RIA M&A Activity Breaks Record In '10
Fueled by a better economy and rising advisor revenue and cash flows, mergers and acquisitions among RIAs broke records last year, according to Schwab Advisor Services.

Schwab counted 109 M&A deals involving RIAs in 2010. That was the highest total since Schwab began tracking deal activity in 2003, and was a 56% increase from the 70 deals tracked in 2009.

Deal making last year comprised roughly $156 billion in total assets under management, versus about $103 billion in AUM the prior year. The average transaction size in 2010 was approximately $1.4 billion compared to approximately $1.5 billion in 2009. RIA firms were the most common buyers among 2010 deals, accounting for more than 50% of acquisitions, a trend that has continued since 2007.

"I think the continued strength of RIAs as the primary buyer category of RIA sellers is another indication of the growing sophistication of RIA principals when it comes to RIA acquisitions," says David DeVoe, Schwab Advisor Services managing director of strategic business development. "The number of deals they're doing is growing dramatically, and they're using these acquisitions to achieve a variety of strategic goals and objectives."

One such example is Aspiriant's acquisition of Deloitte Investment Advisors LLC last summer. Aspiriant itself was created from a strategic RIA-to-RIA merger in 2008 when Kochis Fitz in San Francisco joined with Quintile Wealth Management in Los Angeles with the goal of growing assets under management to $15 billion within five years (the amount since reduced due to the recent financial crisis). DeVoe says the deal, which aims to expand both the firm's geographic footprint and its overall advisory capabilities, is an example of a good transaction.

Another good example is Modera Wealth Management LLC's acquisition of Back Bay Financial Group Inc., which was completed on January 1. Both firms were nationally recognized as leading independently owned advisory firms before the merger, and their coming together is a case of  "one plus one equals three," DeVoe says. "The Modera/Back Bay transaction will likely enable the combined firm reduce their overall expenses while expanding the services and capabilities they can offer clients," he adds.

Contrary to reports that the pace of acquisitions by aggregators of RIA firms has slowed, DeVoe reports the space did 33 deals, or 30% of total transactions last year. "Their model is resonating," he says.

DeVoe says the remaining 20% of M&A deals were a mix of national and regional banks--who continue to play a diminished role in RIA acquisitions--and the larger "other" category comprising private-equity firms, principals at RIA firms themselves, and other players. 
Of the 109 deals tracked by Schwab in 2010, 58% of them represented less than $500 million in assets under management, 23% of deals were between $500 million and $2 billion, and 19% of deals were greater than $2 billion.

DeVoe says valuations for advisory firms last year remained roughly where they were at the end of 2009, with firms with less than $100 million generally selling for four to six times cash flow, firms with between $100 million and $500 million going for five to eight times cash flow, and firms larger than $500 million selling for more.

Residency Program: Jump-Starting A Young Planner's Career
Graduates of college financial planning programs face a classic conundrum: Employers want new hires with experience, but new grads can't get experience until they're hired.

To bridge that gap, Cornerstone Wealth Advisors Inc. has created a three-year residency program designed to give young professionals a full-time, market-rate job with intensive client experience to make them attractive candidates as full-time junior financial planners at program's end. The firm's first resident started last spring, and Cornerstone plans to hire another one in the near future.

In early 2009, Cornerstone wanted to bolster its financial planning staff, but the firm couldn't guarantee that an advisor-track position would be available several years down the road. Jonathan Guyton, principal at the Edina, Minn.-based wealth manager, developed a residency program similar to doctors', where a person could get substantive experience for a few years before moving on to full-time work elsewhere.

"I saw this approach as a way to address a key professional development issue in our industry," Guyton says.

Cornerstone launched its talent search in autumn 2009. The firm sent a job description via e-mail to university-level CFP program directors and advertised on the Financial Planning Association's Web site, receiving 32 résumés from across the United States. The three finalists were invited to the Twin Cities in early 2010 for final interviews, but the firm's top candidate, Christine Damico, wasn't scheduled to graduate from Virginia Tech until May 2010.

