FPA Dismissive Of SEC Action On Broker Exemption
As the expiration draws near for a court-ordered stay in the Financial Planning Association's lawsuit to force the agency to clarify its long-pending exemption for brokers who offer fee-based accounts, the Securities and Exchange Commission has offered for public comment the same proposal-almost verbatim-it already offered twice in the past five years.
"Basically they've punted," says Duane Thompson, the FPA's director of advocacy, who maintained that the association will press forward with its lawsuit if the final rule the SEC must approve by April is not satisfactory. April is the deadline the court gave the SEC to take final action on its pending rule when the agency won a temporary stay of the FPA's lawsuit in August.
FPA President Jim Barnash says: "I feel personally that it was less than valiant of the commissioners to accept another comment period instead of taking action." In addition to pressing forward with its lawsuit if the SEC fails to act responsibly, Barnash says the FPA is considering directing its 28,000 members to enlist their clients in a grassroots letter-writing campaign to Congress and the SEC.
In its temporary rule proposal, the SEC once again asserts the broker exemption for brokers who offer advice and fee-based services on the grounds that such advice is "solely incidental" to their brokerage business. The agency also says brokers' activity does not trigger "special compensation" rules, despite the fact that they're charging fees for their accounts.
The only change in the proposal would require broker-dealers to disclose that the accounts are brokerage accounts and that "as a consequence, the customer's rights and the firm's duties and obligations to the customer, including the scope of the firm's fiduciary obligations, may differ." They would also be required to include a phone number investors with questions can call.
"The rule is pretty much identical to before," says Nancy Morris, an attorney fellow with the SEC's Division of Investment Management. "We're putting everything on the table and saying, 'In light of what we've heard since 1999, what kind of interpretation and assistance can we give so that people have a clearer understanding of what a brokerage account is?'"
Wall Street and the Securities Industry Association (SIA), which have lobbied heavily to maintain the broker exemption, are pleased. "We are supporting the rule definitively because it allows our members to continue to offer extremely popular fee-based broker-dealer accounts without being subject to unnecessary and duplicative regulation under the Adviser's Act," says SIA spokesman Dan Michaelis.
The proposal, S7-25-99, is available on the SEC's Web site (www.sec.gov). The comment period closes February 7.

Brokerages, Funds Await New Regulations
Mutual fund complexes and brokerages firms are bracing themselves for a raft of new regulations that are likely to be issued by the Securities and Exchange Commission and the National Association of Securities Dealers later this year. Privately, executives in both businesses are worried that the new rules may increase the cost of compliance dramatically, and that the major brunt of these additional costs will be passed to small investors, who are often the least efficient to service.
One likely development that is expected to be announced in the first quarter is an industry-wide settlement fining broker-dealers for charging mutual fund companies shelf-space fees and requiring revenue sharing for positioning on their platforms. "We already know how much the fine is," says an executive at a major independent brokerage.
But exactly what the new rules will be regarding marketing support payments from product sponsors, a major source of revenue for many brokerages, is still unclear. A total elimination of these payments would completely rearrange the economics of the brokerage business and probably force a reduction in payouts to reps.
Another issue in the regulatory crosshairs is the use of B shares, which substitute a contingent deferred sales charge for an upfront sales load, and C shares, which charge investors an annual level load in the 1% range for several years. Rumors have circulated in recent weeks that the new regulations could significantly restrict sales of both share classes. Apparently, regulators have grown increasingly concerned that investors did not receive proper disclosure about the deferred nature of B-share sales loads and also are concerned some brokers are selling C shares without providing the ongoing service they were expected to when that share class was created.
If the regulations are as draconian as some expect, they could encourage many brokers to consider converting to registered investment advisors.

