More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
If you believe his critics, Barack Obama is an agent of socialism whose economic and social agenda includes nothing less than the goal of massively redistributing wealth in this country. If you believe him, Barack Obama is a traditional Democrat who believes in fostering entrepreneurship and supporting small businesses and their jobs-creation ability. However, it's not a question of faith that the first African-American president in the country's history has taken office at a time of crisis which most Americans have concluded demands action from the federal government to keep the recession from getting worse, to save the banking system in the United States, to staunch the job drain, and above all, to restore confidence in the American economy, which will help to thaw the credit logjam and set the bulls running again in the stock market.
To do so, Obama and his economic team, notably Treasury Secretary Timothy Geithner, are building on the George Bush-Henry Paulson start of unprecedented government intervention in the markets and the economy, with the notion (famously expressed by Obama's chief of staff, Rahm Emanuel) that you shouldn't waste a crisis. The steps already taken, and others being contemplated even now, clearly indicate that this president and this Congress and this SEC and this Treasury Department and this Federal Reserve will affect advisors and their clients in massive ways beginning this year and extending for years into the future, through changes in the Internal Revenue Code, in legislation, and in regulation that will affect all Americans to some extent, but especially those who pay the bulk of the taxes in this country, create the most jobs, and seek to pass on their wealth to their heirs. In other words, your clients.
For that reason, the 44th President of the United States leads the IA 25 for 2009, our annual subjective list of the most influential people in and around the independent advice business. This year, as the center of the financial universe has shifted from Wall Street to Washington, there are more elected officials and appointed Federal regulators on the list than in any other year. Everyone from Mary Schapiro at the SEC to Barney Frank in the House to Mr. Geithner at Treasury will influence how you practice your profession this year and in the years to come, but driving it all will be Barack Obama.
The first big piece of legislation that came out of the 111th Congress is a case in point. It is a classic piece of Keynesian legislation, using massive amounts of long-term debt in a bid to stimulate the private sector into following the government's lead to spend money and hire people.
The budget proposal passed by both houses just before the Easter recess includes a footnote that would keep the estate tax at the 2009 level in 2010 and beyond, rather than letting the levy, derided by Republicans as the "death tax," either die outright or be reduced. The budget would effectively raise income taxes on those in the top tax brackets, the capital gains and dividend tax rates, and corporate taxes.
Moreover, whatever their benefits, planned Obama initiatives on everything from healthcare to a cap-and-trade pollution scheme would increase costs to employers and likely lead to an even heavier federal debt load, which raises the specter of inflation in the years ahead.
While there is much hype from both sides of the political spectrum over Mr. Obama and his intentions, advisors will be closely watching his every move, and will need to adjust their investment, tax, estate, and philanthropic plans for clients as a result. Stay tuned, and read on for the remainder of the IA 25.
When the man largely responsible for making the independent advisor model possible decides to give up the top spot at the company named after himself, it's a sea change. That's what Chuck Schwab did last fall, ceding the CEO job at the largest RIA custodian to Walt Bettinger. The number and strength of the custodians serving RIAs has never been greater, and even in the independent broker-dealer world, the RIA model has become widely accepted. Still, Schwab remains the RIA leader, and the commitment of the man at the top to the advisor channel will make a difference throughout the advisor universe. When we spoke with Bettinger in an exclusive interview last fall right before he formally took the reins at Charles Schwab, we asked about the importance of advisors to Charles Schwab & Co. He answered first by citing his pedigree of having worked closely with John Coghlan, "the father of Schwab Institutional," and argued that the competition issue between Schwab-affiliated advisors and its retail advice givers has "never been a smaller issue" because "we have clarity in our corporate strategy." He finished by claiming that "the advisor business is not simply a place for Schwab to make money, it's part of our core corporate strategy. That's a statement that may not always have been so clearly made or communicated as it could have been."