Damico was completing a bachelor's degree in finance with a concentration in financial planning. All of the potential jobs she looked at required at least three to five years experience to qualify for a full-time planning gig, so the Cornerstone opportunity seemed like an ideal way to jump-start her career.

Cornerstone's residency program "was the first job description I saw where after three years I would be a full-time planner rather than just an associate," says Damico, 22. "I thought this was a unique opportunity."

Cornerstone decided to hire Damico and wait for her to graduate before launching the new position.

Damico initially did paperwork, answered phones and performed other assorted tasks to learn the ropes. She now sits in on five client meetings a week, and her responsibilities include taking notes, loading them onto the computer and doing follow-up work from the meeting. "During the next couple of months I'll do more of the same, but will play a bigger part in the meeting. Having the chance to sit in on client meetings and interact with them helps me apply what I learned in school."

Damico's roles range from junior financial planner and client service representative to paraplanner and administrative assistant. Guyton says he weights each of those and calculates Damico's pay based on the FPA's salary survey for each position. She gets benefits, as well as 10% salary hikes, at both the six-month one-year marks to account for her increased responsibilities. "We'll figure it out from there because we've never done this before," Guyton says.

Guyton says he created this position with the idea to make it client service-oriented. "Whether it's a residency program or a well-defined career-track position, one of the keys is how soon-and to what degree-they're immersed in client meetings and can establish relationships with clients.

"We're getting the word out to other firms about Christine so she'll have the opportunity to be somewhere after three years," he says.

When Do ETFs Make The Grade?
A new rating system to help financial advisors understand and compare exchange-traded funds was highlighted at the 4th Annual Inside ETFs Conference.

Held at the Westin Diplomat Resort in Hollywood, Fla., the conference was attended by about 1,000 people and approximately 60 exhibitors. The show has grown steadily over the years and is viewed as the go-to place for financial advisors to learn about ETFs. Sessions this year covered more than 20 topics, including some on choosing ETFs, comparing ETFs and mutual funds, selecting region-specific and commodity plays, and understanding ETF risks.

Many at the show were interested in the new A to F ratings system introduced by the conference founders and organizers, IndexUniverse, which provides news, data and research on ETFs and indexes. More recently, the company started ETF Analytics, which developed the ETF ratings system.

Entering beta testing now, ETF Analytics' research and rating system will likely be available for financial advisors to buy in the spring or summer, says Elisabeth Kashner, CFA, the company's senior vice president of analytics who oversees eight other analysts. The company has not yet finalized pricing for the new system.

ETF Analytics first is focusing on rating sector ETFs and eventually plans to grade all exchange-traded products.

ETF Analytics' classification and ranking system is not primarily aimed at evaluating fund performance. Instead, it focuses more on what's under the hood of an ETF so advisors can be sure they're getting the exposure they want in a particular sector. "Our product is strictly focused on beta exposure. ... It's to give our users a tool to get the market exposure they intend to get, and also to understand the cost of getting that exposure," Kashner says.

ETF Analytics' new system grades ETFs based on three overall metrics: efficiency, tradability and fit.

Efficiency assesses how well an ETF tracks its own index. To judge efficiency, Kashner's team looks at tracking error, expense ratios, fund structure, risk of fund closure, transparency, tax risks, performance and standard error of beta.

Tradability measures the likelihood an investor will get a fair deal when buying or selling an ETF. The company evaluates this based on a proprietary measure of underlying liquidity.

A fund's fit score assesses how well the ETF tracks a benchmark for its group that is chosen by ETF Analytics. For most of the sector ETFs, the company is using Thomson Reuters indexes as benchmarks.

Efficiency, tradability and fit are given numerical grades of between zero and 100 that are weighted to come up with the ETF's letter grade. Kashner says ETF ratings will be updated quarterly, but if events warrant, they'll be updated sooner.

IndexUniverse publishes Journal of Indexes and Exchange-Traded Funds Report in conjunction with Charter Financial Publishing Network (CFPN), the parent company of Financial Advisor magazine. CFPN, Credit Suisse and Bendigo Partners recently led a round of equity financing for IndexUniverse to launch ETF Analytics.