Pape Says CFP Board Will Focus On Accountability
The new chairman of the Certified Financial Planner Board of Standards' board of governors says that "accountability" will be the theme of the board's mission this year. It's a theme, he says, that's well suited for the issues facing both clients and advisors.
"I think it resonates with what's going on in the corporate world, and I do think it's something people can relate to today," says Glenn Pape, a CFP and CPA with 23 years' experience. "If you look at the world we're in today, with a tremendous amount of debt, proposed changes to Social Security, shifting responsibility for health care and retirement to employees ... the importance of financial planning is so paramount. People really need accountable and ethical financial planners."
Pape, whose term started January 1, is a partner at Pacific Northwest and Pacific Southwest Private Clients Services and Employee Financial Services Groups in San Jose, Calif., both part of Ernst & Young LLP's Human Capital practice. He has previously chaired the CFP Board's board of appeals and audit committee.
Pape says that high on the CFP Board's agenda for 2005 is completing revisions to its ethics code and reviewing its disciplinary procedures. He expects a proposed ethics code to be presented for public comment after the board's May meeting.
Pape says these are two aspects of the CFP Board of Standards that give value to the CFP mark-something he says the board will continue to try to convey to the public in 2005. "When I look at what distinguishes the CFP, it's the practice and standards we've submitted ourselves and our members to. To me this stands out as something unique in the profession."
A graduate of the University of Chicago, Pape has a bachelor's degree in the classics and an M.B.A.; he is also a graduate of DePaul College of Law.

Advisors: Clients Are Lowering Expectations

    Investors seem to be taking off the rose-colored glasses that were so popular in the go-go 1990s, according to a recent survey.
The survey by AdvisorBenchmarking Inc. found that 62% of advisors surveyed say their clients' expectations for market performance are realistic.
Only 33% say their clients have unrealistically high expectations and 4% of advisors feel their clients have unrealistically low expectations.
"Performance expectations are hard to change, and the 1990s bull market set them sky-high," says Maya Ivanova, research analyst for AdvisorBenchmarking. "Now, good communication between advisors and clients is more important than ever."
Advisors aren't overly excited about the earnings potential in upcoming years, either, according to the survey. Fifty percent of advisors surveyed expect a long-term, secular bull market with cyclical rallies and dips, while 31% foresee a directionless market with many peaks and valleys. On the extremes, 6% expect a sustained bull market and 13% predict a secular bear market with cyclical rallies and dips.
The federal budget deficit is the top economic concern of 27% of advisors, while 20% cited under-funding of Social Security. Other top economic concerns were energy prices, 14%, and the trade deficit, 10%.
The survey consisted of telephone and online responses from 1,023 registered investment advisors.

Morningstar Buys VARDS
Morningstar has added a variable annuity research unit to its operations. The Chicago-based information provider announced it has purchased, for $9 million in cash, Finetre Corporation's Variable Annuity Research and Data Service (VARDS) unit, which provides research and data on variable annuity products. The transaction was completed January 7.
VARDS was founded in 1988. Finetre purchased the unit in 2003 as part of its acquisition of Wachovia Corporation's Info-One Unit.
Morningstar and Finetre say they plan to integrate the VARDS Web-based research products with Finetre's AnnuityNet platform, which provides brokerage firms with online transaction processing and compliance oversight capabilities for annuities and other insurance and investment vehicles. The planned integration will provide brokers with real-time information, according to the companies.
"We have been collecting variable annuity data since the early 1990s and we significantly enhanced our variable annuity data in 2003," says Joe Mansueto, chairman and CEO of Morningstar. "The VARDS acquisition further strengthens Morningstar's investment database and compliments our business well."

