Schwab's Private-Client Pilot Program Growing Quickly

Schwab's six private-client offices are fully staffed and "doing very well," but the giant brokerage has not made the decision yet whether to expand the program, a spokesman maintains. Schwab launched the high-end planning service in May with three offices and added three more in August. Atlanta; Boca Raton, Fla.; Houston; and the Los Angeles area each have one office, and the San Francisco area has two, bringing the total number of Schwab and affiliated offices to 443.

The program has a client minimum of $1 million and is still being run on an invitation-only basis, says Schwab spokesman Lance Berg. "Things are moving quickly, but this is still a pilot currently under review, and we haven't made the decision yet [whether to make it a permanent Schwab offering]," Berg says. He declines to specify how many investors are using the private-client offices or how many investment professionals the company has hired to staff the program, but he says a significant number are CFP licensees.

Other sources put total staff in the six offices at 45. Berg acknowledges the salary-only job has attracted brokers and planners from firms such as Morgan Stanley, Salomon Smith Barney and Wells Fargo-all of which have announced recent layoffs. Earlier this year, Schwab's leading rival as a direct marketer, Fidelity Investments, launched a similar unit.

Although Schwab says the private-client service is designed for "validators" and "light delegators"-investors who still want to implement recommendations themselves-its offerings includes investment management, portfolio design and hedging stra-tegies, as well as tax, estate and insurance services. Fees for the service start at 75 basis points, with an additional maximum of 175 basis points for those who want separate-account management.

How investment advisors who custody assets at Schwab-especially the 400 advisors who pay for client referrals from its AdvisorSource program-will react if the firm puts competing planners in more of its 443 offices remains to be seen. For now, the mood seems to be one of watchful concern. "I'm disappointed that Schwab feels the need to go directly to consumers instead of using their financial advisor network," says Donna Skeels Cygan, a planner in Albuquerque, N.M., who uses Schwab and sat on one of its advisory boards. "I do, however, think that the services I provide are broader and deeper than anything Schwab can offer."

AdvisorSource referred 320 clients with assets averaging $6 million to Schwab's private-banking arm, U.S. Trust, in the third quarter, Schwab says. So, which clients are getting referred to independent advisors who custody assets at Schwab? Says Berg: "The decision is based on client responses to a number of questions. There is no financial incentive to refer clients one way or another."

Some advisory firms understand that Schwab's retail arm, faced with a dramatic decline in online trading, has to react to a changing business environment. But they had hoped Schwab would try to leverage and strengthen its relationship with advisors to boost its business.

"The folks at Schwab Institutional feel our pain," says Greg Sullivan, CEO of Sullivan Bruyette Speros & Blayney in McLean, Va. "The top guns in their retail unit have legitimate concerns but think they have to look like Merrill Lynch."

Sullivan thinks Schwab's obsession with Merrill is a mistake. "What got Schwab where they are is innovative and creative solutions to retail investors' problems," he says. Just because Schwab's next move isn't an easy one doesn't mean it has to be an imitator, he adds. Sullivan's firm has no plans to leave Schwab but is experimenting with other service providers.

First Allied Wins Selling-Away Case

First Allied Securities of San Diego recently defended itself successfully against a $2.1 million claim brought by 13 investors who accused one of its reps of "selling away," or selling securities that were not approved by the firm.

The investors alleged the firm did not properly supervise a former First Allied Pennsylvania rep, who sold them securities from a Philadelphia technology company that ran into financial woes and was shut down by regulators because of securities violations. First Allied was successful in showing the firm never had approved the securities and did not know some of the investors. But since the former First Allied rep declared bankruptcy, the firm was left as sole respondent to defend against the $2.1 million claim. After nine hearings, an arbitration panel of the National Association of Securities Dealers denied the charges in their entirety, though First Allied was held liable for $36,000 in arbitration fees.

"We had hundreds and hundreds of pages of detailed compliance information that showed the broker was supervised and was actively hiding something from the firm," says John Bersin, a Pennsylvania attorney who represented First Allied. "My read of the law is that it requires a showing that there were red flags, and in the absence of red flags, I think the broker-dealer should be excluded from liability."

How do you demonstrate careful supervision? Do unannounced field audits, Bersin says. "They show active oversight. I'm wary of remote types of audits done via the computer and through worksheets prepared by a broker prior to an audit," the attorney says.

Although no one can stop a broker intent on fraud and theft, Bersin maintains, a proactive compliance strategy may detect wrongdoing. He suggests check-up calls to active clients to ensure that they're informed and satisfied, and he advises that account statements contain language asking clients to call headquarters if their holdings don't match those on their statements.

Creating a paper trail that shows the broker-dealer is enlightened about rules and regulations and goes through proper channels to inform its reps also can be a central part of a successful defense. Two years in a row, the firm sent its brokers NASD notices regarding prohibitions on selling away and required them to sign and return statements saying they were not offering unapproved products or services.

