Pershing Makes Inroads With Independent Advisors
Smart investment advisors will triple their assets in the next four years, according to a new report from Pershing Advisor Solutions. Not to be outdone, Pershing itself, which is making a big run at wealth managers, might beat that estimate. The firm grew from $41 billion in advisory assets in 2005 to more than $73 billion at the end of 2007. During the same period, the firm's number of relationships with advisors grew from 385 to 480 firms.

And greater growth is probably on the horizon, thanks in no small part to the firm's recent recruiting coup when it hired longtime star advisor consultant and best-practices guru Mark Tibergien, formerly of Moss Adams, to head its advisor solutions custodian division.

Tibergien admits he has some powerhouse competitors to jostle with for advisors' allegiance and assets, but says he is intent on building a premium service proposition that will make advisors who work with Pershing much more valuable to their clients. And he readily admits he intends to use whatever vendors he needs-including his former firm, Moss Adams-to do it.

The attention that his arrival at Pershing has garnered among advisors in a short time has delighted the veteran advisory wonk. "I have to say the recruiting momentum has surprised and pleased even me," says Tibergien, who has been on the job as a managing director at Pershing since early October. "The number of people who have approached us and are interested in switching from their primary custodian or considering us as a secondary custodian has really grown in the past few months."

Tibergien says that while Pershing is accustomed to dealing with very large money management firms, it is also equipped to work with a wide range of advisory shops. "We mesh with everyone from multi-billion dollar firms to advisors who have $75 million or $100 million, provided they're growth minded."

Pershing hired 180 people during the past three years to prepare for its push into the advisory space. "We believe these human resources will help us fast forward with advisors," says Tibergien. "We've added the capacity to take advantage of the tremendous growth we see coming down the pike. I'm intent on increasing our own capacity, particularly with our conversion team, to help us handle the flow of business and redefine the custodial business.  Obviously the potential for growth in the advisor business excites me."

Tibergien acknowledges that Pershing has some significant competitors, but says he believes the firm is on par with rivals or close to it-especially when it comes to delivering fundamentals.

"If you look at Schwab, which is first to market and largest, they have momentum with larger advisors that comes from size that we can't immediately duplicate," he says. "And TD Ameritrade has done a great job positioning itself in the smaller market, while I think Fidelity has straddled the two. Our challenge is to find our niche so we can develop the optimal characteristics we need to make a difference in the lives of the advisors we serve," Tibergien says.

To do that, Pershing hopes to become a thought leader for the advisory community. In what can be considered a fast start, Tibergien was instrumental in completing Pershing's newly released study: Fast Forward: The Advisor of the Future, written by Moss Adams.

The study found that advisors who are poised for strategic growth can triple their assets by 2012, provided they make the necessary organizational changes such as recruiting new staff, creating and maintaining capacity and fostering a culture that supports strategy.

"I don't intend to replicate Moss Adams, but I will leverage them," Tibergien says of his use of his former longtime firm. "We'll be in alliance with a number of firms like Moss Adams. Our intent is to deal with outside vendors with a great deal of respect."

Schwab Buys Etelligent Consulting
Schwab Performance Technologies (SPT), the portfolio management and accounting solutions subsidiary of The Charles Schwab Corporation, in December agreed to buy back-office outsourcing provider Etelligent Consulting Inc. in a deal that merges two companies that serve the independent registered investment advisor market.

Financial terms weren't disclosed, and the deal is expected to close in the first quarter of 2008. Raleigh, N.C.-based SPT provides interfaces with more than 40 different broker-dealers and makes its portfolio management software available to advisory firms regardless of where they custody assets. Today, more than 3,000 independent RIA firms use SPT's PortfolioCenter, its flagship portfolio data management solutions tool.

Overland Park, Kan.-based Etelligent provides back-office outsourcing services to more than 100 independent investment advisory firms.

Etelligent uses PortfolioCenter as a key part of its business model, allowing advisors to outsource major administrative responsibilities in their back office such as portfolio data management and performance reporting.
"We expect that this acquisition will enable us to help advisors achieve even greater scale across their businesses, as well as offer them greater flexibility in how they work with us," said Dan Skiles, Schwab Institutional's vice president of technology.

