Pittís Legacy: An SRO For Advisors

In an eleventh-hour bid to alter investment advisor regulation, departing Securities and Exchange Commission Chairman Harvey Pitt proposed the creation of a self-regulatory organization and new annual compliance audits for advisors. Insiders say Pitt is attempting to ensure that the National Association of Securities Dealers will have a role in advisor oversight one way or another, either by carrying out SRO duties or annual advisor audits.

The NASD has expressed interest in the role during high-level talks with Pitt, legal sources say. The NASD did not respond to a request for comment by deadline. "We think Pitt and the NASD are partners in crime on this," said one securities lobbyist, who asked not to be named.

Most planning lobbyists are hoping that Pitt's agenda will die on the vine, as did his embattled chairmanship. SEC staffers say Pitt acted alone to advance the SRO and audits. During his year at the SEC's helm, Pitt was constantly criticized for, among other things, meeting with targets of SEC investigations who were former clients and undercutting SEC staffers in the process. Ultimately, an embarrassed Bush Administration forced his resignation.

Still, the overt slap at advisors is notable, since it is one of the few SEC-regulated industries to remain virtually scandal-free in recent years. "There are a lot of people waiting to see what the SEC's rationale for this will be," says Barry Barbash, past director of the SEC's Division of Investment Management and a partner in the law firm of Shearman and Sterling. "I know I'm not alone in believing that planners will be extremely suspicious if the NASD is advanced as the possible SRO."

Historically, advisors have been determined to avoid the NASD's transaction-oriented approach to oversight. Duane Thompson, director of government relations for the Financial Planning Association, says the group plans to oppose the SRO. But he adds: "Maybe ironically this kind of debate will help move the FPA forward, rather than have someone else do it for us."

In another irony, the FPA itself raised the possibility of creating an SRO, albeit for planners, instead of advisors, in a white paper last year. It remains to be seen if regulators or consumers understand the difference.


FPA Program Matches Advisors And Students

The Financial Planning Association has started an internship program designed to match advisors and students. The program is hosted at the FPA's Web site at www.fpanet.org, and provides places for students to post resumes and advisors to post intern openings.

Also part of the site is a listing of guidelines for both employers and interns, including tips on how advisors can make an internship a worthwhile experience for students.

"We really want to ensure the internship is a productive and learning experience, and not just a situation where they want someone for making photocopies," FPA spokeswoman Brooke Harrelson says. "They should actually get to see some real financial planning."

Among the intern duties recommended by the FPA are data entry, report preparation, observation of client meetings and interviewing techniques, assisting in the development of marketing plans and seminar programs, and attending staff meetings.

The FPA says compensation could be in hourly wages or a fixed salary, or in the form of tuition payments, FPA membership fees or CFP examination fees. In cases where there is no monetary compensation, the FPA says, interns should be rewarded with a high-quality experience that will help them launch their careers.

"There is no 'free lunch' and interns should not be considered as cheap labor," the FPA says.

Pimco's Gross: U.S. Facing Economic Decline

Pimco Funds heavyweight bond-fund manager Bill Gross recently authored an article contending that the United States is entering a period of economic decline that may prove difficult to reverse. Writing at his company's Web site, Gross argues that the confluence of excessive private debt, the denouement of the stock market bubble, the overvalued U.S. dollar and near-historic trade deficit were all contributing factors to "what may be a process of hegemonic decay."

Yet the most significant catalyst, Gross writes, were the events of 9/11 and its aftermath. Specifically, the perpetual nature of President Bush's war on terror entails costs "involving potential reversals [of trends] that have formed the backbone of America' economic hegemony for nearly seven decades."

Open capital markets and a strong dollar, the result of policies that have reflected America's philosophy and enriched its citizens, are now in question. Huge budget deficits provide a reminder of an era when America was considered to be in decline.

"These deficits, coming at a time of military expansion in pursuit of terrorist containment, threaten to reverse our hegemonic benefits and end our economic domination," Gross writes. "Our SUVs, as well as our top-cat, near-monopoly of the good times are at risk."

Gross appears convinced that America's world dominance at both the military and economic levels is not sustainable. "America is losing its peace dividend at a time when-because of our high debt, over-consumption, and reflective trade deficit-we cannot afford to."

The most obvious symptom of declining American hegemony is evidenced in the financial markets, according to Gross. The United States "is becoming less wealthy by the minute as foreign investment is withheld and in some cases redirected to Chinese and other more attractive ports of call."

Another symptom of America's decline is its changing stance on free trade, as displayed with the imposition of new steel and lumber tariffs in the last year. "We are becoming a trade repressor as opposed to trade advocate," Gross claims.

As manager of the world's largest mutual fund, Gross has used his unique status to offer a variety of controversial opinions in recent years. Last fall, he predicted the Dow Jones Industrial Average would fall to 5,000, a prediction that has yet to materialize.

