Optional Fiduciary Stance Challenged
The CFP Board of Standards has released proposed rules changes that would allow certificants to choose whether or not they should act as fiduciaries for their clients. Rather than settling issues, however, the proposal seems to have reignited a long-simmering debate over how advisor behavior should be regulated.
Two leading trade associations-the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA)-have voiced opposition to the proposal, arguing all advisors should be held to a fiduciary standard. The FPA said some of the changes are "troubling" and "raise long-term questions about the future direction of the financial planning profession."
Among other changes in the revised rules, certificants or their employers for the first time would be required to have a binding written agreement with their clients that spells out the nature of their relationship. The agreement, under the revisions, must state that the advisor will act as a "fiduciary" for a client or specify another type of legal standard that will govern the relationship. The rules stop short of requiring all certificants to act as fiduciaries. Instead, it sets the fiduciary relationship as the "default" arrangement that applies if no other structure is stated.
In the revised rules, the CFP Board defines fiduciary as acting in "good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and in a manner he or she reasonably believes to be in the best interests of the client." The revised rules also expand the information certificants must disclose to potential clients.
In another change, the CFP Board took its practice standards-step-by-step requirements on how planners should serve clients-and incorporated portions in its Rules of Conduct.
Advisors who were involved in writing the original practice standards expressed dismay at the changes. "It made me disappointed and sad to see they had gutted the practice standards," says Rick Adkins, a former CFP Board chair and CEO of The Arkansas Financial Group in Little Rock, Ark. "There is no longer a separate document that addresses the practice standards using the six-step process in the manner that currently exists."
CFP Board Chair Barton Francis, however, says most of the Practice Standards are covered in the Rules of Conduct and the revisions will lead to an overall strengthening of standards. "We are cleaning up things, simplifying things and raising standards," Francis says.
Harold Evensky, also a former CFP Board chair and chairman of Evensky & Katz Wealth Management in Coral Gables, Fla., says that based on his reading of the draft document the practice standards essentially were removed. "It wasn't streamlined-it was gutted," he says.
The changes are part of an overhaul to the organization's Code of Ethics and Professional Responsibility and Financial Planning practice standards that have been in the works since last year. The board has been under pressure during that time to enforce a fiduciary standard upon holders of the CFP mark while at the same time oversee a diverse membership of investment advisors, brokers, insurance agents and others.
Among the groups calling for a fiduciary standard have been the FPA and NAPFA, both of which voiced their opposition to the "opt out" provision at the CFP Board's annual meeting in Santa Monica, Calif., in early August. FPA President Daniel Moisand said in an interview he's concerned that giving CFP certificants the ability to opt out of a fiduciary standard could undermine the integrity of the CFP mark. "It seems to me that it creates two standards under one designation," he says.
At the CFP Board's first annual meeting in Santa Monica, Calif., in early August, FPA Chairman James P. Barnash remarked, "You don't see lawyers being able to opt out of their fiduciary duty, nor would you think doctors would be able or want to waive their Hippocratic oath to patients."
The CFP Board defended its decision not to impose a fiduciary standard on all certificants, saying the standard isn't applicable in all situations. "The standards should apply to all people with a right to use CFP Board's trademarks, and many of those people have jobs where it would not make sense to call them fiduciaries," the CFP Board states. "For example, a CFP certificant providing employee financial education or other teaching services is not engaged in the type of activity where a fiduciary standard is appropriate."
The CFP Board says it will accept public comments on the draft changes up until September 25 and will consider the public input at its October 24 meeting.

Retired Widow Wins Fiduciary Case Against Advisor
Letting a winning hand ride may be thrilling in Las Vegas, but it's a costly proposition in the investment advisory world, where the failure to move a retired widow's portfolio gains into more conservative investments and protect her principal recently cost Atlanta advisor Joseph Rollins a whopping $445,000 in damages.
With more than 75 million baby boomers moving toward retirement, the case is a telling one about what will be expected of advisors when it comes to preserving and protecting retirees' portfolios. "This is a cautionary tale for both investors and advisors," says Edward S. Feig, the attorney who won the case for Mary LaFontaine Parmenter, a retired widow in her sixties. Parmenter hired Rollins in early 1999 to invest her $729,856 portfolio to provide her with $6,000 a month in income. Using an aggressive, all-stock investment strategy, Rollins took the value of the retiree's portfolio to $1.1 million just one year later-only to see it tumble to a low of $342,105 by May 2002.
Rollins recently lost on appeal in the U.S. 4th District Court. "I have no comment and I'm positive Mr. Rollins is not interested in commenting either," his attorney Frank W. Virgin, a partner in Atlanta-based Slaughter & Virgin, told FA.
"The tale that should be told to advisors is that just because the market is going up, you can't let gains ride," Feig says. "If the objective of the client is capital preservation, you need to take corrective action to ensure that preservation takes place, both of principal and gains." It was critically important to Parmenter that her money be invested in order to fund her cash flow needs and so she could hand something off to her children, Feig says.
The court found that an advisor's advertised or stated investment strategy (Rollins advertised that he would keep investors fully invested at all times) cannot excuse them from knowing their clients' financial and income needs, in this case Parmenter's need for $6,000 in monthly income. The court also found the fact that Rollins' use of a portfolio with a singularly aggressive investment strategy for all clients did not absolve him from fiduciary duty when it came to protecting and advancing individual client needs.
"The real shame here is the dismal interest (2.5%) my client's judgment has been accruing," says Feig, who prevailed on all six counts against Rollins, including breach of fiduciary duty, negligence, constructive fraud, breach of contract and violation of the Investment Advisors Act of 1940.

