Call to Action

When an online broker recommends investments, whic

NASD Notice to Members 01-23, concerning suitability of online communications to investors, is either a big deal or not, depending on who's talking.

The notice spells out what constitutes a "suitable" communication to a client regarding recommendations of investments. It was issued due to the "dramatic increase in the use of the Internet for communication between broker/dealers and their customers."

While broker/dealers didn't express concern over the notice, at least a few consumer advocates are tearing mad about it.

Tracy Stoneman, a securities arbitration attorney in Westcliffe, Colorado, is incensed. "There are so many folks who open up online brokerage accounts who are very na?ve, trading in excess of their income," Stoneman says, "and, in some cases, of their net worth." And they are doing it, she says, in response to solicitations--a term not defined by the NASD in its notice. "The NASD rule insulates online firms from their conduct as long as the person trading is making the decision themselves," Stoneman claims.

Douglas Schulz, of Invest Securities Consulting in Westcliffe, Colorado, agrees. "I think there's little doubt that the damage it does is with the 'call to action'." [The actual statement is, "An important factor . . . is whether . . . a particular communication from a broker/dealer to a customer reasonably would be viewed as a 'call to action,' or suggestion that the customer engage in a securities transaction."]

The acting general counsel of the NASDR, Jeffrey Holik, said the agency tried to strike a balance "between customer protection purposes . . . with the important need not to unduly restrict the benefits from the free flow of information . . . from the Internet."

John Baker, an attorney with Stradley, Ronon, Stevens & Young in Washington, D.C., thinks the notice has merit. "Consumers often allege suitability violations when they bring suitability claims," he says. "In many cases, this will strengthen the consumer's case that the broker made recommendations that apply."

But Schulz stands firm. He feels that the NASD is only looking to protect itself and its members with the notice.

A comment period of 60 days on the notice is about to open.--Marlene Y. Satter

Buyer Aware

New study sheds light on the buyers and sellers of practices

Financial planners often find themselves in a bind when trying to sell their practices. They want to alert enough people to attract sufficient interest among potential buyers, but they also want to remain discreet enough so that competitors aren't aroused and current clients aren't alarmed.

But this approach has only served to push the majority of transactions into the proverbial back room and make it difficult for planners to get a sense of the terms and conditions of the sales taking place. "They're in the dark and have been for quite some time," says David Goad, CEO of FPtransitions, a Portland-based firm whose Web site ( gives buyers and sellers of planning firms a forum on which to anonymously list their intentions, much like the classified ad section of a newspaper.

Now, Goad says, the rules have changed. On April 2 FPtransitions released and posed on its Web site what it calls the first comprehensive study on transactions involving financial planning firms. The report, "2001 Practice Value & Data Survey for Buyers & Sellers of Financial Planning Services Firms," provides planners with detailed information on nearly every aspect of the ads that were placed on the site. It shows what the selling prices were, how those prices related to the gross revenues of the firm, and even what buyers most wanted in a firm they were looking to purchase.

Goad says that 400 individual buyers and sellers were interviewed for the study. Based on those interviews, the study gives some insights into what buyers really want in a financial planning firm. Firms located in the Southwest (with an average selling price of 1.86 times gross revenues) and Northeast (1.82 times gross revenues) command much higher prices than those in the West (1.68) and Midwest (1.58).

Also, would-be buyers placed more ads for firms with less than $100,000 in revenues and fewer than 150 clients than for firms with more revenues and larger client rolls. Perhaps the most interesting finding is that the majority said they were willing to pay more for a fee-based practice (where at least 60%-70% of the business comes from fees) than for a commission-only practice.

"It seems that buyers would like to purchase a firm where the revenue doesn't come from the actions of a particular person who might be an exceptional salesman," says Goad. "They want firms where the revenue generation [is] independent of the people who work there."--Mike Jaccarino

As Go the Stock Markets, So Go VAs
As the stock market has plunged, variable annuity sales are tanking. "Things really aren't good right now," says Edward Spehar, a Merrill Lynch analyst who expects VA sales to be down some 15% to 20% in the first quarter and sluggish into the next quarter. "The stock market is what's largely driving this," he says.

Advisors say that the issue isn't necessarily how to cope with slumping VA sales, but rather how to assuage the anxiety of clients when the topic is raised.