Regional Benchmarks For Advisory Practices
The average revenue generated by a financial planning firm in the United States can be nearly three times as much in a major metropolitan area compared with a smaller rural area, according to data compiled by the Financial Planning Association that highlights regional differences in the financial planning industry.

For example, practice revenue generated by firms in the New York City metropolitan area-including northern New Jersey and Connecticut-is as much as $800,000, compared with revenues of $300,000 in rural markets in the northeastern United States.

This is just one of the regional differences in practice profitability and growth found in the first FPA Scorecard, a joint effort by the FPA and the financial services consulting firm McLagan Partners, designed to help participating planners compare their practices with others in their specific geographic area.

The scorecard showed the net effective payout, meaning the practice profit margin before the owners are paid, ranges from 68% in New York City to as low as 45% in the Dallas-Fort Worth area. Compensation rates and overhead costs also impact practices differently in various regions. In the Virginia-North Carolina corridor, high effective payout rates are achieved despite moderate productivity levels because of low employee compensation costs.

Conversely, Southern California, Washington, D.C., and the San Francisco area have lower net payout rates primarily because of high overhead costs, the scorecard reveals. But Washington, D.C., and San Francisco may offset that by offering more opportunity for practice growth than other areas.

A Load Of Bull
Brokers should add insight to the mutual fund world, but a new study shows that owners of load-carrying mutual funds bought and sold through brokers operating for commissions significantly underperform no-load funds because of poor timing decisions and added fees.

The study should serve as "a wake-up call for investors," says Jeff Buckner, founder of Plancorp in Chesterfield, Mo., an advisory firm for high-net-worth individuals. "Investors in load funds, who are paying for broker assistance, actually have substantially poorer timing performance than investors in no-load funds. Load funds underperform by as much as three times."
The study's sponsor, Zero Alpha Group, a network of independent investment advisory firms-such as Buckner's-with nearly $5 billion in assets under management, is hardly a disinterested observer. Many members of Zero Alpha are acolytes of Dimensional Fund Advisors and are aggressive marketers of both passive investment management and fee-only financial planning. The survey itself was conducted by Fund Democracy, a mutual fund shareholder advocacy organization.

"Mutual fund shareholder performance is worse, sometimes much worse, than that of the fund as a whole, and there is a serious flaw in the mutual fund distribution system," says Mercer Bullard, founder of Fund Democracy and co-author of the study. "If you get advice from a broker, you should have less risk. But the gap between investor performance and fund performance as a whole is wider when you rely on a broker. The SEC should require brokers to act on behalf of the investors, but the SEC continues to undermine this."

Among all load funds, Class B investors suffer from the poorest cash-flow timing, underperforming a buy-and-hold strategy by 2.28% annually, compared with annual underperformance of 0.78% for investors in pure no-load funds, the survey showed.
"Investors in all three principal load-carrying retail share classes significantly underperform when compared to a buy-and-hold strategy," concludes the report. "These findings question the value being added by investment professionals who sell mutual fund shares through conventional distribution arrangements."

"A fee-only advisor is assembling a portfolio for a client with no incentive to put them in one fund or another. But brokers have pressure from sales managers that are hard to overcome," says Thomas Muldowney, managing director at Savant Capital Management in Rockford, Ill., a Zero Alpha Group member.

Brokers are often chasing the latest market trend, the study authors say. "Greed and fear lead to poor (buying and selling) timing," says Bullard. "Investors should not get swayed by immediate past fund performance."

SEC Halts Global Pyramid Scheme Aimed At Hispanic Community
The Securities and Exchange Commission (SEC) has halted a massive pyramid scheme involving roughly 70,000 people in 64 countries that entailed the purported sale of English- and Spanish-language tutorials that preyed on Hispanic communities in Orlando, Fla., and Puerto Rico.