Investors Still Expecting High Returns
Individual investors apparently have not yet bought into the "moderate return" forecasts for today's stock market, according to a new survey.
A survey of 600 investors by JPMorgan Asset Management found that individuals have higher investment return expectations than institutional investors.
While the average institutional retirement plan projects an annualized return of 8.2%, many individual investors continue to expect that they will ride into retirement on the back of double-digit returns, according to the survey.
Investors with between $500,000 and $1 million in investable assets had the highest expectations, planning for annualized returns of 13.1%, according to the survey. Those in the lower bracket, between $250,000 and $500,000 in assets, projected returns of 11.4%. Those with investable assets of more than $1 million expected returns of 9.4%.
Among the surveys other findings:
People between the ages of 50 and 54 were most fearful about not having enough money to last through retirement.
Seventy-five percent of women are anxious about retirement, compared with 52% of men.
In describing their top fears about retirement, 57% cited poor market performance, 53% cited inflation or an increase in tax rates and 44% said they were worried about healthcare costs.

Investors Want Choice
One-stop shopping for all financial service needs remains a pie-in-the-sky concept that has yet to be embraced by affluent investors, according to a new survey.
The SpectremGroup survey found that the affluent, while in favor of the concept of one-stop shopping, feel that it is not yet practical to limit themselves to one financial services company. The survey found, for example, that 29% of affluent investors are not interested in one-stop shopping because they don't feel enough comprehensive services are currently available at one company.
Meanwhile, 43% don't believe that one company can develop the expertise to serve all their financial needs, according to the survey.
The survey found that about two thirds of affluent investors use more than one company-with the majority using two or three companies. The report notes that these figures indicate that investors could potentially be open to the idea of a one-stop shop.
Overall, about 38% of investors said they had no interest in using one financial services firm for all their financial needs, and 32% said they did have interest. About 18% were neutral on the subject.
Investors also were clearly reluctant to disrupt their current accounts to go to a one-stop shopping provider. About 78% said they were unlikely or very unlikely to leave their primary financial firm for a one-stop shopping company.
    The survey was based on information collected from 500 investors who each have $500,000 or more in investable assets.

Advisors Optimistic About Growth Prospects
Financial advisors are extremely optimistic about their firms' growth prospects over the next five years. That's the finding of the latest Rydex Advisor Bench-marking study, which raises the question of whether some advisors' expectations about their growth prospects are as unrealistic as some clients' expectations about equity market returns.
Almost one-third, or 32%, of the advisors surveyed expect their firms to grow at a rate of more than 30% over the next five years. Another 22% think their firms will grow at a rate of between 21% and 30% over that period.
Where is the lion's share of this growth going to come from? According to the Rydex survey, 43% of the responding advisors says the key driver will referrals from existing clients, while 31% say the most important part of their growth engine will be increased marketing and networking.
The classic rearview mirror analogy may explain the reasoning behind advisors' sunny outlook. The average firm in the survey saw their revenues rise by 22% in 2005 to $1.32 million. So it's no surprise that 80% of the advisors in the survey believe they have a better business today than they did a year ago.
Government overregulation continues to be the biggest perceived threat to 65% of the advisors surveyed by Rydex, followed by managing client expectations, which practically doubled to 56% from 29% a year ago. Other threats include the need to work on and in their business simultaneously (57%) and the importance of size to compete effectively (43%).
When it comes to allocating expenses, compensation costs for both principals and staff rose over the last from 40% to 42% and 20% to 22%, respectively. Other expenses on the rise were conferences, travel and entertainment (from 4% to 7%) and marketing and advertising (from 4% to 6%). Legal and compliance costs remained constant at 4%.

Morningstar Adds Portfolio Accounting
Morningstar Inc.'s Advisor Workstation Office Edition, its Web-based investment planning platform for independent financial advisors, now offers portfolio accounting and reporting capabilities at no additional charge.
Features of note include the ability to import data from many sources, portfolio tracking, portfolio performance reporting and accounting functionality. In addition, the Advisor Workstation Office Portfolio Accounting System (PAS) provides 18 new customizable reports; extensive choice of securities, transaction types and expense and fee transactions; and automatic, daily client account importing capabilities.
Statements generated within PAS can be produced separately or merged with other information, such as Morningstar Portfolio X-Rays and asset allocation summaries, to provide customized reports addressing specific client needs.
For further information, or to request a free trial, visit http://corporate.morningstar.com/US/asp/subject.aspx?xmlfile=95.xml or call
(800) 886-1749.

Fidelity And SunGard Integrate Brokerage, Trade Automation
Fidelity Investments, the world's largest mutual fund company, and SunGard, a provider of software and processing solutions for financial service firms, have announced an exclusive agreement to integrate Fidelity Registered Investment Advisor Group's brokerage services with the transaction processing capabilities of SunGard Transaction Network (STN).
Through the alliance, roughly 600 STN customers representing assets of more than $100 billion will have access to an enhanced set of services through a single connection, enabling them to better serve the needs of their clients. The offering will also be available to Fidelity's 170 bank trust and third-party administrators (TPAs).
While the majority of RIAs will not feel an immediate impact from the deal, those who offer TPA services, as well as those who work with a TPA doing business with Fidelity and STN, should benefit. Longer term, the alliance may be felt indirectly by other Fidelity and SunGard customers because both firms will make a "substantial investment" in the integrated platform.