But those who know him don't doubt the sincerity of his opinions, whether they are right or wrong. Indeed, many observers recently have voiced grave concerns about the inability of the U.S. economy to respond to massive fiscal and monetary stimulus.

Laffer Lauds Bush Plan, Clinton Legacy</p>

Economist Arthur Laffer, widely credited with conceiving supply-side economics and providing the intellectual foundation for the tax cuts of the Reagan era, praised the Bush administration's new proposals for accelerated tax cuts and the creation of Retirement Savings Accounts and Lifetime Savings Accounts (LSAs).

Speaking at the TD Waterhouse Institutional conference in Los Angeles on February 7, Laffer said that Bush's proposals were ingenious because of the multiple choices they offered investors. Particularly clever are the proposed LSAs. Like others, Laffer surmised that many investors might opt to pay taxes on existing qualified accounts to convert them to LSAs, creating a windfall for the budget-strapped Treasury Department.

While some attendees worried about the ballooning federal budget deficits, Laffer professed to be unconcerned, noting that a $300 billion deficit is not the problem for today's $10 trillion U.S. economy that it was 15 years ago when the economy was much smaller.

Laffer also surprised some attendees by going out of his way to praise the Clinton administration's economic legacy. After committing several blunders in his first two years in office, Clinton reduced capital gains taxes, which helped engineer a remarkable economic boom. Clinton "out-Reaganed Reagan," Laffer remarked, adding that between 1992 and 2000 the government's share of gross domestic product declined 3%, an impressive feat for any administration.

Schwab Raises Fees On Small Advisors

Schwab Institutional plans to double its quarterly fees to small advisors with less than $10 million in assets in custody at Schwab, from $600 per quarter to $1,200, starting July 1. Deborah McWhinney, president of Schwab Institutional's services for investment managers, attributes the long-expected change in fee schedules to the rising cost of doing business.

The move, which represents Schwab's first price increase in years, comes at a time when the San Francisco-based firm is facing intensified competition from a growing number of rivals, including Ameritrade, Raymond James and Bear Stearns. Some competitors, such as Ameritrade, have made it clear they are happy to serve smaller advisors.

McWhinney says that Schwab does not "want to abandon any segment of the market." But she doesn't say what other rivals know: Serving small advisors is probably the least profitable part of their institutional business.

She acknowledges several hundred advisors leave every year, most of whom are small and decide to exit the business. "We want serious institutional advisors," she says.

Last year Schwab Institutional brought in $20 billion in new net sales, which McWhinney claims is better than the wirehouses did in the high-net-worth market. Most of that growth came from larger offices. "They have the scale" to grow in difficult times, McWhinney notes. "Many of these folks are well-situated for a market recovery."

Despite fierce competition, industry analysts believe Schwab continues to garner nearly 50% of the new assets captured by the financial advisory profession. In contrast, Fidelity's IBG unit brought in $10.2 billion last year, and TD Waterhouse Institutional president Tom Bradley expects to bring in about $5 billion in 2003.

Asked about recurring rumors that Schwab may start to acquire advisory firms. McWhinney says that Schwab "is always looking at what role we should play. We may end up acquiring [advisory firms], we may not."


Ameritrade Targeting Small Advisors


In the competitive advisor custodial services business, small firms can often feel abandoned-stigmatized as money-losing propositions that hurt margins. At Ameritrade, however, the "little guy" has become a rallying cry in the company's efforts to establish itself in the custodial marketplace.

The company is not only welcoming small advisors with open arms, it's actively seeking them out, says Vince Passione, president of Ameritrade's institutional client division. "It's a part of the market that's very underserved," Passione says. "A lot of these people who are coming to us are saying look, I'm being hit with minimums or my service is falling off because I'm no longer considered important."

Ameritrade's $10.99 flat commission on market and limit orders, with no share limits, has apparently been one reason it's been attracting small advisors working on tight margins. "It absolutely does add up and they tend to be price sensitive to a certain extent," he says. Passione says the service and Web-enabled technology have also come into play.

Ameritrade has also been able to improve margins and expand its capacity through its recent acquisition of Datek, he adds. To further pursue the small advisor market, he says, Ameritrade will soon offer advisors who switch, on a promotional basis, $50 and 30 commission-free Internet trades for every client they bring with them.

Ameritrade is also testing a program that will offer advisor clients business consulting services, including marketing and direct-mailing advice. The pricing of the service, which will leverage the services of the same consultants used by Ameritrade, have not yet been set, Passione says, but he adds the service could launch within a few months.

One of the reasons Ameritrade relates to the small guy may be because Ameritrade itself is playing David to the Goliaths of the custodial industry, such as Schwab Institutional and Fidelity. Among a number of firms that entered the custodial market a few years ago, when the stock market was still hot, Ameritrade has focused on the niche that comprises advisors with $25 million or less in assets under management.

At the end of 2002, the company had 315 independent advisors as clients-double the amount it had at the end of 2001, Passione says. About 75% of advisors, he says, fall into the $25 million-or-under category, he says.