The SEC charged Robert Lane at Wealth Pools International Inc. and Recruit For Wealth Inc. with the fraudulent offer and sale of unregistered securities in the form of "associate" memberships in an enterprise called Wealth Pools. The fraudulent offering began in 2005 and the defendants claimed to raise more than $132 million in 2007 alone, according to the SEC's complaint.

Wealth Pools billed itself as a multilevel marketing company whose main product, an English- and Spanish-language tutorial DVD called Talk-N-Tutor, was sold through a network of sales associates around the world, the SEC alleges in its complaint. The DVD is, in reality, a front for Wealth Pools' true product-an investment in one or more "pools" that offer investors an opportunity to receive passive income through the efforts of others to recruit new investors, according to the complaint. The SEC further alleges that investors do not profit from the sale of DVDs to consumers, but from the recruitment of new investors termed "associates."

The SEC's complaint also charges the defendants with luring investors through "opportunity meetings" held at Wealth Pools' headquarters in Orlando, Fla.; in Puerto Rico; and live on the Internet. The defendants enticed investors to purchase thousands of DVDs by falsely promising them that they would earn income for life with no further effort, according to the SEC's complaint. The SEC further charged the defendants with failing to disclose that Wealth Pools is a pyramid scheme utterly dependent on an ever-increasing number of new investors to pay existing ones, and is destined to collapse.

Fund Boards Improved, But Still Need Improvement
A study by two mutual fund organizations maintains that mutual funds are substantially more independent and responsive to shareholder needs, but others say that more needs to be done to improve fund governance.

The study, Overview of Fund Governance Practices, 1994-2006, says good governing practices have voluntarily been adopted by mutual fund boards without the need for additional SEC regulations to protect shareholders. The study is a collaboration between the mutual funds association Investment Company Institute and the Independent Directors Council, the organization of independent directors.

The ICI/IDC study says that independent directors represented about three-quarters of all directors' seats at the vast majority of boards (88%) as of year-end 2006. That's a big improvement from the 52% of boards that could make that claim in 2000. And 56% reported having independent chairs by the end of 2006.

Laura Lutton, senior mutual fund analyst for Morningstar, stresses the need for more independent chairs since these are the people who set the direction of the funds. "The investor experience has improved and the fund-to-fee ratio expense has declined," she says. "That is one of the most important roles that boards have on behalf of shareholders, but clearly there are places where some have still fallen short." For example, she wants boards to be more aggressive in removing advisors when a fund underperforms over the long term.

Dr. Raj Aggarwal, dean of the College of Business Administration at the University of Akron and a board member for the Ancora Family of Mutual Funds, says the issue of independent fund boards pales versus other concerns, such as decreasing funds' focus on quarterly results in favor of long-term results, not chasing market trends, and decreasing the fee ratios as the size of the funds increases.

People Underestimate College Costs
Parents of college-bound children who work with a financial advisor are slightly more prepared to pay for the growing expense of higher education than are those parents who do not rely on the advice of a planner, but there is a lot of room for enlightening parents about the reality of college costs and how they can effectively pay for it, according to a study by Fidelity Investments dubbed the College Savings Indicator.

The Fidelity survey tabulates the current college savings status and attitudes of 2,200 families with children 18 years of age or younger who anticipate attending some level of higher education. The cost is anticipated to be an average of $100,000 for tuition, fees, room and board, and is growing at 5% a year, Fidelity calculates.

Of those surveyed, 58% have started saving for college expenses, but half did not start until their child was 4 years old, raising the monthly savings needed from $245 to $420. Only 21% of the families work with an advisor, and only half of those working with a financial advisor use a tax-advantaged savings plan such as a 529 account, says Martha B. Willis, executive vice president at Fidelity Investments Institutional Services. Further, only 26% of all parents who are saving for college use a 529 account.

"This is a real opportunity for advisors to be more proactive in promoting these tax advantaged accounts and an opportunity to build their business," Willis says.

"If the government is going to give you a tax break, you should take advantage of it," advises Carolyn Clancy, executive vice president at Fidelity Personal and Workplace Investing. "Some 21% of the people saving for college did not even know about 529 accounts and 42% said they prefer saving in a general savings account that can be tapped for other needs."