Managing Volatility In Unstable Markets
Advisors have been telling clients for years that they should focus on a strategy that aims to maximize returns over the long run in spite of ups and downs along the way. But many advisors have begun to question that conventional wisdom.

"The reality is, that's not the only approach, nor is it the best one in many markets," says Barry A. Ransick, a principal at Principled Wealth Advisors in Covington, Ky. "By managing volatility, rather than blindly accepting it, our clients can get more comfortable with their investment approach and may be better positioned for success."

How are advisors attempting to manage volatility? Some are turning to managed volatility funds. Some of these funds look to hold the least volatile investments. Others do that but also employ hedges to minimize volatility. Exchange-traded products tied to the VIX, a well-known volatility measure, also have been gaining in popularity. Strategies that manage volatility are supposed to allow individuals to capture most of the market upside, but with reduced market volatility and more short-term stability in the current topsy-turvy financial market.

"Managed volatility funds are gaining interest among investment managers," says Cory Haith, financial advisor for West Des Moines, Iowa-based Syverson Strege & Co. She says the funds offer low price volatility and include the stock of companies that tend to generate stable earnings and dividends throughout all business cycles.

Syverson Strege & Co. currently uses managed volatility funds in its more conservative client investment models, Haith says. "Generally, we allocate approximately 10% to 15% to such vehicles."

Ransick says more of his clients are asking for income stock investments with low to moderate risk. "Investors, I think, are getting more in tune to the investment lingo," Ransick says. "The average investor today really knows what we mean when we say 'managed volatility.' If you had said it four to five years ago, they would have said, 'What are you talking about?' Today, investors understand that concept of volatility that the markets are having."

Ransick recalls meeting with a widow in her early 50s last month who had been left with an ample nest egg but was leery of making any investments. He says they talked about needing to get into stocks for her long-term security and that they would use a 'managed volatility' investment strategy.

"I think this gave her the comfort to be in equities, that she wouldn't likely have taken had we not been able to talk about something specific, than just, 'Gee, we're just going to buy [stock] in this large U.S. company.'''

Oaks, Pa.-based investment manager SEI offers clients the ability to adopt a managed volatility strategy through some of its products, including its U.S. Managed Volatility Fund.

The fund invests in stocks with lower-than-average volatility and is designed to produce long-term returns comparable to the market, with less volatility and risk of loss. Year-to-date, the fund has outperformed the S&P 500 index by nearly 7%, says Kevin Crowe, head of product development for the SEI Advisor Network.

"Limiting losses, even by one or two percentage points, can make a significant difference in the ultimate value of a portfolio, Crowe adds. "For investors looking for a smoother stock market ride, a managed volatility fund may be the right approach."
One veteran money manager points out that a "managed volatility" investment strategy isn't new. Bedda D'Angelo, president of Fiduciary Solutions, an RIA based in Durham, N.C., says CFPs and CFAs are required to learn about managing volatility.

"It's basic, like brushing your teeth in the morning," D'Angelo says. "Amateurs who lack experience, securities sales people who do not manage portfolios and college students are just now becoming aware of the concept of managing volatility."

D'Angelo says her clients need little convincing to embrace a strategy that manages volatility. "They are mature investors who have lived through many market cycles," D'Angelo says. "Once you have lived through a few bear markets, you already know it's how your portfolio performs when the market goes down that determines investment success. "
- Jim McConville

Patent-And Potential Hassles-Pending Over Wealthcare Case
An ongoing patent infringement lawsuit could impact how financial advisors provide advice to clients.

Richmond, Va.-based Wealthcare Capital Management, which serves individual investors, financial advisors and institutions, this summer filed suit against UBS for using what it contends are its own proprietary processes for financial planning including the popular software MoneyGuidePro. The two patented processes involved in the suit assess a client's long-term financial goals and then use a capital-market modeling technique to determine how these goals can be achieved.

The suit seeks monetary damages and an injunction banning UBS from using the financial advising systems in MoneyGuidePro.

Wealthcare sought patents for its work in 1998, and the U.S. Patent Office only recently granted Wealthcare two patents on its financial planning software.

David Loeper, Wealthcare's founder and chief investment officer, says the fact that the patent office issued the patents proves his system is unique and anyone using it should be paying his firm a licensing fee. If the patent is upheld, it could raise the cost of financial planning because of the fees that would be due to Wealthcare.