Advanced Equities Buying Wells Fargo's First Allied Brokerage
Wells Fargo & Company has reached an agreement to sell its First Allied Securities brokerage unit to Advanced Equities Financial Corp.
The deal is expected to close in the first quarter, the two parties say. Terms of the sale were not released.
Advanced Equities says it will become one of the 20 largest independent brokerage firms in the U.S. after the purchase, with 600 financial advisors providing retail brokerage services from more than 200 branch offices. Upon completion of the deal, First Allied will be operated as a separate broker-dealer within Advanced Equities Financial's Financial Services Group, which includes independent broker-dealer Round Hill Securities Inc.
First Allied is a full-service brokerage and investment services company whose retail business is conducted through independent financial consultants. It currently has 92 team members and 465 contracted representatives operating in all 50 states.
"Unlike financial advisors employed in a traditional branch office environment, independent-contractor financial consultants are self-employed and bear the cost of operating their own independent business," says Keith Daubenspeck, chairman of Advanced Equities. "For these independent-contractor financial advisors, affiliation with us will provide the benefit of Advanced Equities and service capabilities as they continue to enjoy the autonomy and self-sufficiency they prefer."
Wells Fargo decided to sell First Allied and FAS Holdings Inc. because the brokerage unit did not provide enough cross-selling opportunities, says Roger Ochs, head of Wells Fargo subsidiary H.D. Vest.
"Investments are a core product, major growth business and key strategic initiative for Wells Fargo. However, after an extensive review, we've decided that First Allied did not offer the best opportunity to cross-sell other products and services to our customers so we could satisfy all their needs."

Why Wealth Management Is Booming
Having a lot of money may make the bills go away, but not the worries. That was the sentiment expressed in a new survey by PNC Advisors that suggests no matter how much wealth people accumulate, they'll still find something to worry about.
Findings in the survey help explain why the wealth management business is booming. The survey found, for instance, that just 46% of affluent people surveyed say they have become happier as they have accumulated more money.
A third of respondents say that having enough money is a constant worry in their life, and 29% of those with more than $10 million in investable assets feel that having a lot of money brings more problems than it solves.
"Wealthy families are finding that money can bring unexpected challenges along with the obvious rewards, and each generation faces a new set of issues and dynamics," says Joan Gulley, chief executive officer of PNC Advisors.
Among the worries that come with wealth are concerns about the children getting spoiled, having enough money to take care of their parents and deciding upon charities.
Yet for all the worrying about the future, many affluent families aren't preparing themselves for it.
The survey found that 37% of those surveyed do not have a will or trust, or a trustee or administrator for their estate. Of those without such protections, 56% say it's because of procrastination.

Bank Buys Advisory Firm

Compass Bancshares Inc. announced it has purchased Stavis, Margolis Advisory Services Inc. of Houston, an investment advisory firm with about $500 million in assets under management.
The acquired company will operate as a subsidiary of Compass Bancshares, and will retain its senior management team led by CEO Deborah McCully Stavis and President Mary Banic Margolis.
Terms of the deal were not disclosed.
"This acquisition is consistent with our business plan aimed at increasing fee-based revenues," D. Paul Jones Jr., Compass chairman and CEO, says in a prepared statement. He adds that it will also help the bank expand its presence in Southwestern markets.
Compass Bancshares, with $28 billion in assets, operates 376 full-service banking offices, with most in Texas, Alabama, Arizona and Florida.

Even The IRS Thinks The Tax Code Is Too Complicated
The Internal Revenue Service is tangled in red tape and an overly complex tax code, according to a new report.
The report to Congress by the Taxpayer Advocate Service-an independent watchdog unit within the IRS-states that one result of the overly complex workings of the IRS is that many taxpayers are missing out on deserved benefits.
"Without a doubt, the largest source of compliance burdens for taxpayers and the IRS alike is the overwhelming complexity of the tax code, and, without a doubt, the only meaningful way to reduce these compliance burdens is to simplify the tax code enormously," writes Taxpayer Advocate Nina E. Olson.
The Taxpayer Advocate says some of the specific problems within the IRS are the Alternative Minimum Tax (AMT), the earned income tax credit and the large number of provisions designed to encourage taxpayers to save for education and for retirement.
Among the recommendations in the report are that the IRS improve its examination process for the earned income tax credit, after research that indicates many taxpayers are being wrongly denied tax credit claims.
The report also calls for the elimination of the AMT, simplification of certain tax burdens on small businesses, the streamlining and simplifying of tax incentives for education savings and spending, and simpler incentives for retirement savings.
"The need for AMT relief looms like the proverbial elephant in the room, and for that reason we once again, for the third year, recommend its repeal," writes Olson.