Breakaway Brokers Boost RIA Ranks
The number of registered reps transitioning to
investment advisory practices-so-called "breakaway brokers"-are
boosting the growth of the RIA field, according to industry officials.
Experts who have reviewed the filings say the majority of new entrants
into the business come from two sources: reps opting to become
independent advisors and hedge funds forced to register by new
regulations.
Some observers expect the number of new RIA
registrations to accelerate next year, perhaps even doubling. The
Securities and Exchange Commission, meanwhile, is projecting a healthy
boost in the ranks of registered investment advisors this year.
The number of SEC-registered investment advisory firms grew from 8,535
as of October 2004 to 9,022 in October 2005, according to SEC spokesman
John Heine. The agency projects that the number will grow to 10,000 in
October 2006, he adds.
Those numbers do not represent the total universe of
RIA firms. The SEC figures do not include advisors with assets of less
than $25 million who register with their respective states.
"The increase in new RIA practices over the past few
years has become unprecedented, with many of these new entrants
establishing wealth management practices," says Scott Dell'Orfano,
executive vice president of Fidelity Registered Investment Advisor
Group, which saw 200 newly formed firms sign up for its custodial
services last year.
Dell 'Orfano thinks that number could double to 400
in 2006. "Based on our experience with new entrants, much of this
movement is, among other things, driven by a desire to manage and build
equity in their own business," he says.
Competition over breakaway brokers is heating up
among firm that provide custodial and clearing services to RIAs,
including the big three: Charles Schwab, Fidelity and TD Ameritrade.
Moreover, traditional firms like Merrill Lynch, which has its own RIA
services custodial unit, are strengthening their competitive offerings,
partially to retain assets but also to participate in the growth of
this business.
In March, Fidelity Investments introduced a tool
that helps reps plan the transition to an RIA practice. The online
guide is available at ria.fidelity.com and includes "a check-list and
timeline for addressing virtually all of the critical areas associated
with establishing a new RIA practice," according to Fidelity.
The tool provides help on areas ranging from
financial projections and registration to compliance and opening
accounts, according to Fidelity. Also, Schwab has announced it is
reinvigorating its strategy for capturing the business of registered
representatives interested in transitioning-either totally or
partially-to a fee-based RIA practice.
TD Ameritrade also has what it describes as an
end-to-end transition program tailored to the needs of breakaway
brokers, including dedicated sales specialists to guide reps through
the transition. Part of the recruitment strategies have hinged on the
ability to give reps a way to conduct "hybrid" dually registered
practices that retain some commission-based work.
Fidelity offers a tool that allows reps to estimate
revenues and expenses based on their expected assets under management.
CFP Board Opens Annual Meeting To Public
This summer CFP Board of Standards will hold an
annual meeting in Santa Monica, Calif., and Los Angeles that will be
unlike any meeting it has held in the past. The meeting is open to the
general public and features such keynote speakers as Queen Noor of
Jordan, Pfizer CEO Hank McKinnell, former United States Senator Bob
Kerrey and NASD Vice Chairman Mary Schapiro.
According to some sources, the organization is
expecting 4,000 to 6,000 people to attend. CFP Board's Web site is
urging consumers with questions about mortgages, credit cards,
retirement savings and other topics to attend and meet with experts
"who have the gold standard of personal financial planning
certification" and "will not charge you anything" or "attempt to sell
you anything." The meeting also features special tracks for educators
who run and teach financial planning programs and for firms that employ
CFP licensees. Some CFP practitioners were surprised that no sessions
appear to be targeted for continuing education.
However, CFP Board CEO Sarah Teslik has indicated
she wants to expand the organization's reach, and the list of other
speakers reflects her interest in financial literacy. They include
financial literacy advocate Louis Barajas, Elizabeth Donati and Robert
Duvall and Fund Democracy President Mercer Bullard.
New Planning Tools Unveiled
Financial Profiles Inc. recently released its much-anticipated
Universal Desktop Application (UDA), a new platform with its planning
and needs analysis tools. Meanwhile, SunGard has upgraded
PlanningStation, its browser-based financial modeling and planning
solution for financial advisors.
Financial Profile's UDA is a hybrid platform that delivers the
capabilities of desktop and Web-based applications in a single package.
Both Profiles+ Forecaster and Profiles+ Professional are available on
the UDA platform offering advisors enhanced client functionality and
case management. At the same time, the UDA system facilitates
oversight, business reporting and analysis at the corporate level.
The UDA enables advisors to work in both online and offline modes
within the same user interface. For more information visit
www.profiles.com/ products_solutions/enterprise/uda.php.
The new version of SunGard's PlanningStation includes improved scenario
and estate planning capabilities, a new forms repository, support for
the Roth 401(k) and a new asset allocation module.
Enhanced scenario planning helps advisors to create multiple client
scenarios and profiles for further analysis and comparison on
hypothetical financial plans. With enhanced estate planning
capabilities advisor can now model inter vivos gifting, credit shelter
trusts, transfers of existing life insurance policies to irrevocable
life insurance trusts (ILITs). PlanningStation now helps advisors
produce comparisons for Roth 401(k) decisions.