One way to do this is to stress that "now is a buying opportunity," said Robert Dale, a planner with Linsco/Private Ledger in Melbourne, Florida. But that view only goes so far, according to Dale. In the case of one $500,000 policy he recently sold, the planner said he relied on new credits offered by some insurance companies. One firm is giving clients 5% of the face value of some contracts up front, so for that client with a $500,000 policy, $25,000 was added to his principal, says Dale.--Mike Jaccarino

Fidelity: Not Shy on Retiring

Fidelity Investments sets up a Retirement Business Unit designed to help advisors sell and service all manner of retirement plans

F idelity Investments Institutional Services Company, Inc. (FIIS) has bolstered its commitment to the retirement plan business by founding a new Retirement Business Unit.

The unit will combine retirement product and program development with the sales and operations of retirement plans. Fidelity says the unit will promote the value of an advisor's expertise in the selection of a retirement plan, and will provide advisors with the support they need to succeed in the retirement plan market. "We think there's never been a better time for a retirement plan delivered by investment professionals. We see tremendous growth in this part of the market," says Fidelity Executive VP Donald C. Holborn, who heads the new unit.

Support for advisors will come in a variety of ways and through various FIIS channels. "We have dedicated retirement specialists in the field and a dedicated 401(k) sales desk," says Holborn. "A component of the new unit is to create communication and education using both print and Internet-based materials to support advisors."

The unit will offer a retirement plan review, which enables advisors to help plan sponsors create an action plan; a retirement book of business, which will provide advisors with one view of their entire Fidelity retirement plan business; a resume builder program for advisors to present to prospective clients; and Fidelity Advisor 403(b), a retirement savings product designed for employees in the kindergarten through grade 12 market and sold exclusively through advisors.--Josh LeBaron

At first glance, there are many similarities between the startup advisory firm MyCFO and the typical Internet company. The company employs state-of-the-art technology, has experienced incredible business growth, and has yet to turn a profit.

Yet there is evidence that something more substantial is happening at MyCFO. As of late March the advisory firm had signed up 300 clients and had $12 billion under direct management (it also has a $10 million minimum). While the capital markets have been parched for most startups, MyCFO secured $45 million in additional financing in March. "We're going to use this money to grow faster," says COO Frank Tirelli. This growth will take the form of six new offices scattered around the country, doubling MyCFO's bricks-and-mortar presence. And Tirelli says the firm will turn its first profit by the fourth quarter.

MyCFO has 360 employees, the majority of them traditional advisors. Clients interact with an experienced "client service director" who coordinates the services delivered to the client using MyCFO's staff, each of whom may be an expert in a specific area, such as tax preparation, charitable giving, or insurance. The company charges a fee based on the client's assets and for some specific services.

What about technology? Tirelli says the entire back-office functions of the firm have been automated, allowing the advisors to concentrate on advising. All of this adds up to what Tirelli says is a traditional investment advisory business clothed in the fancy dress of today's advanced technologies.--Mike Jaccarino

Balancing Act

The annual scramble to rebalance the Russell 1000 and 2000 stock indexes is nearly upon us, and this year's version promises some dramatic changes. Following the plunge of the Nasdaq, "it will be the revenge of the old economy," says Brad Pope, head of U.S. equity index portfolio management at San Francisco-based Barclays Global Investors. He expects some 30% of the Russell 1000 and 2000 components to change when Frank Russell Co. announces the final composition of the rebalanced indexes at the end of June. Pope thinks technology's weighting in the indexes will decrease, while financial issues' weighting will increase.

A preliminary version of the changes is due May 31. Portfolio managers don't expect the rebalancing to spark major price movements in the indexes. Still, you'll have to be on guard to see that the revisions don't upset your allocations to particular industry sectors or asset classes. But even if you are sitting tight with your allocations, Pope thinks now would be a good time to harvest tax losses in index mutual fund portfolios. He notes that an investor can sell a money-losing position in an index mutual fund, realize the tax benefits, and purchase the same value of shares in a similar exchange-traded fund without running afoul of the IRS's wash sale rule. Barclays, of course, runs iShares, a major family of exchange-traded funds. But the same advice would hold true for its competitors.--William Glasgall

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