Schwab Institutional Offers Succession Planning

Schwab Institutional is expanding into the succession planning business with the creation of a new business unit, Schwab Advisor Transition Support Services. The move comes after many financial advisors affiliated with Schwab, half of whom are over 50 years old, asked for such a platform.

The new program has four components, says Deborah McWhinney, president of Schwab Institutional. The first involves developing a cadre of experts, including attorneys and CPAs, for advisors to use when contemplating the purchase or sale of a practice.

The second component entails the development of several standardized approaches to transition, including valuation models and legal structures. "We want to help people to develop a basic path so they don't have to reinvent the wheel," McWhinney says.

The third element is access to financing. At present, Schwab is relying on third-party lenders, though at some point its U.S. Trust arm may decide to get involved. In the meantime, executives at Schwab plan to educate lenders in the dynamics of the business. She adds that financing could be made available to help junior partners buy out senior ones and keep the firm independent.

The final component of the new program is a match-making service. "We are uniquely positioned to introduce people," McWhinney says. "For larger firms, it's a way to expand."

Schwab plans to construct an online database for people who seek to combine firms. Although the information will be private and released only with advisors' permission, it could provide acquirers with a framework to understand the revenue and profit structures of different firms. "A lot of the value won't be in the metrics; it will be in the personality issues," McWhinney predicts.

The giant brokerage and custodial firm plans to introduce all four components of the service at its annual Impact conference in San Francisco on November 12. Josh Rymer, senior vice president of strategy, says that the firm will conduct a road show with financiers and hold seminars on the subject in January and February.

Securities Firms Scramble As Excess SIPC Coverage Is Dropped

The brokerage and custodial industries are scrambling under the threat of losing one of the big security blankets they offer investors: supplemental SIPC insurance.

Also called "excess" Securities Investor Protection Corp. (SIPC) coverage, the policies have been offered by private insurance companies to cover investor losses, in the event of a securities firm failure, above and beyond the $500,000 maximum offered by basic government-backed SIPC coverage.

This year, however, three of the four major companies offering excess coverage announced they would no longer underwrite supplemental policies. Now securities firms are trying to find ways to fill the void before their current policies expire.

Charles Schwab, for example, was scheduled to hold a Web-based conference in late October to discuss the situation with its advisor clients. The NASD, meanwhile, put out an alert in July that advised its members to promptly notify clients.

"The availability of excess SIPC coverage may have served as an inducement or a determining factor for customers in deciding to open or maintain a securities account," says the NASD alert. "Therefore, members and member organizations that offer additional or excess SIPC coverage should provide customers 30 days notice prior to the discontinuation or reduction of any such coverage."

Firms are looking at alternatives including self-insuring and putting a liability cap on excess-coverage policies, which currently entail unlimited liability on the part of insurance companies.

TD Waterhouse, for example, got a new supplementary insurance policy in the spring from Lloyds of London that provides up to $150 million in coverage per client, says Thomas A. Nally, TD Waterhouse's senior vice president of brokerage services.

Some think the situation is not as dire as it may seem. While securities firms consider SIPC coverage an important perk, supplemental SIPC claims are extremely rare. The insurance only covers losses in instances of firms going bankrupt-a circumstance that typically does not lead to the loss of client assets. Furthermore, SIPC coverage does not cover losses sustained through fraud.

Some industry insiders wonder if investors know that SIPC insurance does not protect them from fraud.

"I think probably a bigger percentage than we think not only think it covers issues of fraud, but I bet there's a percentage who think it covers market risk," says Dennis Kaminski, executive vice president of Mutual Service Corp. in Palm Beach, Fla.

LPL Unveils New Portfolios For Smaller Investors

LPL Financial Services, the nation's largest independent broker-dealer, has introduced a new series of portfolios called Optimum Market Portfolios designed for smaller and mid-sized accounts that are automatically rebalanced on a quarterly basis. The portfolios are being managed by Delaware Investments, although only two of the 12 funds in the portfolios are Delaware funds.

The automatic rebalancing feature is one of the portfolio's primary attractions. The issue is that rebalancing is "enormously time-consuming, especially on mid-sized accounts," explains Todd Robinson, LPL's CEO.

After all the market convulsions of the past three years, advisors and investors are gaining a renewed appreciation for the value of rebalancing. So are regulators. "On C shares, regulators will ask you about rebalancing," Robinson says. "If the customer signs off, you don't have to call them every quarter to rebalance and you also get the benefits of the discipline."

Delaware is managing the portfolios on an institutional basis so they will have lower fees than many fund-of-fund structures. Savings on management expenses and low-cost e-wholesaling permits the asset allocation platform to offer a payout up to 40% higher to reps and still control the expenses to the client, LPL says.

LPL's research department, headed by research director Lincoln Anderson, is acting as a consultant and receives a fee. Under the structure of the agreement between LPL and Delaware, LPL expects Delaware to switch managers if they request a switch.

At present, the sub-advisors to the asset allocation platform include Delafield, Hotchkis & Wiley, Liberty Wanger, Marsico Capital Management, MFS, Scudder Investments, T. Rowe Price and Van Kampen.

"There are 15 different asset allocation models, so this is not like a lifestyle fund group," says Mark Casady, president of LPL. "This is one of the only places you can buy Liberty Wanger Small-Cap [the old Acorn fund] that is now closed to new investors."

