LPL Financial Buys Cleveland Trust Firm

Recognizing the growing importance of estate planning in the advisory business, LPL Financial Services purchased The Private Trust Co., a nationally chartered trust business, in February. The acquisition comes at a time when many financial advisors are cultivating a more upscale clientele and intergenerational wealth transfer is becoming a more significant part of their business.

The Private Trust Co., which is actually a bank and a trust company, was launched in 1995 by Richard Beeman, who remains CEO after the acquisition, and Larry Hatch, who continues as chief fiduciary officer. Prior to starting this business, the pair had run the trust business at National City, a large Cleveland-based bank with $56 billion in trust assets.

During the 1990s, the rapid consolidation within the banking industry caused widespread dislocation and frequent service lapses. This "prompted people to start trust companies," says Mark Casady, chief operating officer at LPL. Also, as wealth levels increased over the last decade, a number of reps at LPL found that many of their top clients required trust services. "LPL can now offer major trust services on a national basis, and these new services can add value to clients," Casady says.

Jim Putnam, LPL's managing director of marketing, acknowledges that the acquisition was inspired as much by defensive reasons as by offensive ones. Between 10% and 15% of LPL's reps have more than one high-net-worth client (assets exceeding $5 million), and in some cases these reps "lost control" of client relationships.

Put another way, between 500 and 600 LPL reps have at least three or four clients with more than $5 million in assets. "It's not all their clients, but it's often their best client," Putnam says. "Reps will continue to be able to use other trust companies."

The acquisition by LPL, the nation's largest independent brokerage, provides The Private Trust Co., which has just under $300 million in assets, with resources to grow far beyond what it could do with internally generated funds. "LPL is willing to invest in technology and build compliance into the culture," says Beeman. "We have six employees now, but we are hiring thanks to the acquisition. It's a nice time to be hiring."

Beeman also thinks the trust business will have a different orientation at LPL than it would have at a bank. "The challenge is to stay client-focused," he says. "Trust officers at banks view their loyalty as being to the organization." Additionally, at many banks, the trust department's income represents only 10% or 15% of the total, so they don';t have a lot of clout in territorial turf wars.

The acquisition also marks a departure in strategy for LPL, which sat on the sidelines during the merger and acquisition wave that swept the independent broker-dealer industry in the late 1990s.

"Most times, we found we were better off negotiating with individual reps who were a good fit" rather than acquiring entire firms and then trying to retain as many reps as possible, Putnam says.

LPL, which has $46 billion in assets, has previously indicated it may do an initial public offering (IPO) in the next few years if market conditions are conducive. But officials say they have no immediate need for the funds and are willing to wait until the IPO market improves.


AICPA Considers Nixing PFS Mark

Will CFP Board Seek A Takeover?

The American Institute of CPAs is considering dropping its personal financial specialist (PFS) credential-setting off an effort by some of its members to keep the program alive and speculation that the CFP Board of Standards could take it over.

The scramble to save the PFS credential began in February, when AICPA informed its credential holders that it was undertaking a review of all its credential programs "to determine how best to allocate resources."

AICPA officials say the review could present a range of options, including the continuation of the programs, scaling them back or AICPA's exiting as administrator.

In addition to the PFS credential, the organization is also reviewing its administration of its certified information technology professional (CITP) and accredited business valuation (ABV) certification programs.

AICPA spokesman Joel Allegretti called the reviews routine, saying a special committee on accreditations set up by the AICPA in 1998 recommended regular reviews of credential programs. "We do this periodically," he says.

Some AICPA members, however, don't see it that way-and are concerned that the review could signal the end of AICPA's involvement in specialist credentials. "The word on the street is that the budget may be the driving factor," says James Shambo, a CPA and PFS who is president of Lifetime Planning Concepts in Colorado Springs, Colo.

Shambo and some of AICPA's more than 3,000 PFS holders have started their own organization, the Association of CPA Financial Planners. That organization is now mounting a drive it hopes will result in it taking over the credential from AICPA over a two- to three-year period, says Shambo, president of the new organization.

"Our members are about 1% of the AICPA membership," he says. "In this organization, they'll be 100% of the membership, and we can be more focused and devoted to the kind of things our members are asking for."

There is also speculation, however, that another player may be interested in taking on the administrative role: the CFP Board of Standards. This is partly due to the fact that the CFP Board has recently been on a drive to unify the credentialing of financial planners under the CFP banner.

Also, CFP Board of Standards CEO Louis Garday, who has been spearheading the effort, is himself a CPA. When he first became CFP Board CEO, Garday indicated that he thought one of the most fertile areas to increase the number of CFP licensees was among CPAs.

When asked about the possibility of the CFP consolidating the PFS program into its own, Garday responds there have been no formal talks on such a proposal. But he indicates he would welcome a discussion of the idea.

"We will always discuss details with any other credential program about how we can create a better awareness of the planning profession and less confusion over multiple credentials," Garday says. Of the future of the PFS credential specifically, he adds, "Obviously, that is one (discussion) we would be very attracted to."

He noted that 6,600, or 16%, of the 41,500 CFP certificate holders are CPAs. Of these CPAs, he says, about 1,700 also hold the PFS certification.


Lockwood Financial Expands Beyond Separate Accounts

In the wake of its acquisition by The Bank of New York, Lockwood Financial has announced an expansion of its services and product lines to independent advisors.

Among the changes will be broadening its offerings beyond the separate account products that have been Lockwood's focus, according to Lockwood Advisors President Chris Tomecek. Additional products will include mutual funds, hedge funds, passive investments, structured fixed-income products, collateralized loans and mortgages, he says.

