Transparency Comes To 401(k) Fees
U.S. Department of Labor in October mandated that employer-sponsored 401(k) retirement plans must disclose fees that savers pay on investments and transactions by January 1, 2012. The announcement came a day after Putnam Investments rolled out a program to offer online disclosure of fees and expenses to participants of the 401(k) plans it administers.
Participants new to 401(k) plans must receive an explanation of costs when first signing up for an account, the Labor Department said. The regulations also will require 401(k) providers to give participants enough information to allow cost comparisons with other investment choices and a Web site with additional details.
Putnam's program, which the company said is ahead of the curve in the industry, will allow participants and plan providers who visit its Web site to see the fees associated with their 401(k) investments. The program was expected to be available to 30,000 people by the end of October and to all 50,000 in its plans by year-end.
Boston-based Putnam began making more information accessible online in June, when it made fee schedules available to employers who sponsor 401(k) plans. Making fees available to individual investors, which is being done now, is the next step in that process, says Edmund F. Murphy III, managing director and head of defined contribution plans for Putnam.
Disclosures regarding 401(k) plans are coming under scrutiny as more employers are switching from defined benefit plans to defined contribution plans. The number of workers enrolled in traditional pension plans that provide retired employees with lifetime payments fell from 27 million in 1975 to about 19 million in 2007, even though the workforce increased, according to the Labor Department. At the same time, defined contribution plans such as 401(k) plans increased from 11 million to 67 million.
To find the various fees that apply to their investments, participants would typically have to go through lengthy prospectuses. "That is quite an arduous task," Murphy says. "We will notify each plan sponsor so they can tell participants this information is available. Once an individual clicks on the link on the Web site, a video automatically pops up to explain the fees. We have taken into account that there are various levels of understanding, and we will track participant behavior with a follow up survey (to see how many participants access the information). A lot of this is going to be about educating participants."
The disclosures are important because expense ratios are the most consistent predictor of performance, with lower-cost funds typically beating higher-cost funds, says Laura Pavlenko Lutton, editorial director in the mutual fund research group of Morningstar Inc. Putnam's fees will be updated in real time.
Fidelity Investments, the largest U.S. provider of 401(k) plans, has been enhancing participant statements, its online presentation of fees and its marketing materials to provide more disclosure, said Beth McHugh, vice president of market insights for the Boston-based company. The new features will be ready by the government's deadline at the latest and "will go beyond the regulations," she said.
About 11 million workers have their employer-sponsored retirement plans with Fidelity, which manages $735 billion in 401(k) account assets, the firm said.
Bloomberg News contributed to this article
RIA To Expand By Offering Advisors Ownership Stake
Beverly Hills Wealth Management (BHWM), an RIA started earlier this year by a former Morgan Stanley executive, is setting its sights on attaining a wider profile.
Founded by Margaret "Mag" Black-Scott, former vice chairman of global wealth management at Morgan Stanley, the firm currently consists of four employees, including an advisor with more than two decades of wealth advisory experience who recently came from Merrill Lynch.
Black-Scott says her goal is to hire seasoned advisors with at least ten years' experience and good compliance records from wirehouse and RIA firms who serve her firm's target client base of high-net-worth and ultra-high-net-worth individuals, along with corporations and institutions.
In return, Black-Scott says BHWM will offer advisors an ownership stake, an increased payout and an independent platform with access to providers of institutional-level investment products.
"We'll have growth opportunities in different kinds of specialty areas to offer clients," she says. "A lot of that stems from my background and knowing people in a variety of industries."
Black-Scott says BHWM is custodially agnostic, but that Fidelity is its primary custodian thus far.
A native of England who is married to David Scott, a former NASA astronaut who walked on the moon as part of the Apollo 15 mission, Black-Scott was a 30-year veteran of Morgan Stanley who began as a broker and then worked her way up through the advisory ranks to become a division director for the western U.S. responsible for more than 3,000 employees and revenue of $1.5 billion. She was appointed to her vice chairman role in early 2008, and retired at the end of that year.
Black-Scott said after a half-year of retirement she got the bug to start an advisory firm that she says emphasizes trust and transparency. "We want to take the business back to where clients and advisors want the business to be," she says.
And she believes many advisors want to do the same. "I think there are many people and many [advisor] teams that are frustrated for a lot of reasons with where they work," Black-Scott says. "And we believe there's a great opportunity in this space based on the fund flows going from wirehouses to RIAs."
Black-Scott says BHWM is trying to replicate the playbook used by Hightower, a Chicago-based, advisor-owned company with a growing national footprint of advisors that serves high-net-worth and institutional clients.
Hightower is a well-capitalized company backed by several outside institutional investor groups. That includes Red Eagle Ventures, a private-equity firm led by David Pottruck, the former CEO and president of Charles Schwab and a current Hightower board member.
