Financial Services Overhaul Getting Closer
December should be a busy month for those involved with overhauling the U.S. financial services industry. In November, committees in the U.S. House of Representatives and the Senate passed separate reform bills with far-reaching implications that run the gamut from the role of the Federal Reserve to the application of the fiduciary standard among financial advisors. The bills will be debated in both chambers this month, and there are hopes of getting a compromise bill to President Obama sometime soon.

The House Financial Services Committee passed a bill proposing to strengthen the Securities and Exchange Commission by doubling its authorized funding over five years and providing new enforcement powers. The bill would authorize the SEC to collect user fees on all SEC-registered investment advisors to pay for the entire cost of its inspection program, and would enable the SEC to ban mandatory arbitration clauses in customer contracts. It would also raise the threshold that separates SEC- and state-registered investment advisory firms from $25 million in assets to $100 million.

In addition, the bill calls for establishing a harmonized fiduciary duty standard of care for both investment advisors and broker-dealers who provide investment advice, a standard that would put clients' interests first. But various trade groups representing investment advisors, who are governed by the fiduciary standard that's embedded in the Investment Adviser Act of 1940, are concerned that wording in the legislation could enable brokers who sell only proprietary products or a limited range of products to meet their fiduciary obligations by getting "consent or acknowledgement" from the customer. Although the fiduciary standard allows for the sale of such products, these groups fear that in some cases they could be sold under the fiduciary banner even if they aren't in the client's best interest.

"This could lead to a weakening of the fiduciary standard," says Dan Barry, director of government relations at the Financial Planning Association.

The House bill also contains an amendment that could give the Financial Industry Regulatory Authority (FINRA) authority to regulate the RIA businesses of dually registered advisory firms and advisors or firms associated with brokerages. But a spokesman for the House Financial Services Committee says that Chairman Barney Frank (D-Mass.) will offer an amendment to strike the FINRA-related amendment when the bill goes to a full House vote in early December.

Not everyone favors that. "I'm in the camp that believes that FINRA is probably the one organization that can oversee all of this activity if given the budget to beef up its number of examiners," says Russ Diachok, president and chief executive of Geneos Wealth Management, a broker-dealer in Centennial, Colo. "I'm aware that's not a popular opinion."

The Senate Banking Committee's far-reaching reform package would also boost the SEC's authority and resources, while streamlining its oversight responsibility to make it more efficient. Specifically, it would make the SEC self-funded through fees it already collects via securities transactions. It also raises the dividing line between SEC- and state-registered investment advisory firms to $100 million.

The Senate bill would also excise the broker-dealer exclusion to the Investment Advisor Act that exempts brokers from registering as advisors so long as the advice they give clients is incidental to selling products. "What that means is if a broker meets all of the test of an advisor--i.e., compensated for rendering advice regarding securities--they'd be subject to all of the regulatory standards as investment advisors and would be governed by an overarching fiduciary duty," says David Tittsworth, executive director of the Investment Adviser Association.

McCann Making Mark At UBS
(Dow Jones) UBS is beginning to untangle a strategic direction for its U.S. wealth management unit, now that a new leader is in place. Appointed in October, former Merrill Lynch brokerage head Robert McCann has shown a threefold strategy: stop throwing buckets of money at new recruits; focus on retention; and stake a claim somewhere between mid-size firms and the biggest wirehouses. His challenges are to quickly stanch client-money outflows and put a shine back on UBS reputation for financial advice, tarnished by the Swiss banking scandal. He also must combat persistent rumors--ones that he and other executives deny--that the parent company may sell or spin off the U.S. wealth management unit. Over the past year, the other major brokerages in the U.S. merged with big banks or each other in a hurried effort to regain stability. UBS has been relatively idle, leaving many industry analysts wondering what direction UBS Wealth Management U.S. will take. "We all know [McCann] has to have a plan or he wouldn't have taken the job," says Alois Pirker, wealth management research director at Aite Group. "It's just a matter of how that plan unfolds and whether it is successful."

McCann's new management team includes six current members of the executive committee and four new hires, all colleagues of McCann's at Merrill Lynch: Bob Mulholland, Brian Hull, John Brown and Paula Polito.