"What is interesting in this case is that one of the patents, on its face, is fairly broad," says Anthony J. Fitzpatrick, a lawyer who practices in the area of intellectual property litigation with a concentration on patent and trade secret matters with Duane Morris LLP in Boston. "That is what has financial planners worried."

The patent office takes into consideration what existed before the patent was applied for to determine whether something is patentable. The applicant has an obligation to disclose what existed and the patent office also does its own research, although the patent office is under extreme time constraints for the amount of research it can do and how much expertise it can develop in a given field.

It would seem financial advisors would have to rely on their software providers to determine whether there is a patent infringement. However, in this case, "there will be a big fight to determine what existed prior to 1998," Fitzpatrick says.

PIEtech Inc., the developers of MoneyGuidePro, which has been the focus of most of the controversy, says it will vigorously defend its rights and its clients, including UBS. It claims there is no patent infringement. Some experts say the patents should never have been granted in the first place because Wealthcare is trying to patent the process of financial planning itself.
Some experts even say they would not be surprised if someone asks the patent board to re-examine the issuance of the patents. Some patent attorneys estimate that when approved software patents are challenged in court, about 80% of them are thrown out.

Water M. Primoff, director of the Professional Advisory Group of Altfest Personal Wealth Management in New York, questions whether work that had previously been done manually, such as preparing goals for a financial plan, can be patented when software is developed to do it on a computer.

"This becomes a public policy question," Primoff says. "Planners who have a close relationship with a client may have to say they have to do research or consult a patent attorney before they can answer a question. The Supreme Court may have to make a judgment on exactly what is patentable, taking into consideration the small business people who are professionally advising clients."
--Karen DeMasters

Bank On It (Not)
Banks with wealth management divisions dream of using their financial advisors to promote referrals and cross-selling across a bank's various business lines. The goal is to provide customers with a more holistic product offering and to snare more investment assets. Sounds good in theory, but it is more difficult to pull off in practice.

Ideally, banks seek partnerships between retail banking, small-business banking and the advisors at their wealth management units. But according to a recent report from Aite Group, few U.S. banks have achieved more than a 25% investment cross-sell ratio with their mass-affluent customer base.

Part of the problem, according to Aite, is that the bank-affiliated advisors most plugged into their institution's referral network do worse than those who generally eschew referrals and instead drum up their own business. "The lowest-producing group [of advisors] in terms of revenue per client are those most reliant on referrals at bank branches," says Aite senior analyst Sophie Schmitt.

Among the possible reasons: Advisors located at bank branches may not be getting enough quality referrals or they may not be good at cold calling for new business. "They might be relying on the bank as a crutch," Schmitt says. Plus, some customers might look at advisors working out of bank branches as glorified bank tellers.

The roster of leading banks with wealth management divisions include Bank of America, Wells Fargo, JPMorgan, PNC, SunTrust and U.S. Bank. Not all of them have advisors conducting business out of bank branches.

Aite's report, Referral and Cross-Selling Adoption in Bank Wealth Management: A Need for New Incentives, found that Merrill Lynch and Wells Fargo advisors are still trying to figure out how to use their retail bank channels after recent mergers involving those two companies (Merrill with Bank of America and Wells Fargo with Wachovia). And that might be a good thing for those advisors, who generally continue to do well doing their own thing. "A lot of advisors who ignore being part of the bank in terms of leveraging internal partners are doing quite well," Schmitt says.

But that's not quite what the banks have in mind. Thus, Aite concludes in its report that banks and brokerage leaders need to agree on what makes an ideal bank financial advisor and modify the existing compensation system to reward the ideal person.

'Sympathy Pricing' Leaves Brokers Feeling Sorry
It's a nice gesture by advisors: When times are tough andthe markets stink, drop certain fees for clients to let them
know you feel their pain. Not a good idea, according to a study by Toronto-based consultant PriceMetrix.

The study, which focuses on transactional equity commissions, states that such sympathy pricing not only causes advisors to lose money immediately but also hurts in the longer term because they're not able to quickly reset prices when markets rebound.

PriceMetrix found that the average discount on commissions during the '08-'09 downturn jumped from 37% to 43%. Since then, advisors have had a mixed record boosting prices again--just 13% charge full price while half of advisors discount their commissions by at least 30%.

"[Clients] do not expect a discount when market performance is poor any more than they expect to pay a premium when market performance is strong, says Doug Trott, PriceMetrix president and CEO. "As such, advisors should be confident charging a fair price in bad times, as well as good times."