When asked what might change at the house that Chuck built, he promised to retain the company's approach, since when "you adjust your message for the times, that's when companies get in trouble." Perhaps that thought was on his mind as he threw down the gauntlet before the entire financial services industry in a recent essay that accompanied Schwab's 2008 annual report. "The current crisis," he wrote, "presents an enormous opportunity...to begin again--to regain the trust of the American people and keep it for the long term. My fervent hope is that the industry rebuilds itself so it never again contributes to the creation of another financial crisis like this one. Rather, our industry should serve as the very defense that ensures we never face a crisis like the one we are in today."--James J. Green
Senate Finance Committee Chairman Max Baucus, D-Mont., wants to make health care reform a reality this year. On April 2, the Senate passed a budget resolution which includes a health care "reserve fund" that Baucus says will ensure a bill can meet the budgetary rules when it's considered by the Senate this year. Baucus has also promised that the Finance Committee will vote on comprehensive health reform in June, and that Congress should deliver a bill to President Obama this year. Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI) in Washington, says that while the formation of healthcare legislation will "come from many sources...the odds favor enactment of health reform in 2009."--Melanie Waddell
As head of the Federal Deposit Insurance Corp., Sheila Bair has the enormous task of fixing the banking system which, she said in a mid-April speech, would require large financial institutions to hold more capital, take less risk, and refrain from becoming so big that their failure would topple the entire system. Bair said she's "cautiously optimistic that the industry is getting on a better footing; many banks are making money," but warned that "there's still more pain to go." To help cleanse bank balance sheets and thaw the credit markets, Bair pointed to the FDIC's Legacy Loan Program, unveiled in March, under which Treasury and private investors will purchase assets from banks by creating public-private investment funds (PPIFs).--Melanie Waddell
The pioneers of the independent advice industry are growing up along with the industry itself. In some places, those trailblazers are beginning to take a step back from the helm of their advisor ships to allow a younger generation their turn at the tiller. At Commonwealth Financial Network, the independent broker-dealer celebrating its 30th anniversary, that happened earlier this year when longtime chairman and CEO Joe Deitch handed over the CEO duties to Wayne Bloom. Bloom joined Commonwealth in 1989, and calls the change part of a long-planned succession, noting that Deitch has been "training me to do this for years." With his background in wealth management and stewardship of the B/D's fee business, Bloom seems to be well positioned to skipper the Commonwealth ship.--James J. Green
After founding Vanguard Group and creating the first index mutual fund, John Bogle certainly earned the right to relax when he stepped down as senior chairman of Vanguard in 2000. But that's not in the nature of this investing pioneer, who remains active and influential.
In February he testified before the House Education and Labor Committee, which is considering a bill that would require disclosure of all fees on 401(k) plans and the inclusion of at least one low-priced index fund in every plan. Rep. Robert Andrews, D-N.J., a member of the committee, said April 7 that "John Bogle's testimony was so compelling, I can't imagine anyone else" having such an impact on getting that legislation passed, which the Congressman predicted would happen this year.--Robert F. Keane
For Tom Bradley, TD Ameritrade Institutional's president, this year is all about focusing on "the basic blocking and tackling," which in his mind comprises three parts: service, technology and advocacy.
Bradley has long used his company's muscle to back up the RIA community, starting with his opposition to SEC's broker-dealer exemption rule and strong support for a fiduciary standard applied to anyone who provides financial advice to individuals.
He's currently concerned about how the industry will be regulated going forward. "There's been a lot of discussion about changing the regulatory structure, marrying the Securities Act of '34 with the Investment Advisers Act of '40," he notes. "I don't think that we should do that."
Instead, he would like regulators to understand the difference between a broker who sells financial products to institutions and individuals who understand that they are dealing with a salesperson, and "advisors that operate under a fiduciary obligation" to the client. Bradley also feels it's important that advisors and brokers not be audited by the same people. "What you don't want to have is an inspector or examiner walk into a broker-dealer one week and an investment advisor the next. If you allow that to happen you will have cracks in the system. You need people that are focused just on investment advisors or just on registered representatives/salespeople.
"I also think that from a regulatory standpoint we have to look at individuals wearing two hats," he continues, "where they're the salesperson one minute and then they're the fiduciary the next. I think that is fraught with risk."
Another area getting Bradley's attention this year is providing support for the growing number of breakaway brokers. "There's so much disruption at the wirehouses that we are literally having conversations with thousands of advisors representing billions of dollars in assets," he says, adding that the big question is just how many of those brokers will actually break away. "I think there's tremendous potential here and we'll see next year at this time how it all shook out. I think it's a once-in-a-lifetime opportunity, though, for us and for the breakaways."--Robert F. Keane
That there will be additional regulation of the financial services industry this year is a given. "The question is, will it be harmful or helpful to our members' businesses?" asks Dale Brown, president and CEO of the Financial Services Institute. "We're fully engaged to see that at a minimum it's a do-no-harm outcome, but ideally that we actually make some improvements in the regulatory environment."
The elements that Brown and his staff are pushing in any new regulation that is developed are transparency, efficiency, and effectiveness. "We've really got to focus on making regulation effective for our core client, which ultimately is the middle class investor, and ultimately that makes it more effective for independent broker-dealers and independent financial advisors." --Robert F. Keane
After 25 years with A.G. Edwards and more recently Wachovia, Gene Diederich was named CEO of the big St. Louis-based RIA firm the Moneta Group in April, exemplifying the continuing migration of advisors from the wirehouse to the independent model.
