FRONTLINE NEWS

FPA Seeking Advisors For NFL Players

The National Football League Players Association is going on a recruitment drive-for talented financial advisors.

Fed up with seeing NFL players ripped off by con artists, the union recently started a program that screens and registers advisors for its 1,800 members. "What led to it is, over the past three years, 78 players have been defrauded of over $42 million," says program director Kenneth Ballen. "We're not talking about bad investments. It ran the gamut from various kinds of Ponzi schemes to real estate fraud."

In some cases, NFL players lost millions of dollars after unwittingly hiring so-called advisors with criminal records.

Football players and other professional athletes, observers say, could use the protection. They make ripe targets for rogue advisors because they're young, inexperienced with financial matters and often land multimillion-dollar contracts right out of college.

The union's members share in a payroll of about $2.5 billion. The union so far has received 150 applications, but that may be only the beginning.

The Financial Planning Association, which provided advice to the NFLPA when it started planning the program a year ago, says 1,000 of its members have expressed interest in applying.

Duane Thompson, the FPA's director of government relations, says players unions in other sports may follow the example of the NFLPA and start programs of their own. "It's the first players association to look at positively addressing what may be a problem for all professional athletes," he says.

Applicants have to meet a tough set of requirements, starting with a $1,000 initial fee and the completion of a 17-page application. The application process includes a thorough screening of any criminal or disciplinary actions, Ballen says.

Among the eligibility requirements are a bachelor's degree, three years work experience and either graduate training or certain professional designations or certifications.

Those who make the cut then are registered by the union and free to solicit business with NFL players. To remain registered, advisors pay an annual $500 fee and must abide by a 51-page book of rules. Advisors, among other things, are required to give players quarterly statements detailing investments and how the advisor has been compensated.

Of course, not all advisors are likely to be interested in the program. A poll conducted among advisors in the late 1990s found that pro athletes ranked among the least-desired clients. People who become sudden millionaires in their early twenties often have a sense of invincibility that can make them inclined to ignore advice.

Clients would have a clear right to ask for detailed information about an advisor's compensation under proposed disclosure-rule changes released by the Certified Financial Planner Board of Standards.

The Board is accepting public comment on the changes until July 31. Barring anything drastic, they could be implemented as early as January 1, 2003, board officials say.

The proposals have been controversial. Late last year and early this year, critics have contended the changes would not go far enough in protecting the interests of clients-particularly in light of the fiduciary issues raised by the Enron collapse.

Much of the debate has focused on a change to rule 402 of the Board's Code of Ethics and Professional Responsibility. The rule, as it stands now, requires advisors to "disclose conflict(s) of interest and source(s) of compensation" before entering into a relationship with clients.

Under the proposal, the rule would include a subsection that says advisors must "inform the client or prospective client of his/her right to ask at any time for information about the compensation of the CFP Board designee."

Some critics feel this addition has shifted the burden of disclosure responsibility from the advisor to the client. Among the staunchest critics has been the National Association of Personal Financial Advisors, which contends the rule changes fall short of full disclosure by advisors.

A copy of the proposal is available at the board's Web site, www.cfp-board.org.

Despite the repercussions of the Enron disaster, many benefits managers still disagree with attempts to restrict or regulate the amount of company stock in employee 401(k) plans, according to a recent survey.

In a separate survey, meanwhile, Enron appears to have made investors more cautious about investing heavily in one company. The survey of benefits managers was conducted by the Employee Benefit Research Institute (EBRI) in late January, in the wake of the Enron collapse. EBRI sent out surveys to 3,346 members of the International Society of Certified Employee Benefit Specialists on Jan.uary 15, and about 900 were returned.

At Enron, according to the report, 57.73% of 401(k) plan assets were invested in company stock. Such heavy reliance on Enron stock proved disastrous for employees as the company stock fell in value by 98.8% in 2001.

The fallout of Enron's bankruptcy has led to a series of Congressional hearings and proposed legislation that would limit employee 401(k) investments in company stock. But Enron or no Enron, many respondents to the EBRI survey appear to disagree with such restrictions.

When asked, for example, if the government should limit employees' ability to put 401(k) investments into company stock, 63% said no, 32% said yes and 5% did not know. The survey also asked if 401(k) plan sponsors should be allowed to restrict the sale of company stock they contribute to employee 401(k) plans. While a majority, 63%, disagreed, there were 29% who agreed with such restrictions.

"That finding was surprising to us," Jack VanDerhei, an EBRI fellow who authored the report, told Dow Jones News Service. "Even with all that's happened, there's still a decent level of support out there" for employers' right not to restrict the sale of company stock.

The survey also found that only 14% of those companies having a company stock investment option in their 401(k) plans limited the amount or percentage of company stocks that employees can hold. Yet there seemed to be overwhelming support for voluntary diversification. Ninety-three percent agreed that plan sponsors that offer company stock as an investment option should advise their employees to diversify. But when asked if employees should be required to diversify if they are overinvested in company stock, only 40% agreed.

The nationwide survey of investors was commissioned by Eaton Vance Corp., and was conducted between January 17 and 22 with people who have invested in both qualified and nonqualified retirement plans.

Among the findings were that 87% of investors agreed that it is too risky to have a large percentage of their personal assets invested in the stock of any single company.