Pape Named CFB Board Chair-Elect

An advisor with Ernst & Young LLP has been named chair-elect of the Certified Financial Planner Board of Standards for 2004 and will become chairman in 2005. Glenn Pape, who is a partner and West Coast leader for Ernst & Young's Human Capital practice, will take the position on January 1, when current chair-elect David Diesslin takes over the chairmanship from Chairman Rick Adkins.

Pape has a broad array of credentials. He is an attorney and a CPA in addition to being a CPA certificant, and has 23 years of experience in financial planning.

"Glenn brings a tremendous breadth of knowledge and experience to his new position, and his passion for helping the public understand and measure their financial well-being is consistent with our mission," Adkins says. "His expertise will be very welcome as we work to get the greatest value out of CFP Board's resources."

Prior to joining Ernst & Young, Pape was a partner and vice president at The Ayco Company LP, responsible for financial education services, and research and development. He was a manager at Arthur Andersen before joining Ayco in 1988, heading the Chicago-based firm's retirement planning practice.

Most Americans Plan To Work Past 65, Survey Finds

The urge to continue working beyond the traditional retirement age of 65 continues to run strong in America's working population, according to a new survey.

The survey by the AARP, formerly known as the American Association of Retired Persons, found that 70% plan to work past 65. Furthermore, more than half expect to work into their seventies or eighties.

While noting the trend of Americans wanting to extend their working years is not new, AARP officials say the survey found that these sentiments run deeper than many may have realized. In years to come, this is going to lead to a larger workforce, the survey notes. People who are 55 and older will make up 17% of the workforce by 2010, up from 13% in 2000, says the Bureau of Labor Statistics.

"What did surprise us is that people intend to work way past the traditional retirement age," says Jeff Love, research director at AARP, which has been surveying people about their retirement plans since 1997.

The survey, which involved interviews with 2,001 people between the ages of 50 and 70, found that higher health-care costs, insufficient retirement savings and investment losses contributed to the desire to work past 65.

Wells Real Estate CEO Fined, Suspended By NASD

The National Association of Securities Dealers (NASD) has suspended Leo Wells III, president of Wells Real Estate Funds Inc., from acting in a principal capacity at the firm's broker-dealer for one year.

NASD also sanctioned the broker-dealer, Wells Investment Securities of Norcross, Ga., for rewarding reps who sold the firm's real estate investment trusts (REITs) with lavish entertainment and travel perquisites, a violation of NASD rules. NASD also censured Wells Investment and Wells and fined them $150,000.

NASD, which announced the actions in an October 13 press release, prohibits REIT sponsors from rewarding broker-dealer reps from other firms with entertainment, gifts or other noncash compensation.

Wells Real Estate acquires and manages office buildings and other commercial properties. The projects are funded through the sale of REIT and direct participation program (DPP) offerings managed by Wells Investment and sold through other broker-dealers. As of mid-October, Wells Investment has managed four private REIT offerings, which have raised investor proceeds in excess of $3 billion, and 13 DPPs, which have raised investor proceeds of more than $300 million, NASD says.

According to a Wall Street Journal article, Wells says it spends only 84% of proceeds from securities sales on property investments. In the past two years, Wells has been raising money at an unprecedented rate, so fast that it cannot invest the funds at the pace it is attracting new money. Competitors have complained that it has been bidding up prices in a frantic effort to put the money to work.

In 2001 and 2002, Wells Investment sponsored conferences in Scottsdale, Ariz, and Amelia Island, Fla., which were attended by broker-dealer reps from other firms who sold its REIT products, NASD says. "Although Wells Investment represented to NASD that these conferences were 'strictly educational,' they actually constituted lavish affairs that did not meet the standards of NASD rules," NASD says.

Wells Investment is one of the only real estate companies that marketed DPPs to financial planners and survived the limited partnership debacle of the 1980s. When financial assets stopped appreciating in 2000 and interest rates kept falling, the 7% dividend on its private REIT suddenly became very attractive and the firm was flooded with investors.

Wells Real Estate did not return phone calls for comment by press time.

Morningstar Creates New Foreign Stock Categories

Morningstar is continuing to tweak the way it categorizes the thousands of mutual funds it covers.

The firm announced it is splitting up its foreign-stock mutual fund category into five new categories: large value, large blend, large growth, small/mid-cap value and small/mid-cap growth.

The changes were scheduled to take effect October 3, and follow a series of sweeping changes that were made last year to refine the way in which Morningstar categorizes and rates mutual funds.

The changes will apply to open- and closed-end funds, exchange-traded funds, variable annuities and separate accounts.

"Previously, we grouped all foreign-stock funds in one category," says Don Phillips, Morningstar managing director. "Now, by separating them into five distinct categories by similar investment style and size, we can more effectively help investors understand the differences between the funds."

The change is along the lines of revisions made to the domestic fund rating system last year. Funds were recategorized so they were rated in comparison to funds with similar styles. Previously, funds were clumped together in broad categories, resulting in high star ratings for funds using the hottest investment styles. That's what happened in the late 1990's, when large-cap growth funds won all the five-star ratings and value funds languished at the bottom of the ratings scale.

Phillips notes the same problem with foreign funds. He cites a fund such as American Funds' EuroPacific Growth Fund, which owns a variety of large, well-known stocks such as Unilever and Nestle, being part of the same rating group as Eagle Overseas Fund, which uses a strict value approach in the small- and mid-cap arena.

"Each brings different types and levels of risk to an investor's portfolio," he says. "Our new fund categories will help make these distinctions apparent to investors."

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