Visit www.sungard. com/planningstation for more information.
Ticking Time Bomb: Home Title Problems
The surge in home refinancing in recent years has led to a new problem
for today's home sellers and refinancing customers: a logjam of
clerical problems.
Title searchers and others in the real estate industry say that the
refinancing explosion led to overworked lawyers, lenders and filing
clerks making an increased number of errors that are still embedded in
the marketplace.
Some title searchers say they've seen an increase in cases in which
sellers or refinancing applicants have been unable to prove clear title
because of missing or erroneously filed documents. "It will take many
years to work the problems out of the system," says Stan Kaplan of
Commonwealth Title in Sudbury, Mass. Kaplan says at least a third of
the 40 to 50 titles he researches a month for home sales and refinances
suffer from problems."You cannot sell or refinance unless your title is
clean," he says.
Experts say home sellers and refinancing applicants should be diligent
in researching their titles early in the mortgage application process.
Managers Think Tide Turning For Large-Caps
Whether it is a case of bullishness or bullheadedness, money managers
say they remain optimistic about large-cap growth, according to a new
survey. The results of Russell Investment Group's quarterly money
manager poll found that 70% of managers surveyed are bullish about the
prospects of the large-cap growth sector for the remainder of the year.
The results evidently reflect a feeling among managers that a shift in
market momentum is on the horizon. Those sentiments come at a time when
the Russell 1000 Growth and Russell Top 2000 Growth indexes were the
lowest-performing segments of the Russell index family during the first
two months of the year.
"To understand the managers' allegiance to what have been out-of-favor
market segments, we have to consider some historical perspective," says
Randy Lert, chief portfolio strategist with the Russell Investment
Group. "Over the past decade the Russell 2000 Value Index has
outperformed the Russell 2000 Growth Index significantly outside of
historical norms, and investment managers believe that such a level of
disparity between market segments may not be sustainable."
Managers had an overall positive attitude toward the market, with only
8% saying the market is overvalued. A majority, 67%, feel the market is
fairly valued and 24% feel it is undervalued.
After large-cap growth, managers were most bullish about mid-cap
growth, which drew a positive outlook from 63% of managers, and
non-U.S. equities, which got a bullish rating from 57% of managers.
More than 100 managers participated in the survey, according to Russell Investment Group.
Criminals Using Brokers For Money Laundering
Criminals are laundering money in annuities and life insurance policies
through independent brokers, according to a U.S. government study.
The report, U.S. Money Laundering Threat Assessment, said the insurance
industry generates more than one-half trillion dollars in premiums and
contract revenue. However, the primary business of life/health
insurance companies has been gravitating heavily to the underwriting of
annuities.
"The expansion from insurance policies to investment products has
substantially increased the money laundering threat posed by the
insurance industry," it says.
"Money launderers exploit the fact that that insurance products are
often sold by independent brokers and agents who do not work directly
for insurance companies. These intermediaries may have little know-how
or incentive to screen clients or question payment methods. In some
cases, agents take advantage of their intermediary status to collude
with criminals against insurers to perpetrate fraud or facilitate money
laundering."
Examples of insurance money laundering:
Rogues buy deferred annuity or life insurance policies that can be
cashed out. This makes it easy to put dirty money in and take clean
money out in the form of an insurance company check.
Rogues borrow against a life insurance policy that has been funded with dirty money.
Rogues can invest money in an immediate or
deferred annuity and receive a clean income stream from the investment.
The report notes that insurance companies are required to have
anti-money laundering procedures for nongroup insurance, including
annuities and other products with cash value or investment features.
Nevertheless, it's tough for companies to ensure that policies and
procedures are followed when they use agents who are not their
employees.
Plus, it is difficult for both advisors and insurance companies to
conduct due diligence when the annuity or insurance buyer may not be
the beneficiary. It's even harder with multiple parties involved in a
single contract.
The report cites complications due to the fact that the insurance
industry is state regulated. State regulation, it says, focuses more
heavily on safety and soundness than anti-money laundering. Only 38
states, it says, have anti-money laundering statutes; 21 have currency
reporting requirements and only one state has a suspicious activity
reporting requirement.
The report also indicates that investment advisors are exempt from the Bank Secrecy Act regulations.
In one instance, says the report, federal law enforcement agencies
discovered Colombian drug cartels were using drug proceeds to buy life
insurance policies, which were subsequently liquidated with the cash
value transferred to an offshore jurisdiction. The cash value of a life
insurance policy can be less than the amount invested due to surrender
charges. But the fees are considered a cost by the criminals, it says.
In another instance, drug proceeds were wired to the insurer based on a
broker's instructions. Once the money was received, the broker
allocated assets in a variable annuity. The broker also received cash
from the client in Colombia and credited the client's policy with funds
from the broker's business and operating account or from commission
checks. Later the money was withdrawn from the annuity.
The report reflected work by 16 government agencies.