Forty one percent said their views about the risks of investing heavily in a single company stock have changed for the worse in the past year. And 18% said they have greater exposure to a single stock than they consider prudent. "The survey response indicates that attitudes about single-stock risk are in the process of changing," says Thomas E. Faust Jr., chief investment officer of Eaton Vance Management.

Has the financial services business moved from an era of accumulation to one of preservation? A recent study released by Charles Schwab suggests that this is indeed the case, and advisors had better be thinking about more than stock and mutual fund picking if they hope to win over affluent clients.

"Affluent households are interested in more than simply investment performance," says Myra Rothfeld, senior vice president of Schwab Institutional Marketing. "They are looking for a broader array of services to grow, protect and ultimately transfer their wealth in the most efficient manner."

Schwab's annual study of affluent investors, conducted by the Spectrem Group, says the reason for the emphasis on preservation is obvious: Affluent investors have been losing money during the past two years.

After an explosion of wealth during the bull market of the 1990s, the study found, the total value of domestic U.S. investable assets for all U.S. households declined from $18.6 trillion to $18.1 trillion from June 2000 to June 2001. The so-called affluent market itself shrunk by 28%, going from 13.3 million households to 9.6 million. And total investable assets held by affluent investors went from $13.9 trillion to $10.9 trillion-a decline of 21.6%.

Yet despite the losses, the study concludes affluent investors are growing more desperate for professional financial advice. Households with a primary advisor, for example, increased from 60% in 1999 to 65% in 2001.

The number of wealthy investors who felt they "need very little advice when making investment decisions" dropped from 53% during the market peak of 1999 to 32% last year. And 23% of wealthy households say they are consulting with their advisor more frequently to diversify their portfolios.

The FDIC fears that the failure of Hamilton Bank in Miami, which had $1.3 billion in assets, could result in the largest amount of uninsured deposits in history. The agency said it was looking at a maximum of $106 million in uninsured deposits at that bank, which was closed by the Office of the Comptroller of the Currency on January 11.

About $29 million was confirmed uninsured. The FDIC was seeking further documentation on the remaining $77 million. Prior to Hamilton Bank's failure, the largest amount of uninsured deposits in a bank failure was $65 million-resulting from the failure of Superior Bank, Hinsdale, Ill., in July 2001.

Why are an increasing number of bank depositors finding their money is not fully covered by FDIC insurance? FDIC spokesman David Barr says that in 1991, Congress required the FDIC to tighten certain procedures, putting more uninsured depositors at risk in bank failures. He also cites the influx of living-trust agreements as a chief source of depositor confusion over insurance coverage.

One common way for your client to increase FDIC coverage at a bank beyond the FDIC's limit of $100,000 per person is to have the account set up "in trust for" your client's named beneficiaries.

This action can expand FDIC coverage from $100,000 per person to $100,000 per named beneficiary. So if your client names three children as beneficiaries, the account actually may qualify for up to $300,000 worth of FDIC coverage.

The problem: The FDIC warns that most living-trust agreements void this additional FDIC coverage. Once there's a living trust, the FDIC must check the living-trust agreement for any "conditions." If it finds any, the added FDIC insurance coverage is void. And nearly all living-trust agreements have conditions. One of the most common conditions is a clause that says the whole trust agreement is subject to being overruled by a separate will.

"This really became an issue in July 2001, with the Superior Bank failure," Barr said. "There were a lot of (living-trust) clauses that had negative impact for depositors. This (Hamilton Bank) is the second failure where we've seen a good number of living trusts."

The FDIC is finding other issues that could result in uninsured money.

Depositors seeking extra FDIC insurance coverage are setting up accounts "in trust for" nieces and nephews. Under FDIC insurance rules, only a spouse, child, grandchild, parent or sibling may be named. Nieces, nephews, in-laws and friends do not qualify for added insurance.

Another reason: The failure to periodically review accounts and restructure them with an eye to FDIC insurance. Say a client has a joint account with his or her spouse containing $150,000.

Under the FDIC joint account rules, the account would have qualified for up to $200,000 of coverage-$100,000 per person. If your client's spouse dies, and the account is not restructured within six months after the death, the FDIC only will provide coverage of $100,000 for the same account.

Barr suggests that if you have any questions about how much FDIC coverage your client truly has at a bank, call (877) ASK-FDIC, or visit its Web site at www.fdic.gov.

Even if the bank gave your client misinformation about FDIC insurance and you have written documentation, Barr says, that won't change any FDIC rules. He warns that financial advisors who misinform clients about FDIC insurance coverage may be at risk. A class-action lawsuit is pending in state circuit court in Chicago, charging that employees of Superior Bank misled depositors about FDIC insurance coverage.

Other issues to consider if an FDIC-insured bank fails:

Once a bank fails, CD contracts are broken. Thus, clients may withdraw funds from a CD without penalty.

If another bank acquires a failed bank branch, it could pay lower rates on deposit accounts and change account fee structures.

Expect the FDIC to seek documentation from your clients of trust agreements.

Depositors are given 30 days to empty a safe deposit box at a failed bank branch that is not acquired. If the box is not cleaned out by then, the FDIC drills the boxes, empties the contents, holds them aside and tries to contact owners.