As The Number Of Players Shrinks, Recruiting Intensifies
If the financial advisory business supposedly occupies the sweet spot of the financial services industry, then why is it shrinking? According to a recent report on recruiting from Cerulli Associates, the total number of advisors and brokers dipped 4.25% between 2005 and 2007, to 245,831. The main reasons are simple enough: The existing advisor base is aging, fewer young people are entering the profession and marginal players are finding it difficult to survive. And as the ensuing recruiting challenges play out across the advisory business, it's impacting different channels in different ways.
According to Cerulli, a Boston-based financial services industry research and consulting firm, just 3% of advisors, including brokers, in 2007 were less than 30 years old. The largest demographic group in the advisory space was the 51- to 60-year-old age bracket (38%), followed by the 41- to 50-year-old age group (28%). Ideally, the scores of existing collegiate financial planning programs will fill the pipeline with new recruits to staff the industry's future growth. The Certified Financial Planning Board of Standards has identified 91 active undergraduate programs, 48 graduate programs and three doctorate programs of financial planning.
Cerulli analyst Katharine Wolf says many graduates of financial planning programs have three or four job offers with starting pay in the $50,000 to $60,000 range. Despite that, she says these programs aren't seeing blockbuster growth.
"People don't enter college wanting to be financial planners," Wolf says, adding that many stumble into it during the course of their studies. These programs are generally planning-centric and eschew the traditional sales model to build a book of business that most of today's advisors cut their teeth on. As a result, graduates entering the profession today gravitate toward fee-only firms where they can put their holistic planning skills to work.
But not all advisors are pleased with these recent graduates. Bedda D'Angelo, president of Fiduciary Solutions, a small fee-only firm in Durham, N.C., has found young planners coming out of college just want to serve clients and aren't trained in-nor have much interest in doing--the nitty-gritty chores required to run a practice. "The younger generation finds compliance onerous and abhorrent because they're much less structured than we are," she says.
Wolf says new graduates can thrive in firms with team-based practices where there isn't any sales pressure to build their own book and where there's an infrastructure to train young talent, help them build trust with clients and manage their professional growth. During the past eight years, independent advisory firms-both registered investment advisors and broker-dealers-have gained on the so-called structured channels (wirehouses, banks and insurance companies) in hiring college graduates, now accounting for roughly 40% of that market.
As the supply of advisors contracts and new blood is increasingly attracted to the fee-based model, the competition among broker-dealers of all stripes to recruit existing talent has intensified. Many B-Ds are changing their business models and shelling out big bucks to beef up their practice management services and attract and retain top talent. According to Cerulli, some pay packages have zoomed to unprecedented heights with offers of as much as 260% of one year's gross revenue for elite advisors at wirehouse firms. Top independent reps can expect more subdued bonuses of 10% to 30% of a single year's gross commission.
"Recruiting is very costly," says Peter Griffo, vice president for national recruiting at Cadaret, Grant & Co., an independent broker-dealer in Syracuse, N.Y. What ultimately attracts and retains advisors is the firm's culture, he adds. According to Cerulli, the top reason advisors switch firms is
that they dislike the culture at their current firm and/or see something better at another firm.

