CFP Board Posts Anonymous Case Histories
For the first time, the CFP Board of Standards is posting sensitive information online about actual misconduct cases that have come before it for the public and financial advisors to see.

The board has posted a collection of roughly 100 anonymous histories of cases heard between November 2007 to July 2009 by the board's Disciplinary and Ethics Commission, which hears allegations of misconduct by CFP certificants.

"The ultimate goal of putting this sensitive information online is both to improve our transparency as a standards-setting body for the financial planning profession, and to provide a new user-friendly resource to our CFP certificants," says CFP Board CEO Kevin R. Keller.

The anonymous case histories will enable certificants and members of the public to identify specific types of activities that CFP Board deems to be contrary to its standards, the CFP Board says. The histories may also be useful to a CFP certificant preparing to appear before the commission, as well as to the  commission itself in determining whether a contemplated offer of settlement is appropriate based on its precedent decisions, it added.

The histories include the issue presented as well as findings of fact relevant to the commission's decision and its analysis and conclusions regarding rules that were violated. For example, one of the histories describes a revocation case in which the advisor did not deliver a promised financial plan for an 85-year-old client, borrowed $1,000 from the client and then recommended that the client invest about two-thirds of his life savings, or $75,000, in a viatical. The commission found rules were violated and revoked the advisor's CFP license.

The cases can be searched by kinds of decision (13 that include revocations, suspensions, dismissals and more), keywords, standards violated and categories of cases.

As case histories, they don't read like rollicking narratives. Yet aside from their goal of being instructive, some have their quirky moments. Take for example the case of a person whose CFP designation was revoked because he solicited financial professionals through an e-mail that contained unprofessional language including, "What to say to a qualified prospect so that he dumps his other advisor like rotten goods."

Other lines used by this person included: "Drip marketing that acts like acid to dissolve the relationship with their current advisor"; "Stop talking to poor people. Find the wealthy retirees and learn to make them your clients"; and, "It's so easy to take business from other advisors when you know the few secrets of competitive marketing."

Although the CFP Board previously had not posted anonymous case histories on its Web site, respondents were routinely provided with a hard copy of anonymous case histories from 2004 to 2007 to help them prepare for their hearing, says Michael Shaw, managing director, Professional Review and Legal, CFP Board. Going forward, the board will refer respondents to its Web site to read such cases, he added.

Shaw says the initial response to the new case histories initiative has been positive. One example, he notes, is that the CFP Board's registered programs use them to teach their students.

"The important thing about these reformatted anonymous case histories is they do a much better job than previous case histories of identifying the rationale the commission used in reaching its decisions," Shaw says. "Previously, you couldn't figure out how the commission got from identifying the facts and violations to imposing the sanctions."

Rx Needed For Long-Term Health Care Companies
Even as more folks realize that long-term care (LTC) can have an outsized impact on their long-term financial health, and some financial advisors are incorporating this into their planning, many LTC health carriers are struggling in this capital-intensive industry.

According to a recent report from A.M. Best, the insurance rating company, most of the small- to mid-sized LTC companies it monitors are consistently unprofitable on their LTC book of business. In addition, these companies-and monoline LTC underwriters in general-face challenges in maintaining necessary surplus levels.

The reasons are many. For starters, the current low-interest rate environment has buffeted insurers because a sizable amount of claim payments are financed through fixed-income investments. On top of that, investment losses during the downturn, coupled with higher expenses and the need to boost claims reserves, are impacting the bottom line.

In addition, LTC pricing is based on assumptions that a high percentage of policyholders will drop coverage, resulting in fewer claims. But more people-particularly elderly policyholders-are maintaining coverage, and liabilities are rising as people live longer.

Jeffrey Lane, senior financial analyst at A.M. Best, says many LTC policies--particularly those written before 2002--were mispriced. "They had weaker medical underwriting, didn't anticipate life spans increasing, and used inaccurate assumptions for interest rates," he says. "In addition, they didn't anticipate increased medical costs or the costs of health-care facilities."

Lane adds that pricing and underwriting on newer LTC policies have improved, but that the 30-year-old LTC industry will probably need more time to get it right when it comes to true claims experience.

As for companies stuck with poorly written LTC policies, Lane believes these companies will have to boost rates to bolster reserves. But state regulators have been slow to approve rate hikes on the older books of business at the requested amounts. In short, these older policies are a drag on profits.

A.M. Best says few options exist to fix the mispriced older policies, and that selling those blocks won't be easy because there are few interested buyers.
Lane says larger LTC carriers with more diversified operations and more access to capital are better able to withstand these challenges. As such, these types of companies have maintained "superior" ratings (A+ to A++) during the past decade.

The top five in the LTC space are Genworth, Bankers Life & Casualty, John Hancock, MetLife and Transamerica.

Among the group of smaller carriers, where long-term care comprises a bigger chunk of their business, the average rating during the past decade fell to B- (vulnerable) from B++ (secure).

"You're safer with a larger, more diversified company with sufficient capital that will be around longer to pay claims," Lane says.