The study says that advisors who consistently priced trades during the past three years outperformed advisors who didn't.

Personal Capital Aims To Upend Investment Advice
(Bloomberg News) The Internet has changed how we pay our bills and apply for loans. What hasn't evolved as much is the relationship between wealthy individuals and their financial advisors, who manage their clients' holdings, take an annual cut of overall assets, and periodically offer updates in person or over the phone.

Bill Harris has a plan to bring this kind of personal wealth management into the Internet Age. A Silicon Valley veteran and a former chief executive officer of Intuit Inc.,  Harris has quietly worked for two years on a start-up called Personal Capital, raising $27 million. Harris said he hopes to create a new kind of financial-services firm catering to moderately wealthy individuals whose net worth, from several hundred thousand dollars to several million, is not quite fat enough to attract the high-priced investment advisors at Morgan Stanley or Goldman Sachs Group Inc.

"We want to bring personalized, high-end wealth management services to a part of the market that is fundamentally underserved," Harris said.

At the center of Harris' plans is a free Web site, personalcapital.com, that helps people track their finances and improve their portfolios. The company formally launched in September, and site visitors can register their various bank accounts, investment accounts, 401(k) retirement plans, mortgages and credit cards.

They get assessments of how risky their investments are and their allocations to various asset classes and geographies. They also can measure fees on their mutual funds and judge whether the performance justifies the price. Some of this mirrors what's available on other sites such as Wikinvest and Sigfig.com, and with personal financial management software such as Mint.com.

Personal Capital wants to go further. It plans to match customers who seek hands-on help with one of its registered investment professionals. That's the part of the business that Harris said is "a pretty big swing for the fence," and the company is competing with portfolio advisory services from Charles Schwab and Fidelity Investments and with thousands of independent broker-dealers around the country.

The start-up currently employs eight wealth advisors in a call center in San Francisco and plans to add to that staff as the volume of customers grows. Each client is assigned an advisor who designs a personalized investment strategy and is available to talk via telephone, e-mail, video chat or instant messenger.

The company will charge an annual fee of 0.75% to 0.95% of the invested assets, compared with the average for the wealth management industry of 1.5% to 2%. "We've tried to combine real-time data tools that allow you to understand and take control of your financial decisions with the ability to have a personal advisor, to whom you can delegate," Harris said.
The company will face challenges. It's launching into a volatile stock market and a faltering economic recovery. Jim Bruene, editor of the Online Banking Report, is skeptical of the company's plans but said he thinks the market environment might help.
"There's a lot of volatility, and people are looking for advisors," he said. "On the other hand, will they go to a brand-new Internet company or will they go back to a name they have heard about for the last 100 years?"

There are other issues facing Personal Capital, such as: Why would anyone trust a financial advisor whom they've never met with some of the most important decisions they'll ever face? Mitch Tuchman, CEO of a portfolio management software maker called MarketRiders, said Harris is wading into a field that tends to revolve around trust and relationships.

Orphaned 401(k) Plans
Expect more 401(k) assets to be frozen due to abandonment if client plans go unmonitored, warns Rania V. Sedhom, an attorney and principal with New York-based Buck Consultants. 401(k) plans become abandoned, or "orphaned," when employers shut their doors or declare bankruptcy, and it generally happens with small and midsize businesses. It can happen if an employer flees the country or simply stops contributions because of financial difficulties. Or when two employers merge and one merger partner's 401(k) plan is simply ignored. And 401(k)s also can become abandonead through death, neglect, bankruptcy or the jailing of an employer.

A 401(k) plan, Sedhom says, need only be inactive for 12 months to be abandoned. Once that happens, a plan participant's retirement stash can be held hostage. Even though an investment company, bank, brokerage or life insurance company may be holding assets in the plan, nobody is legally permitted to disburse them until specific rules are followed. Meanwhile, a plan's investment and operational fees still must be paid during abandonment. Depending upon the wording in the plan's contract, it's possible that employees could be saddled with that bill.

Sehom worries that abandoned plans could soon become a major issue given recent rumblings in Washington about the possibility of taxing 401(k)s as part of federal deficit reduction efforts.

"That's a little bit scary for most people," she says. Such talk could prompt clients and/or employers to halt plan contributions, rendering a plan inactive. Amid market downturns, she adds, clients often avoid opening 401(k) statements-another potential move toward inactivity.