Pomering To Run Moss Adams' RIA Unit
Apparently, it's better to be an RIA these days than a consultant to RIAs. Moss Adams LLP, the Seattle-based regional accounting firm that has been a major player in the financial advisor consulting space, is in the process of restructuring its operations.
Rebecca Pomering, the principal who ran its advisor consulting business, is moving over to run Moss Adams' RIA unit, which manages $811 million in assets. The move allows Pomering to spend more time with her family and participate directly in the rapid growth of the advisory business.
The firm also suffered a defection when practice management expert Philip Palaveev announced he was leaving the firm to become president of Fusion Advisor Network and its group of more than 200 advisors. His new job starts June 1. Palaveev, who was a Moss Adams principal and head of the firm's market research team, focused on consulting with investment advisors, broker-dealers and insurance companies. At Fusion, he will remain in Seattle but spearhead the Elmsford, N.Y., company's practice management operations and will oversee efforts to double the size of its registered investment advisor network in five years.
Pomering says the consulting business will definitely "look different going forward than it does today, but it's a great business" and "we hope to see [it] continue in a meaningful and growing way, even if that's in a different environment than we've had in the past." She says Moss Adams is likely to make a further announcement in late May or early June.
Outside observers expect Moss Adams to retain its valuation business for advisors, while restructuring the consulting business. The latter business, which is national in scope, was always a bit of an odd duck within the confines of a large regional accounting firm.
The moves follow the decision in early September 2007 of Mark Tibergien, Moss Adams' original consulting guru, to become chief executive officer at Pershing Advisor Solutions LLC. Managing partner Mark Jaeger is taking over as the chief operating officer of the RIA unit, focusing on overall operations, technology and portfolio management.
Palaveev said it was time for a new challenge. "Consulting is a great job but it's almost like being a sports commentator who's talking about what's going on on the field and what should be happening," he says. "I just wanted to play in the game."
As a Moss Adams consultant, Palaveev says he helped advise Fusion founder Stuart Silverman when he started the company earlier this decade. "Over the years I've consulted with many Fusion advisors and attended every Fusion conference," he says. "It just felt comfortable going there."

Pershing Advisor Solutions Sets Exec Committee
With the recruitment of Jim Dario as managing director of business development, Pershing Advisor Solutions (PAS) continues to fill out its management team. Dario, who was a senior executive in charge of relationship management at Fidelity's RIA unit, will essentially run the sales side of Pershing's RIA business, according to Mark Tibergien, president and CEO of PAS.
"We got lucky with Jim," Tibergien says. "He has a deep understanding of the RIA customers served by Pershing and a proven track record."
Paul Wichman, who had been in charge of business development, moves over to take on a new position as director of customer service. "Our No. 1 priority as a firm is creating a flawless experience for advisors and their clients," Tibergien says.
Karen Novak was promoted to chief operating officer. Controller Gerard Mulligan joins Tibergien, with the five of them forming PAS' executive committee. PAS serves as custodian to about 500 RIAs with about $70 billion in assets, as well as the RIA operations of several hundred brokerages with about $200 billion in assets. Overall, Pershing provides custodial services for about $1 trillion in assets, while its parent, BNY Mellon, services $22 trillion.

A Taxing Affair
If so-so returns on many mutual funds last year and lousy returns on a lot of funds so far this year weren't bad enough, investors might've noticed a nasty little surprise during the recent tax season--larger taxable distributions on their mutual funds.
According to a report by Lipper Inc., buy-and-hold investors of taxable mutual funds paid a record-setting amount of taxes for 2007 estimated at $33.8 billion. That was 42% more than the prior year, and it topped the previous record of $31.3 billion in 2000 during the zenith of the dot-com bubble.
Mutual fund distributions also set a record last year at $581.6 billion, which topped the prior standard of $418.5 billion set in 2006. Part of that is a function of size--the mutual fund industry has become a Goliath, and distributions come with the territory. Another cause is the selling associated with the recent rotation into growth-oriented and large-cap sectors after years of dominance by value-oriented and small- and mid-cap sectors.
As for the rise in taxable distributions for investors, a big factor is that tax-loss carryforwards from the dot-com crash of 2000-2002 have worked their way through the system and can't be counted on anymore to offset taxable gains. And that doesn't bode well for investors in the near term, particularly if substandard returns grip the market and if the Bush tax breaks sunset in 2010 and distributions on equity funds are exposed to higher marginal tax rates (income from taxable bond funds are still taxed at an investor's highest marginal tax rate and not at the 15% rate on qualified dividend income for equity-related income).
"A lower-return environment is when taxes are more important," says Tom Roseen, a senior research analyst at Lipper, the mutual fund research company. "No one cares if you lose 3% or 4% in taxes when you're getting huge returns." He says taxable distributions are by far the biggest performance drag on fixed-income funds.
Roseen says investors should screen funds for after-tax returns rather than just total returns-fund companies have to provide after-tax returns information in their prospectuses. He also suggests lobbying Congress, where a couple of proposed bills hope to level the playing field for buy-and-hold mutual fund investors by making capital gains tax-deferred until they're sold.

