More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
As we went to press, the White House and Congress have agreed to a $789 billion stimulus package of spending and tax cuts proposed by President Obama--which includes another patch for the Alternative Minimum Tax. Meanwhile, in the second week of February the Treasury Secretary, Timothy Geithner, took plenty of heat on Capitol Hill when he presented the Obama version of the bank bailout plan. TARP part deux would include up to $2 trillion in public and private funds to buy toxic assets from banks, to promote new lending to consumers and businesses, and lower mortgage rates for some homeowners.
The markets and many advisors had mixed reactions to the stimulus legislation and the Geithner bailout plan. The markets and some Congressmen seemed to want more detail from Geithner, and many advisors worry about increasing the nation's debt, which in the past has led to higher inflation, and which we could ill afford at this time when the economy and the markets, and confidence, remain at depressingly low levels.
However, just as the announced actions by the President and his Treasury secretary--whether they be flawed or not--may help restore confidence to the frozen credit markets and some hope to the increasing number of unemployed, advisors seem to have turned a corner. No, they don't believe we've hit the bottom--most seem to accept the economists' consensus that that won't happen until the third or fourth quarter of 2009. But among recent gatherings of groups as diverse as the independent broker/dealer association, the Financial Services Institute, the RIA custodian TD Ameritrade Institutional, the Commonwealth Financial top producers conference, and several retirement planning workshops sponsored by Investment Advisor, it appears that advisors and the companies with which they partner are exhibiting a new sense of resolve despite the midst of uncertainty.
That resolve has been helped by a fall in advisor revenue which necessitated a close look at the cost side of their practices, which is helping those advisors become more efficient. The demise of the wirehouses and even the Bernie Madoff scandal seems to have improved the image of independent advice-givers on Main Street, while it's also prompted many of those wirehouse brokers to consider joining an independent B/D or going fully independent, perhaps coming in as a partner with a sizable book of business to an established RIA firm.
In sum, it seems that advisors are reaching that stage of mourning--acceptance--in which they can begin to build their leaner practices again, adding clients, perhaps adding partners, and reassessing a compensation system that, in the words of GDC Research's Dennis Gallant, has over time "become a drug" to advisors. The charging-a-fee-on-AUM approach has been lucrative for many advisors, but it also focuses clients on the wrong goal--portfolio performance--and places the advisor's revenue stream out of her control, while negating the value of the advisor's strong suit: advice itself.
San Antonio Rosier
In the end of January in San Antonio, the Financial Services Institute celebrated its fifth birthday with an annual conference that attracted "500-plus" attendees, according to conference chair and FSI board member Frank Tauches of American Portfolios, though like most live events these days, attendance was down 10% from the prior year. Greeting those attendees, Executive Director Dale Brown said the group had for "five years kept a laser-like focus on regulation," which he said "should reflect the reality of how advice is provided in the 21st century." New FSI Chairman Eric Schwartz of Cambridge Investment Research said that now regulators inside the Beltway ask FSI for their opinions on regulatory matters, and that "to be seen as a partner is the greatest achievement of the past five years."
While Brown said the "SEC was perpetuating its institutional bias that cost was the most important factor in investing," he reported that the Commission's move to "reform 12b-1 fees, by all accounts walked out the door with Chairman Cox." Brown did express concern that the government's response to the current economic and market crisis, along with the Bernie Madoff scandal, could lead to a "dangerous over-reaction," he nevertheless argued that "Congress is the key to long-term change."
Las Vegas or Bust
The TD Ameritrade Institutional conference, held in the first week of February, was a typically rambunctious affair, and not because it was held in Las Vegas.
No one can say that advisors who custody their clients' assets with TD Ameritrade don't feel comfortable expressing their feelings. Some 900 advisors joined with 400 other attendees (including 150 TD employees) to network with one another, learn about the custodian's new offerings in technology and investing vehicles, and to engage with A-list speakers ranging from T. Boone Pickens to Karl Rove and Gen. Wesley Clark.
The mood of resolve mixed with despair was captured accurately by TD Ameritrade CEO Fred Tomczyk (he assumed that position from Joe Moglia last October), who in his welcoming address admitted that "I've seen difficult markets, you've seen difficult markets, but no one's seen markets like this." However, Tomczyk noted that TD Ameritrade had record earnings of $2.33/share in FY 2008, that it has a strong balance sheet and cash position--$1.3 billion in cash, debt of $1.4 billion, and $1.4 billion in EBITDA--and no U.S. real estate credit risk.
"We are committed to the RIA channel," he said, noting that it is "the fastest growing segment of the wealth management business," and because it is "our way of providing customized advice for the high net worth." As further evidence of its commitment to RIAs, Tomczyk announced new responsibilities for TD Ameritrade executive Brian Stimpfl, long the custodian's technology guru, who will now head an Advisor Advocacy and Industry Affairs Group. Stimpfl said the new position is further evidence that TD "wants to be a true partner, not just a custodian."
Tom Bradley, president of TD Ameritrade Institutional, prompted the first shout-out from the assembled advisors when he opened his remarks by listing the companies that were no longer in business due to the financial crisis. When he said the name "Merrill Lynch," a voice from the audience shouted "Who?" to much laughter from the assembled throng.
During the question and answer portion of the point-counterpoint session between General Clark and Bush Administration official and longtime Republican consultant Rove, an advisor questioned why Rove could complain about the policies of President Obama, and prompted applause when he recited a litany of what the advisor said were Bush-era missteps and deceptions. Soon the applause turned to shouts from some advisors pro and con the advisor who was speaking, while Rove and Clark's exchanges grew more heated.
In the final session of the conference on February 6 as Bradley spoke, an advisor called out from the audience, "Thanks for what you did with the Reserve Fund," referring to the $35 million commitment TD Ameritrade made last year to make up the shortfall experienced by TD advisors' clients who were invested in the Reserve Fund Primary Fund, which infamously broke the buck on its money market fund. In an interview, Bradley said he believed some of that $35 million had yet to be spent on backstopping the fund. (For more on Bradley, please see Catching Up With on page 16).--James J. Green
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