The team will shape a strategy in light of its competitors' directions, which are already somewhat clear: Morgan Stanley Smith Barney is going for the stand-alone model, while Wells Fargo Advisors and Merrill Lynch have jumped on the universal banking bandwagon. All three have the captive broker setup, rather than the independent model, where Raymond James Financial Inc.  has made a name for itself. McCann insists there is no plan to spin off the division. Nor will there be any major acquisitions, and he will instead work with what he's got. And he has said he has no desire for the kind of scale that Morgan Stanley Smith Barney, Merrill Lynch and Wells Fargo Advisors boast, each with about 15,000 to 18,000 brokers. Big isn't necessarily best, he said.   UBS' recent advisor count was about 7,300. It's possible to be successful at that level, analysts say, but it will require the brokerage to make up for its lack in quantity with better quality. It will also mean they have to rebuild a good reputation, which Pirker says usually takes about three years. The group is already pruning the tree to make its brokerage force a bit on the higher end.

McCann says his priority is retention of top talent, which would help stop outflows. While brokers are notoriously focused on financial compensation, he says retention isn't all about money. "Really it's a much richer stew than that," McCann says. He plans to maintain an open architecture environment, pay brokers competitively, make UBS a place where they are proud to be, and ensure that clients trust them. Brokers are now awaiting the unveiling of a compensation plan for 2010, which typically is done this time of year. In November, UBS announced it will spread broker payouts on managed accounts over an entire quarter, rather than giving advisors their commissions in one lump sum at the quarter's start. The company says this will "reduce wide fluctuations in monthly compensation payouts," but it has irritated some brokers.   

Copyright © 2009 Dow Jones & Company Inc.

Main Street Securities B-D Now With National Planning
National Planning Corp. last month took over the broker-dealer operations of Main Street Securities LLC., and Main Street's 65 registered reps and more than $750 million in assets are now part of NPC.

No cash transactions were involved and no assets were transferred. For Main Street, the arrangement is seen as the best way to grow its business. Bobb Meckenstock, Main Street's president, says the Hays, Kan.-based firm didn't have the resources to do the massive recruiting needed to reach its desired size. "Our management team earlier this year decided we needed a partner in whatever form that takes," he says.

Meckenstock says Main Street will keep its corporate entity and its brand name as it operates as a branch office under NPC, a broker-dealer based in Santa Monica, Calif. Meckenstock remains president of the corporation, and is supervising manager of the branch office.

Small B-Ds Could Face Large Audit Costs
An amendment to a broad U.S. House bill aimed at financial services reform could ratchet up the audit costs for small independent broker-dealers, says the National Association of Independent Broker-Dealers (NAIBD).

The amendment proposed by Rep. Paul Kanjorski (D-Pa.) would require accounting firms that audit broker-dealers to be regulated by the Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation created by the Sarbanes-Oxley Act of 2002 to oversee auditors of public companies. That includes audits of large, publicly traded broker-dealers. 

If passed into law, this measure would also include auditors of smaller, non-public broker-dealers. The problem, says the NAIBD, is the proposal doesn't differentiate between introducing (non-custodial) B-Ds who use outside clearing firms and don't touch client money, and larger custodial firms who directly handle client money.

Auditing standards for the latter are more complex and costly, says NAIBD Chairman Steve Distante, CEO of Vanderbilt Securities in Melville, N.Y. Applying PCAOB oversight across the board "could take out a group of independent B-Ds who can no longer afford to be in business," Distante says.

"Realistically, it'll at least double or triple the [auditing] fees," says Stephen Sussman, president and CEO of Regulatory Compliance, a broker-dealer compliance firm in Londonderry, N.H.

Sussman says that probably would be more a function of supply and demand rather than complexity of services offered. "It'll cause a lot of auditors to get out of the business of auditing broker-dealers because they'll have to be reviewed by the PCAOB rather than their own peers," Sussman says. "That's a stricter degree of peer review, and a lot of small accounting firms won't want to go through that." The result: Auditors could charge higher fees.

Kanjorski's amendment, originally introduced to amend Sarbanes-Oxley regulation, was rolled into the Investor Protection Act that was passed by the House Financial Services Committee last month and is slated for debate on the full House floor in December.