Women Face Tougher Retirement Than Men
A woman retiree in the U.S. is far more likely than a man to face economic hardship, or even poverty, says a new study written by Cindy Hounsell, president of the Women's Institute for Secure Retirement (WISER) in Washington, D.C.
The study, The Female Factor 2008: Why Women are at Greater Financial Risk in Retirement, posits that women face unique challenges that could jeopardize the economic security of their retirement years. Among them is that women on average spend fewer years in the work force than men, and earn 77 cents for every $1 earned by men--the median salary for women working full time in 2006 was $32,515 versus $42,261 for men.
African-American women earned a median salary of $27,535 and Hispanic women earned just $22,285.
Only 22% of women over 65 received income from an employer-sponsored retirement plan in 2004 (the year used in the study), compared with 29% of men who received such payments. The median annual benefit for these women was $4,488 annually, less than half of what men received. Similarly, the average Social Security benefit for women is $800 a month, compared with $1,177 for men.
Women typically live five years longer than men, so they have to make their retirement money last longer. The long-term trend isn't particularly encouraging. The study says that a 25-year-old college-educated woman today can expect to make $523,000 less than a 25-year-old college-educated man over a lifetime.

Boomer Retirements Could Go Kaboom
Despite recent studies that paint a rosy picture of how well baby boomers are prepared for retirement, a study from Barclays Global Investors paints a gloomier scenario. Some of the results, which will be published in full in the fall issue of The Journal of Investing, are being released in Barclays' InvestmentInsights.
The authors, who say optimistic conclusions for the retirement health of baby boomers are based on erroneous assumptions, have titled their analysis as a warning-The Future Shock of Retirement. Jonathan Cohen, Barclays Global Investors senior fixed income strategist; Matthew H. Scanlan, head of American institutional business; and Matthew O'Hara, head of securitized credit research, say changes are needed by government, employers and individuals to avert a retirement crisis.
They say errors in some recent studies occur because the researchers assume current costs and benefits will remain stable in the future. Instead, "current benefit levels (for Social Security and Medicare) are unsustainable," the authors say. "Today, 6.9% of federal income taxes go toward the two programs. By 2020, as much as 26.6% of all federal income taxes would be required to sustain current Social Security and Medicare benefits for the greatly expanded retiree population."
Defined contribution (DC) pension plans now outnumber defined benefit (DB) plans, a trend that won't be reversed, and "DC plans typically fail to address longevity and inflation risk." At the same time, pre-retirees are saving less than they were 10 and 20 years ago and less than people in countries such as Germany and Japan save now.
The wealthiest top half of pre-retirees "look reasonably well-prepared for retirement under current conditions, but are highly sensitive to future changes," the trio concludes.

Millionaire Use Of Independent Advisors Grows
Millionaires increasingly are handing the keys over to independent advisors, reports a study by Fidelity Investments. The survey of more than 1,000 households with at least $1 million in investable assets (excluding workplace retirement accounts and real estate) found that 26% of millionaires used the services of independent advisors last year, compared with 22% in 2006. Independent advisors held 71% of investable assets last year versus 56% the prior year.
Millionaires seemed pleased with the service provided by their independent advisors-89% are satisfied to very satisfied with their advisor, and 37% are still working with their first independent advisor. As for clients who no longer work with their first advisor, the main reasons for changing were due to the client relocating or the advisor retiring.
Among the respondents of the second annual Fidelity Millionaire Outlook, the average annual income before taxes was $380,000 and the average household investable assets were $4.3 million.
As a group, millionaires considered themselves to be wealthy when they hit the $2 million mark. But wealth means different things to different folks. On average, millionaires with $10 million or more said they didn't start to feel wealthy until they amassed $6.3 million. Those with less than $10 million said they started to feel wealthy when they reached $1.7 million.