SEC To Roll Out Uniform Exam Manual
(Dow Jones) The Securities and Exchange Commission is finalizing a new uniform manual for its examiners that it expects will nationalize the agency's examination program.

"We want processes and procedures to be the same throughout the country," says Norm Champ, deputy director of the SEC's office of compliance inspections and examinations. Speaking in February, Champ said the SEC expects to distribute the new manual to its examiners within 30 to 60 days. "Our goal is to experience a national exam program," he says.

The SEC has faced criticism from the securities industry about a variation of examination processes and procedures among its regional offices. Nationalizing the exam process, Champ says, will also increase the agency's efficiency and "allow us to get out to more investment advisors."
Copyright © 2011 Dow Jones & Co. Inc.

Commonwealth Boosts Payout, Trims Charges On Fee-Based Assets
Starting on April 1, Commonwealth Financial Network will increase the payout and reduce ticket charges for its fee-based asset management program, Preferred Portfolio Services (PPS).

The independent broker-dealer, based in Waltham, Mass., and San Diego, will raise its payouts 200 basis points at every level from $50 million to $500 million. Above the latter figure, the payout rises 300 basis points to 98%. Specifically, payouts will rise to 94% from 92% on assets between $50 million and $100 million; to 95% from 93% on assets between $100 million and $150 million; to 96% from 94% on assets between $150 million and $250 million; to 97% from 95% on assets between $250 million and $500 million; and to 98% from 95% for advisors with assets exceeding $500 million. The payout is linear, not tiered.

"A lot of people advertise higher payouts, but it's only on a production level that's pretty high," says Commonwealth CEO Wayne Bloom. "This is linear starting at dollar one. We re-evaluate where their asset levels are every quarter and we reprice, so as they continue to build their assets we give them a better deal."

Regarding ticket charges, advisors with more than $25 million in PPS assets will see the cost of PPS online orders for equities and ETFs reduced 50% from $16 to $7.95. Commonwealth says this is the eighth time it has improved pricing through either payout increases, program cost reductions or both since the program started in 1996.

"Trading is a commodity now," Bloom says. "If you don't have best execution, you're no longer in the game. We clear through Fidelity, so it's not an issue. That's attractive from a recruiting perspective.

"On the payout side, it's a continued sharing of those economies of scale," he added. "Making our advisors more profitable makes them stronger, and hopefully they'll reinvest some of that money back into their business for marketing and client relationship activities."
Commonwealth says more than 70% of its revenue is fee-based, and that the PPS program has more than $25 billion in assets.

Has Life Insurance Become Passé?
When the financial markets went down a few years ago, so too did people's interest in buying life insurance. Now the industry needs to get its mojo back, according to a recent report from Aite Group.

As a percentage of personal disposable income, life insurance premiums hit a historic low in 2009. The industry rebounded modestly through the third quarter 2010, as gross premiums industrywide grew 6% year-over-year and the fourth quarter was expected to be strong thanks to rising applications by folks 60 years and older.

But the big question, as posited by Aite, is whether the industry will witness a reversion to the historical mean or whether people no longer have much interest in higher-margin life insurance products. Or, as the Aite report puts it, it remains to be seen whether the "financial planning dogma of 'buy term and invest the rest' has gained purchase among the industry's target demographic of the mass affluent and up."

According to Aite, the life insurance industry's highest margin products have been higher-face-amount policies designed to help high-net-worth people minimize estate tax concerns. But these types of products are less desirable now that there's a $5 million exemption for estate, gift and generation-skipping taxes, coupled with a top federal estate tax rate of 35%, for the next two years. Lower rates for both the exemption rate and the top rate for estate taxes would've exposed more people to the tax.

To make up the difference, Aite suggests that life insurers will need to focus their sales efforts on the middle class. Last August, Limra released a study that showed only 44% of U.S. households have individual life insurance, which was a 50-year low.

Possible solutions for insurance companies to grow their business include using multi-channel distribution, online application forms and, for companies with enough scale and ambition to go abroad, tapping into opportunities in emerging markets.