Debate Over Investment Advice Continues
(Dow Jones) The protracted debate over who can provide investment advice to retirement plan participants won't get resolved until well into next year.   The U.S. Department of Labor has once again pushed back the effective date of rules meant to clarify this contentious issue until May 17. The department said it needs more time to analyze questions of law and policy. The effective date has been subject to repeated delays that reflect the procedural and substantive challenges of crafting regulations that give workers access to unbiased investment advice.

Phyllis Borzi, assistant secretary of the department's Employee Benefits Security Administration, has said that investment advice regulations issued early this year by the outgoing Bush administration "went too far in permitting investment advice not specifically contemplated" in the Pension Protection Act of 2006. She said the department wanted rules that were more closely in line with the act. Borzi didn't make clear exactly which, if any, specific provisions troubled her department. But attorneys expect the revised regulations to eliminate or scale back the most controversial elements of the Bush administration's proposal. Among those were rules that allowed the compensation of employers and affiliates to vary with the investment options a retirement plan participant chose, as long as the compensation of the individual providing the advice didn't vary.

Attorneys expect the reworked rules to require that the compensation of both advice providers and their employers be level. If also applied to affiliates, a level-compensation requirement would restrict the ability of financial advisors affiliated with investment companies whose funds are offered in a retirement plan to advise participants in that plan. Such a restriction would likely benefit independent financial advisors who don't sell investment products.

Copyright © 2009 Dow Jones & Company Inc.

Despite Downturn, Advisory Firms Are Beefing Up
Most financial advisors will remember 2008 (and early 2009) as the year from hell when plunging markets hammered assets under management and increased demand for client service meant rising workloads and expenses. But according to a recent study, a number of firms planned to take advantage of the upheaval by adding staff to capture market share when the good times return.
The report by FA Insight, a financial services industry consulting firm in Tacoma, Wash., led by former consultants at Moss Adams, found that 8% of firms planned to cut staff this year following last year's turmoil versus 29% who said they intended to increase staffing. Adding staff is one thing, but FA Insight finds that the most successful advisory firms leverage that by making formal training programs available to their employees and are more likely to offer them across every position group.

The most successful firms are also more apt to give raises, despite an uncertain economy. While most respondents said they didn't anticipate adjusting salaries this year, of those who did, more said they'd be increasing rather than decreasing them.

Raising salaries is no small order in the wake of 2008, when average overhead costs as a share of revenue jumped to 45%, or roughly five to ten percentage points higher than the typical firm experiences in more normal times. "Whether in good times or bad, human capital must be viewed as an asset that is constantly invested in, nurtured and allowed to grow in order for firms to enjoy long-term success," says Eliza De Pardo, principal and director of consulting at FA Insight.

In the report, De Pardo and FA Insight's co-principal and research director, Dan Inveen, set some parameters to align compensation with performance. One suggestion: linking incentive compensation to performance-based objectives for every position at a firm. Another is if a firm funds incentive pay through either a profit- or revenue-based pool, they should implement a hurdle to activate that pay.

The survey, The 2009 FA Insight Study of Advisory Firms: People and Pay, uses input from 200 advisory firms contacted online during May and June.

Reviving The Pension Plan
The devastating market downturn that hammered many a 401(k) account has people longing for the days of guaranteed pension plans. A new investment vehicle set to begin life on January 1, 2010 might offer a solution. The DB(k), an employer-sponsored retirement plan authorized by Congress under the 2006 Pension Protection Act, is designed to be a hybrid defined pension and defined contribution plan in one tidy package.

DB(k) plans would provide employees at participating companies with a guaranteed lifetime monthly income stream equal to 1% of average pay during the final three years of work, times the number of years worked under the plan up to 20 years, or 20% maximum of the final average pay.

At the same time, workers would have 4% of their pay automatically deducted and put into a 401(k) plan, with an employer match of up to 50% of that. Employees can opt out or change their contribution level.

DB(k) plans are designed for companies with 500 or fewer employees. All of the paperwork is consolidated into one plan document, and companies would file a single Form 5500-the annual reporting form for most retirement plans.

Sounds like the best of both worlds, but there's a catch: Neither the U.S. Treasury Department nor the Internal Revenue Service has formulated rules for DB(k) plans.

The agencies have sent out requests for information seeking guidance from various organizations.