A firm's quick and ethical response when wrongdoing is uncovered also can play in its favor. First Allied discovered the alleged selling away and sent letters to all of the rep's clients explaining the situation. The firm went to mediation to settle the case, but the 13 investors rejected the offer, Bersin says. "Still, we were able to come in and show we were on the up and up and care about our clients. I think it went a long way toward positively swaying the arbitration panel." Bersin currently is associate general counsel with Josephthal & Co, which formerly owned First Allied.

FPA Offers Annual Meeting Sessions On The Internet

The Financial Planning Association's annual meeting has been exported to the Internet, after being canceled following the September 11 terrorist attacks.

Virtual Success Forum 2001 is an online version of 20 educational sessions that were planned for the annual meeting, which was to be held September 13-16 in San Diego.

The sessions, each a little more than an hour and a half, run through December 14. Registration costs $49 per session, with multiple-session discounts available.

In addition to logging on to the sessions via the Internet, participants can use a telephone to access audio versions. Participants may ask questions of speakers during the presentations and join group discussions afterward.

The schedule of sessions and other program details are available at the FPA's Web site, Interested advisors may register at the site or by calling (800) 756-8280.

The CFP Board of Standards has approved 15 of the sessions as two-credit courses, according to the FPA. "Members who were counting on Success Forum for CFP continuing-education credits (will get) the ability to fulfill their requirement," says FPA President Guy Cumbie.

Terrorist Attack Victims Respond To Advisor Efforts

As emergency workers continue to dig through the smoldering wreckage of the World Trade Center, volunteer advisors are helping victims and their families cope with the financial devastation caused by the September 11 terrorist attacks.

Through hot lines and at walk-in help centers, volunteer CPAs and financial advisors have helped hundreds since the attacks on the trade center and at the Pentagon, officials say.

The number of people seeking assistance has increased, notes David Cho, volunteer coordinator with the New York State Society of CPAs. "Come October, more and more people started coming in for help," he says. "Back in September, they were still trying to get through the day to day. They had more immediate problems at the time."

About 250 society members have signed on as volunteers since the attack, with many of them staffing a help desk at the Bank of New York building at 110 Maiden Lane in New York. The society also has a hot line, 1-800-NYS-SCPA, and more than 100 people have sought help either through the hot line or the walk-in center, Cho says.

Much of the work has been assisting small-business owners with completing paperwork needed for federal Small Business Administration loans, he says.

"We are dealing with situations where they have the documentation and don't understand what's required, and also with companies and individuals whose documents were destroyed," he says.

Society volunteers also are donating temporary office space to displaced business owners, Cho says.

The Financial Planning Association, meanwhile, has set up a national support center for victims. Victims who call the center at (800) 647-6340 are referred to volunteer FPA members-about 200 in the New York metropolitan area and 60 in the Washington area, says FPA Associate Director Marv Tuttle. Another 140 members from other parts of the country also have volunteered, he says.

Calls to the center have picked up since the FPA spent more than $100,000 on two full-page ads in The New York Times and The Washington Post on October 24, he says. As of November 5, 125 people had contacted the center seeking help, with most of the calls made since the newspaper ads ran, he says.

Volunteers are helping with a variety of financial matters, including estate issues, Tuttle says.

"We're certainly seeing some folks who have lost a family member," he says. Callers also include people who have been unable to earn income because they were injured or lost a job as a result of the terrorist attacks.

Helping victims and their families repair the financial damage from the attacks will be a lengthy process, volunteer organizers say. "We'll be here as long as we're needed or until they kick us out," says Cho.

Likewise, the FPA continues to get volunteers and hasn't contemplated when the work will be done, Tuttle says. "Our intent is to be available for the duration, whatever that might be," he says.

More Parents Aware 529 Plans Are College-Saving Tool

Parents increasingly are looking to 529 plans when it comes to saving for college costs, according to a recent survey.

The survey found that 37% of 500 parents were aware of the state-sponsored education plans-up from 24% a year ago.

"We and other companies who are managing similar programs are certainly trying to get the word out," says Doug Lockwood, vice president of shareholder education at American Century, which commissioned the study.

Lockwood says there are a couple reasons for the marketing push. One is that people aren't as familiar with 529 plans as they are with other college-saving options, such as Education IRAs. The other hurdle is 529 plans can be complex.

But people who are aware of them appreciate their tax benefits, Lockwood says.

Among the study's other findings:

Twenty-two percent have consulted with a financial advisor about a 529 savings plan or something similar.

People are more pessimistic about their ability to save for their children's college educations. Only about half believe they will meet their goals, compared with 57% last year.

Underestimating college costs seems to be a common mistake. Thirty-eight percent expect one year of college to cost less than $10,000, yet the College Board projects the average four-year bill for sending an in-state resident to a public college is $48,800 to $56,500. The tab for private colleges ranges from $107,500 to $124,000.

About 75% who expect their children to pursue postsecondary education are saving or investing for that purpose, but 30% of them have saved less than $5,000.

Just under half, 44%, of parents currently saving for college costs indicated 529 plans would motivate them to save more.