Jesse Slome, executive director of the American Association for Long-Term Care Insurance, concurs with A.M. Best's assessment of the state of the industry. "Long-term care insurance is a small market and probably one of the most difficult industries to be in from financial and reserve perspectives," he says. "And with the interest-rate environment adding to that, it makes it real tough for smaller players to stay in the business. In fact, a number of them have left because it's much easier to make money elsewhere."

Slome cited Equitable Life & Casualty in Salt Lake City, which stopped writing LTC policies in January. "And they were one of the few companies that had sales growth [in LTC policies] during the past year," he says.

An interesting new twist to the LTC business are products combining annuity-like features with LTC policies. These "combo" products--also called linked or hybrid products--are policies that pay out between two to three times the annuity value for long-term care.

Slome notes the adoption rate for these combo products has been slow. "They're still offered by only a few companies--mostly long-term care carriers," he says. He expects more annuity underwriters to enter the LTC space.

Plan Ahead To Cushion Medicare Surtax
(Dow Jones) The Medicare surtax at the heart of the new health-care law is certain to hit wealthy taxpayers hard unless they make a good plan to manage it, and some are already starting to do so.

Strategies for the tax involve creating effective tax deductions under new investment income rules, choosing the right investments, insurance products and business structures, and picking the right time to set up trusts. The idea is two-pronged but basic: Reduce overall taxable income, and reduce investment income.

There has never before been a separate tax to support Medicare beyond a levy on wages, and it looks to be the biggest revenue raiser in the health-care law over the next 10 years.

The surtax adds a 0.9% Medicare Hospital Insurance Tax on earned income over $200,000 for single taxpayers and $250,000 for married couples, and an Unearned Income Medicare Contribution of 3.8% on investment income for taxpayers with adjusted gross incomes over $200,000 for single filers and $250,000 for married filers.

The 3.8% is assessed on the lesser of net investment income or the amount of modified adjusted gross income over the threshold. Net investment income is investment income minus certain expenses and includes interest, dividends, capital gains, annuities, rents, royalties and passive activity income. It does not include active trade or business income, distributions from IRAs or other qualified retirement plans, or income considered for self-employment taxes.

Keeping income below the threshold will be a key line of attack. Ways to do that include stashing money in qualified retirement plans and tax-exempt or tax-deferred investments including municipal bonds. Non-qualified deferred compensation, life insurance policies and oil and gas investments are other ideas, according to advisors.

People should convert IRAs to Roth IRAs to keep investment income down, according to Barry C. Picker, a certified public accountant at Picker & Auerbach CPAs, P.C. in Brooklyn, N.Y. The money the taxpayer pays to do the conversion won't be producing investment income in the future, and the Roth will produce a tax-free income stream, Picker says.
Copyright © 2010 Dow Jones & Company Inc.

Estate Planning? More Americans Say 'No Thanks'
The number of Americans with estate planning documents fell significantly last year, and most of the blame lies with the recession.

According to a recent survey released on the Web site Lawyers.com, the number of respondents who said they possessed estate planning documents such as wills, trusts or power of attorney decreased significantly from the prior survey conducted in 2007. In the latest survey, just 35% of respondents said they had wills, 29% said they had a power of attorney and only 18% had a living trust or other trust agreement.

It appears that recent economic doldrums have dented many people's wallets and psyches. In the Wills & Estate Planning survey of 1,022 people conducted by Harris Interactive, 71% said it's more important to save money for immediate needs than on long-term estate planning. Similarly, 73% said that economic hard times made it harder for them to plan for the future. In addition, 9% said they don't want to think about dying or becoming incapacitated.

The survey found that affluent Americans (defined as household income of greater than $50,000) are significantly more likely to have estate planning documents. Whether or not they've updated them is another matter.

Martin Shenkman, an estate and tax planning attorney in Paramus, N.J., says he has one wealthy client in Florida who took a big hit when that state's real estate market tanked. "She had a lot of specific requests in her will, and I'm not sure she now has enough money to cover them," he says. "There are other people like that who, if they don't revise their documents, will have an ugly mess after they pass away."

He notes the vast majority of his clients did nothing about their estate planning needs during the downturn. And the confusion caused by the federal estate tax repeal in 2010-and its uncertain future-didn't help. "People are saying 'Congress can't even figure out what the rules are, so why should I spend money on something when I don't even know what it will be,'" Shenkman says.

Investors Seek More Advice
Retirement assets recovered nicely last year, and as assets rose so did the number of people who said they needed financial advice, according to a study by Spectrem Group.

In its report, Retirement Market Insights 2010, Spectrem found that total retirement assets were $9.3 trillion at year-end 2009. While that didn't completely make up for losses in 2008, it was nearly an 18% jump from the prior year.

Almost three-quarters of retirement plan participants said their plan balance remained less than it was before the market meltdown. Sixteen percent said they were break-even, and 11% said they were ahead.

Elsewhere in the survey, a majority of folks said they wanted more guidance in the investment process. "The number of [defined contribution ] plan participants seeking advice on how to invest their retirement funds has more than doubled since 2008, suggesting some lingering uncertainty," said Gerald O'Connor, a director at Spectrem.