To date, BHWM has been funded solely by Black-Scott. The company is currently in a "friends and family" round of capital raising, and will begin sourcing additional investment capital in six to 12 months.
"I see smaller independent advisor firms attempt to recreate that [Hightower-like] model all the time, whether they have grand ambitions to be a national firm or are simply trying to develop a regional or super-regional strategy," says David Selig, CEO of Advice Dynamics Partners, an M&A consulting firm in Mill Valley, Calif.
"It's a common refrain: Build a better mousetrap and the disenfranchised will come," he continues. "But you need to have a very compelling pitch that helps you differentiate yourself, maybe not from a Hightower, but from an RIA down the street trying to do the same thing."
For BHWM, whose office is in the heart of Beverly Hills on Wilshire Boulevard near its intersection with Rodeo Drive, its goal is to hire two or three additional advisors by year-end. It aims to have from $80 million to $100 million in revenue in five years. "Based on the plan we've put together, we believe we can do that with a steady growth trajectory," Black-Scott says.
She adds BHWM is working on expansion opportunities in different cities around the country, but wants to grow carefully to make sure they get it right. "We don't want to get ahead of ourselves," she says.
For now, BHWM is relying on Black-Scott's industry contacts--as well as word-of-mouth referrals--to expand its advisor base. She says they'll eventually hire recruiters to attract new talent.
States Getting Ready For Advisor Oversight
As most advisors should know by now, the Dodd-Frank Wall Street Reform and Consumer Protection Act that became law this summer will switch investment advisors with less than $100 million in assets under management from federal to state registration by July 21, 2011. The law will affect about 4,000 investment advisors, and has raised concerns in some circles about whether state securities regulators in cash-strapped states will have the resources to do the job.
Regardless, it's the law of the land, and state regulators are gearing up to handle the increased workload. In response, the industry membership group, the North American Securities Administrators Association, has created the IA Switch Resources center (www.nasaa.org/industry___regulatory_resources/investment_advisers/13183.cfm) to help advisors transition to the new order.
Among other things, the site contains an FAQ section, a directory of state broker-dealer and investment advisor registration and examination contacts, and a calendar of events listing seminars and workshops hosted by various state securities offices. It also aims to keep advisors abreast of the latest happenings as the SEC and the states hash out details of the transition, such as when advisors should begin the switch and how much it'll cost.
"Costs should be limited, depending on the timeline," says Patricia Struck, administrator of the Wisconsin Department of Financial Institutions' securities division. "And that's the kind of thing we're identifying right now."
Struck says Wisconsin generally conducts routine advisor examinations once every three to five years, which she says is comparable with the national average among states. It's estimated that the SEC examines investment advisors roughly once every nine years. And she notes Wisconsin is looking to hire an additional member for its existing staff of six examiners.
Define Your Target Market
An old saw says that luck is the residue of design. But financial advisors might say that growth is the residue of design. According to FA Insight's Growth By Design study, advisors are in growth mode again following the market downturn and the best firms are doing it not simply by cashing in on the market rebound, but by focusing on a target market that lets them pinpoint their time and money on more profitable clients.
The study shows the typical advisory firm (defined roughly as having 200 clients, $1 million in revenue and five staff members) expects to finish this year with a 6% rise in clients, a 13% jump in AUM and a 16% leap in revenue. They also plan to increase staff size from five to six employees.
The best firms, according to the study, generate significantly greater annual revenue growth and more owner income per dollar of revenue. The drivers of outperformance include less overhead expense as a share of revenue, more profit per client and greater productivity per staff member.
According to FA Insight, 30% of firms don't have a defined target market. "There are many different ways to define your target market, but the most important thing is to have one and to build your firm and client experience around that," says Dan Inveen, principal and research director at FA Insight, a Tacoma, Wash.-based consultancy.
For more information on the study, please visit http://www.fainsight.com.
Advising Celebrities Can Be More Pain Than Pizazz
(Dow Jones) Not every estate advisor wants a glittery clientele. For some old-line advisory firms, celebrity clients bring too many headaches. Stars can be highly demanding and, besides, the publicity that surrounds them has a way of turning negative--headlines about legal fights actors Larry Hagman and Nicolas Cage have had with their advisors are just two recent examples.
Over the years, a special model for managing celebrities' affairs has evolved, based on how entertainment works. Artists often are gone from home for stretches and a business manager is usually the gatekeeper, in charge of choosing other advisors, including investment managers and estate attorneys.
While a traditional firm may be hired to do a particular task like draft a trust or manage investments, it will not always rush in to take over the whole show.
"They don't specialize in it, and it is often very labor intensive," says Jonathan A. Karp, a shareholder at Reish & Reicher in Los Angeles. A business manager knows he is "signing up for 24/7 availability, whereas the traditional financial advisor often does not want to."