"To date, we have delivered strategic and style allocation recommendations to advisors and focused primarily on separate account managers to implement those recommendations," Tomecek says. "But we recognize that the financial advisory business is rapidly shifting its focus from asset gathering to a comprehensive wealth advisor model."

The firm's research department, meanwhile, will be challenged to "re-invent itself to support the strategies-based, multi-product approach," says Len Reinhart, Lockwood's founder and chairman.

The ability to expand beyond separate accounts was cited as one of the chief advantages Lockwood would gain at the time of its purchase by The Bank of New York in July.


Regulators' Sweep Reveals Breakpoint Overcharges

Negligent record keeping cost front-end load mutual fund investors more than $600,000 in missed breakpoint discounts in just one year, according to a new report from securities regulators.

Of 43 firms examined in a joint three-month sweep conducted late last year, regulators found that brokerage firms have a poor record of ensuring that customers get the right discounts, or any discount at all, when they purchase front-end load mutual funds. Regulators from the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange worked together on the sweep.

Only two of the 43 firms examined provided customers with appropriate discounts, three never applied discounts and the remaining 38 firms routinely overcharged customers. Investors at the select firms were overcharged $637,023.29 between October 2001 and October 2002. The faulty record keeping at the firms cost incorrectly calculated breakpoint discounts for one in three investors, with a $364 average overcharge.

All 2,000 U.S. retail broker-dealers have been put on notice that they must review their operations and report findings to the NASD. The SEC and the NASD are working to alert investors to the fact that they may be eligible for sales charge refunds.

Some problems appear to be accidental, arising from a systemic failure on the part of brokerage firms to link customers' purchases in each fund family in a meaningful way, regulators say. Currently, about 7% of fund sales are front-end load mutual funds.

To rectify this problem, the SEC and NASD are developing a statistical formula broker-dealers will be required to use to calculate customer breakpoint discounts. "We plan to revisit this until firms get it right," an SEC spokesman says.

Typically, breakpoint discounts are applied to front-end load funds to reduce sales loads at investment levels starting at $50,000. The discounts increase at intervals up to $1 million.

Regulators released the report as the House Financial Services Committee opened hearings into mutual funds fees and fee disclosure.


Curian Capital Offers New Fee Structure

Curian Capital LLC has introduced a Web-based separate accounts solution with an added perk for advisors: a financing setup to help ease the transition from a commission to fee-based practice.

The program was created after the company's marketing research found that many advisors were wary of the temporary revenue drops associated with transitioning from commissions to fees, says Jim Vitalie, the company's executive vice president for strategic development.

"Most people said they were interested in converting, but didn't want the income drop," he says.

Ciran Capital is addressing the concern by offering the Fee Advance Program, which basically provides advisors with an up front loan on each of their fee-paying accounts.

For example, Vitalie says, if an advisor with a 1% asset management fee gets a $100,000 client account, Ciran Capital LLC will pay the advisor an advance of 2.4%, or $2,400. The 1% fee paid by the client, meanwhile, will be deducted from the account toward repayment of the advance. In the second year, 0.25% will be deducted, and in the third year another 0.25%. That will result in the advisor paying $2,500 over three years to repay Ciran Capital for the $2,400 advance. The advisor would be subject to penalties if the account is closed before the three years are up.

"In the fourth year, they go back to 1%," Vitalie says.

Other features of the separate accounts product include a $25,000 account minimum and a paperless account opening and administration process, he adds. Curian Capital is a subsidiary of Prudential plc, a 150-year-old financial services company in the United Kingdom with $250 billion in assets under management.


Survey Finds Hedging On Hedge Funds

It looks like hedge funds-touted as an alternative to mutual funds the past few years-aren't immune to bear markets, war clouds and sinking investor confidence.

A survey by Reuters and LJH Global Investments, a hedge fund advisory firm, has found that the $600 billion hedge fund market buckled under market pressures late last year, after enjoying a recent rise in popularity as an alternative investment.

The survey of 50 hedge funds found that investors put about 20% less money into hedge funds in fourth quarter 2002 than they did in the third quarter. Hedge fund performance, meanwhile, was on average the worst it's been in years, albeit still better than the S&P 500.

The year was also highlighted by hundreds of hedge fund closures and a conservative streak among hedge fund investors, who gravitated toward market neutral strategies, according to the survey. The study found that 79% of the new money put into hedge funds in the fourth quarter went into such funds.

Corrections And Amplifications

The article "Sleeping Giant Awakes" in Financial Advisor's February 2003 issue discussed various products offered by TIAA-CREF, including its tax-deferred variable annuity, Personal Annuity Select. The annuity's fixed-account option allows for full withdrawals at any time and partial withdrawals or transfers every 180 days with no market value adjustments or interest penalties. The article misstated when withdrawals can be made from Personal Annuity Select's fixed accounts.

The article "LTC Premiums Start Creeping Up" in the February issue incorrectly cited Medicare as an alternative to buying long-term care insurance. Medicare provides limited reimbursements for skilled nursing care, but it is not a reliable replacement for long-term care insurance.

The article "Schwab Asks for Advisors' Patience, Wrestles With Its Own Problems" in the Frontline News section in the December issue should have said the number of Schwab's branches dropped from 440 to 428 in one year and the firm raised in-house planning fees to $1,500 for private retail clients. Also, John P. Coghlan, head of the firm's retail business, visited 24 branches in 2002.