and potentially-depending on the outcome of the case-stand accused of aiding and abetting tax fraud. The penalties include jail time and heavy fines. McKenzie says the IRS has been investigating advisors all over the country since the prior voluntary disclosure program in 2009.