Once a plan is abandoned, 401(k) funds can only be released after a "qualified termination administrator" is appointed by the U.S. Department of Labor Employee Benefits Security Administration. The appointee must be someone eligible under IRS rules to serve as a trustee or issuer of an individual retirement plan, or somebody who holds the assets of the abandoned plan. These are often banks, trust companies, mutual fund families or insurance companies.

In 2006, the Employee Benefits Security Administration rolled out a program that outlined how financial institutions can terminate plans and distribute benefits abandoned by sponsoring employers. During fiscal years 2006 through 2010, the EBSA says there were 685 applications under that plan, and that nearly half-331 applications-came in fiscal 2010.

Commenters on its 2006 rules had suggested that record keepers, third-party contract administrators, accountants and plan service providers would be in a better position than financial institutions to handle the job. Reason: their ready access to plan documents and records. However, an EBSA spokesman says the amendment is primarily to address certain issues related to bankruptcy trustees who step into the shoes of the plan administrator when they handle a Chapter 7 bankruptcy.

So what should you do to avert abandonment of your client's 401(k)? Sedhom says advisors should tell clients to be proactive with their account, review all statements and ask questions of the plan sponsor if they suspect there is a problem. If a client leaves an employer, it's typically best to transfer the 401(k) to the new company plan or into an IRA, she says.

Do you have a client who can't find 401(k) plan assets from a prior job? Search the EBSA's database for companies and qualified termination administrators at www.askebsa.dol.gov/abandonedplansearch/, or call 1-866-444-3272 (EBSA).
-- Gail Liberman

Advisors Spending More Time On Problems With Trusts
Financial advisors say they are spending more time ironing out snafus in legal documents needed to transfer assets to their numerous baby boomer clients who are due inheritances from their deceased parents' estates.

Consumeraffairs.com cites cases in which estates and custodial accounts have been tied up and can't be liquidated because of administrative errors and problems with paperwork. One financial advisor's client, who asked not to be identified, told Financial Advisor that he was racking up thousands of dollars in legal fees trying to get a brokerage firm to unfreeze assets of a trust and recognize a legal document appointing him as trustee.

"Whenever you're dealing with custodians on the trust side, everything goes through legal, so it creates a whole other barrier," says John Catalfamo, a registered investment advisor in Palm Beach Gardens, Fla. He says he's been spending more time on these kinds of issues.

After a review by a brokerage's legal department, trust documents are apt to go to the firm's operations department, which then provides an advisor with a list of which documents are missing or need to be fixed.

Even something seemingly simple could potentially create slowdowns in having assets released from a trust. For example, Catalfamo says, he once noticed that an attorney had misspelled a client's name as "Jon," when it should have been "John," on a living trust document. Fortunately, Catalfamo caught the error and was able to help the client correct the document.
While it may be tough for a financial advisor to resolve a legal issue in a different state, it's routine for a lawyer to handle, says Juan C. Antunez, a Miami trust and estates attorney. "In this [legal] practice area, that's a nothing phone call."

What makes matters particularly complicated when mistakes are uncovered is that changes may need to be made at many levels. Each state has laws affecting trusts, and every bank, brokerage and investment company has its own policies.
When the trust grantor dies, the problems of correcting mistakes or omissions get compounded. To nip this issue in the bud, many trust companies are wooing financial advisors to have their clients hire them as successor trustees. This way, their experienced professionals can review documents and help eliminate administrative problems while trust grantors are alive.

Another carrot from trust companies: a commitment that the advisor will retain the investment management side of the business. This comes as more competitors, including financial advisor custodians, are marketing trust and investment management services directly to consumers. Advisors who fail to handle this issue in advance risk losing a client's business after he dies.

Lorenz Fiduciary Services Inc., a La Jolla, Calif., private fiduciary company, cites this very reason in seeking the successor trustee business of financial advisor clients. "Private fiduciaries don't sell financial products," notes Marguerite Lorenz, a private fiduciary and partner at the family-owned business. A professional fiduciary license-unique to California-permits oversight of non-family member conservators, guardians, trustees and agents under durable power of attorney.  "It's in our interest and the client's interest to use the same financial advisor."

National Advisors Trust, Overland Park, Kan., a trust company founded by financial advisors, also offers this service. CEO Ron Ferguson says some firms are more helpful with administration than others.

Unlike many normal brokerage-style custody accounts, for example, his company offers income-principal cash accounting that can be useful if a client wishes the asset income stream and principal to go to different people. "We are not the trustee," Ferguson stresses. "The spouse or family member is the trustee. They have an advisor."
-Gail Liberman