Celebrity fortunes tend to rise and fall more than those of other high-net-worth people, at the same time that stars are under pressure to live a lavish lifestyle that often results in out-of-control spending. High divorce rates and a demand for anonymity also complicate matters.
It is "a different world, without a doubt," says Michael S. Fredlender, managing director, Provident Financial Management, which manages the financial affairs of people in the music, television and sports industries, as well as business executives and others.
Movie stars, for example, must deal with studio and endorsement contracts. A financial advisor who works with them needs to understand the basics of these contracts, just as someone who represents a wealthy oilman must know oil and gas law.
Business manager Steven H. Levitt, a shareholder at Sobul Primes & Schenkel, certified public accountants in Los Angeles, downplays some of the differences between working with celebrities and other wealthy people. The goal, he says, is the same: to make money grow and preserve it for generations. Stars are no more out of control than any other group, he insists. Like other types, they include some wild spenders and some very conservative savers.
The "tried-and-true" approach remains the best for entertainers, as for other wealthy people, he adds. In fact, Levitt recommends the same estate attorneys to all of his clients, whether they be celebrities, business executives, or others.
The demands of celebrity are behind the development of at least one kind of special estate planning tool, known as a privacy trust. These trusts are often used to keep the location of a star's house a secret, and use completely fictitious names. The trust may be named, say, the "Lemon Shortcake Trust," and the trustee is a person somehow related to the star, but with a different last name.
Estate attorneys also do a lot of divorce-proofing when drafting documents for celebrities. Prenuptial agreements are de rigueur with second marriages. Attorneys deal with this issue with other kinds of clients, to be sure, but in the entertainment industry, must be "a little more sensitive to it," according to Karp.
Copyright © 2010 Dow Jones & Co. Inc.
Aspiriant Buys Deloitte Investment Advisors
California-based Aspiriant has announced that it acquired Deloitte Investment Advisors (DIA) from international financial services giant Deloitte Touche Tohmatsu.
The purchase, completed last month, gives Aspiriant an operation consisting of 40 employees and six offices across the country. The wealth management firm now serves nearly 800 clients with more than $7 billion in assets under management.
In addition to existing offices in San Francisco and Los Angeles, Aspiriant now has offices in New York, Boston, Cincinnati, Milwaukee Minneapolis and Detroit. Terms of the agreement were not disclosed.
Aspiriant was founded in January 2008 when Kochis Fitz in San Francisco merged with Quintile Wealth Management in Los Angeles. The firm is employee-owned and was created with the goal of pursuing an aggressive growth strategy. At the time of the merger, the firm set a five-year goal of growing to $15 billion in assets under management. That was later reduced to $12 billion due to the global financial crisis.
"This acquisition is in keeping with our long-term strategy to remain the leading independent wealth management firm that can provide expanding benefits to clients and serve their wealth management needs for generations," said Rob Francais, CEO of Aspiriant.
Philadelphia, Chicago and Boston Are Study's Worst-Off Pensions
(Bloomberg News) Philadelphia will run out of money by 2015 to pay pension obligations with existing assets, and Chicago and Boston by 2019, a study by economists at Northwestern University and the University of Rochester forecasts.
The report, The Crisis in Local Government Pensions in the United States, warns that mounting liabilities threaten "the ability of state and local governments to operate."
The study examines 77 of the largest municipal defined-benefit pension plans, covering 2 million public employees and retirees, roughly two-thirds of the nation's total. The estimated liability of all municipal retirement funds is $574 billion, according to economists Joshua Rauh of the Kellogg School of Management at Northwestern University and Robert Novy-Marx of the University of Rochester.
"The fact that there is such a large burden of public employee pensions concentrated in urban metropolitan areas threatens the long-run economic viability of these cities, as residents can potentially move elsewhere to escape the situation," wrote Rauh and Novy-Marx.
Philadelphia will be the first to run out of money from existing assets. Rauh said the "day of reckoning" for that city and others may arrive sooner if pension funds do not earn the anticipated 8% return on equity that most funds hope for.
Mayor Michael Nutter said last month that he plans to end the city's defined-benefit retirement system, which promises a set level of pension payments to retiring employees based on their pay and length of time on the job.
The study calculates that by 2015, Philadelphia's expected pension-benefit payments will compose 19% of the city's anticipated revenue. In Boston, benefits will consume 27% of 2019 revenues. And in Chicago, promises will gobble up 53% in 2019.
Six large cities are listed as most vulnerable--Philadelphia; Boston; Chicago; Cincinnati; Jacksonville, Fla.; and St. Paul, Minn.--because they are projected to run out of money from existing assets no later than 2020. Another 36 cities and counties are projected to be in similar trouble by 2030.
As the financial problems deepen, political pressure will build for a government bailout, first with cities going to states for help, followed by states going to Washington, Rauh predicted.
States will "cease to be able to function" because the accumulation of debt will prevent some of them from borrowing money, Rauh said.