Specifically, 58% of people said they wanted more advice, versus 26% in the year-earlier survey. Among retirement plan participants, the most requested type of  information they might find helpful was having an expert to answer questions (53%).

That provides a business opportunity for advisors who advise company-sponsored retirement plan programs.

The Spectrem report is based on data from both public and private sources, along with Spectrem surveys.

Institutional Approach May Work For Your Wealthy Clients
Institutional investing techniques can help advisors provide wealthy individual clients with a more structured investing approach, says Steve Horan at the CFA Institute.

The institute awards the chartered financial analyst designation and helps set high standards for its 100,000 members. Horan, the institute's head of professional education content and private wealth, says the technique known as the asset liability approach that is used for institutional clients, such as pension funds, insurance companies, endowments and others, can be used to help individual clients plan successfully.

Some 30% of CFA members also handle private clients, most with between $1 million and $5 million to invest. The number of CFA members who want to take on private clients is growing, Horan says.

"The asset liability approach is a different starting point for the conversation between the advisor and the client," Horan says. "It takes the approach used in institutional planning and applies it to individuals, which is a more disciplined approach to wealth management."

When managing a fund for an institution, the advisor determines the assets that will be paid into the fund and then makes investments that will generate enough money to cover the liabilities it will eventually have in the form of payouts.

To use such an asset-liability approach for high-net-worth individual clients, one of the first steps is to account for all assets, not just the ones in the portfolio. For example, human capital is an asset, one that is much higher for a young person than one near retirement, Horan says. Social Security is an inflation-proof asset that a person cannot outlive.

The liabilities are the goals the person has-paying for children's college education, retirement or a new house-and the advisor needs to build a plan that shows assets will cover those liabilities.
"Financial advisors may think of these elements, but we want them to put it into a basic, structured framework that clearly shows the assets against the liabilities, which allows them to make better investments," Horan explains.

Wirehouses May Want To Tap Indie Trend
(Dow Jones) The big brokerages don't want to make independence their main business, but some industry experts say it would be profitable for them to tap into the breakaway movement.

Of the three biggest brokerages, only Wells Fargo Advisors has an independent channel that its brokers, along with others, can join if they decide to leave the wirehouse model. That channel, FiNet, sprung from a 2001 acquisition of a Florida-based independent brokerage, J.W. Genesis, that eventually came to Wells Fargo after a string of acquisitions. Morgan Stanley Smith Barney and Merrill Lynch have no such option.

Merrill Lynch does have a registered investment advisor, or RIA custody business for money manager services, but it is not actively growing that business, and its employee advisors can't move to that channel. Representatives from Merrill Lynch and Morgan Stanley Smith Barney declined to comment on whether they have plans for an independent outlet for their advisors.

One Morgan Stanley advisor in the South says he knows why the wirehouses don't make the move. "They don't want to give that many people that kind of freedom," he says.

Some observers believe it could be worthwhile to do so because it would add more volume to the clearing arms of the firms, which would spread out their costs and essentially be profitable for them.

An independent channel would also enable a wirehouse to keep a good advisor who decides to go independent in-house. Well Fargo Advisors says that since 2006, about 100 advisors have moved from its employee channel to FiNet, which has about 825 total advisors.

Were Merrill Lynch and Morgan Stanley Smith Barney to decide to create their own versions, they would have to find a way to "enable the world of independent brokers with the wirehouse capabilities without diminishing [the wirehouses'] current competitive advantage of having the best offerings out there," said Doug Dannemiller, brokerage and technology analyst at Aite Group.
Copyright © 2010 Dow Jones & Company Inc.

People Still Don't 'Get' The Stock Market
After a rough start, 2009 turned into a great year for the stock market. Too bad many investors missed it, and maybe they wouldn't have if they really knew what the story was.

According to a survey of 1,000 people by Franklin Templeton Investments, 66% of respondents believed the stock market was either down or flat last year. Of course, the major indexes were neither. The Dow gained 18.8%, the S&P 500 rose 23.5% and the Russell 2000 jumped 25.2% in 2009. And many overseas markets did much better.

"The market decline of 2008 and early 2009 is still fresh in investors' minds and is stifling their willingness to invest in stocks," said David McSpadden, senior vice president of Global Advisory Services for Franklin Templeton Investments. "We believe that if investors focus on the longer-term opportunity provided by equities, the case is very compelling, which is one of the reasons we as a firm believe strongly in the value of working with a financial advisor. The misperception that exists right now is translating into a lost opportunity for people working to build their savings." 

The survey found that 57% of Americans believe that stocks are too risky to invest in right now, versus 39% who see stocks as a solid investment opportunity. Evidently, 18- to 34-year-olds had the bejeebers scared out of them because that's the age group most likely to view stocks as too risky.

Correction
The entire hedge fund universe of about $1.4 trillion pales next to the $30 trillion for traditional assets, and even the biggest hedge funds-which are about $25 billion to $30 billion-would be small funds for a lot of fund families, says Jon Sundt, president and CEO of Altegris Investments. In the article "An Alternative World" (April 2010), Sundt was misquoted as saying the hedge fund universe was about $1.4 billion and that the biggest hedge funds were about $25 million to $30 million.