Like many individual advisors before him, Diederich says that what attracted him to Moneta was its service model and its smaller, more entrepreneurial culture where everything is custom built. He thinks the independence trend is well established and doesn't see it diminishing, though he warns that "I don't think for a second that the broker-dealer model is going to go away. They're massive and they have scale and scope, and for a lot of advisors that's going to continue to be the preferred venue." --Robert F. Keane
He's the longest-serving member of Congress in Connecticut's history, but that's not why Democratic Senator Chris Dodd is on the IA 25. It's because as chairman of the Senate Committee on Banking, Housing and Urban Affairs he has been knee-deep in every piece of legislation since the current financial crisis began. He's likely to spend the rest of the year working on rewriting the financial regulation rulebook, a project on which he and his House counterpart, Congressman Barney Frank, have pledged mutual support. In a letter sent to President Obama in late March, Dodd wrote, "I am confident that through this process we will be able to design a system to better protect consumers and restore confidence in our banking system."--Robert F. Keane
Wealth manager, entrepreneur, crusader, and software tinkerer are all titles that could be claimed by Greg Friedman. His greatest fame may be as cofounder of Junxure, the CRM software that over the past year has been fortified with practice management and client portfolio enhancements. His greatest legacy may lie more in his commitment to get disparate software makers to agree to make their packages play well with others as part of the Your Silver Bullet initiative. All the while, Friedman continues to run his wealth management firm--Friedman & Associates--where he puts into practice his technology gospel. In the midst of the crisis, Junxure instituted a new training program meant to immediately help advisors improve their efficiency and client service.--James J. Green
One person every advisor should keep close tabs on this year is Barney Frank. As chairman of the House Financial Services Committee, Frank, D-Mass., is at the helm of crafting financial services reform legislation that could profoundly change advisors' lives. Both Frank and Senator Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, have promised President Obama that they will deliver a financial services reform bill by year-end. Will that legislation include harmonizing the rules for broker-dealers and advisors and require brokers to adhere to a fiduciary standard? In an exclusive interview with Investment Advisor in early April, Frank said that the Committee hasn't "begun to focus on that level," as Congress is now looking at "systemic risk to start with and resolving insolvent institutions outside the banking system." But, he said, "We'll look at all issues." Frank also said that it's premature to say whether it will be the Federal Reserve or the FDIC that will be designated the systemic risk regulator. While the Obama Administration's financial reform proposal is "not a complete outline yet," Frank said, he supports the Administration's reform goals. "They haven't said anything I disagree with."
In a joint letter sent to President Obama on March 30, Frank and Dodd said they agree on the core principles for modernizing the financial regulatory system that the Administration and Treasury Secretary Timothy Geithner have put forth, "including providing for systemic risk regulation, strengthening consumer and investor protection, streamlining prudential supervision, and addressing gaps in regulation."
Frank told IA that strengthening "market integrity and investor protection at the SEC" and the CFTC will also be priorities for his committee this year. While there's political support for merging the SEC and CFTC, Frank said, "I think it's reasonable that they have similar rules so there's no regulatory arbitrage between them." If you achieve that, he said, "it's less important whether or not you merge them." The SEC's enforcement division will also get more financial help from Congress this year, Frank pledged.--Melanie Waddell
Last year in the IA 25, we hailed Timothy Geithner, then president of the New York Fed, for his role in arranging an emergency loan for JPMorgan Chase's buyout of Bear Stearns. This year, as U.S. Treasury Secretary, Geithner takes on an even bigger task as he strives to help the Obama Administration orchestrate a financial services regulatory reform plan. Revamping the current regulatory landscape, he told Congress in late March, would not take "modest repairs at the margin, but new rules of the game." The Administration's plan, Geithner told Congress, includes four broad components: addressing systemic risk, protecting consumers and investors, eliminating gaps in regulatory structure, and fostering international coordination.--Melanie Waddell
There may be nobody else who straddles the RIA and independent broker-dealer universe with more power than Charles Goldman. Since leaving his post as head of Schwab Institutional last year, Goldman has taken on the task of making Fidelity Investments' advisor-facing business units--Institutional Wealth Services (its RIA custodial unit), National Financial (its correspondent clearing arm for BDs), and its family office business--bring their service delivery up to the standards of Fidelity's longtime strengths in investing and technology. "It's not about resources; we have plenty of resources," he said in a March interview, "it's about giving the customer service people the tools to effect change." The industry will be watching to see if he makes good on his promise.--James J. Green
He may have died in 1976, but Benjamin Graham's influence continues in the advisory community, especially now, for his disciplined approach to bottom-up analysis. His 1949 book, The Intelligent Investor (Harper Collins), the fourth edition of which was published in 2003, has sold millions of copies and remains a valuable tool for investors today. His disciple Warren Buffett has called it "the best book on investing ever written."
The father of value investing, Graham stressed the fundamental differences between investment and speculation, and never deviated from his belief that the key to making sound investments was looking at the numbers (P/E ratios, debt, dividends, earning growth, asset value, etc.) and making intelligent decisions based on them.--Robert F. Keane
The proposed financial services regulatory reform legislation from Congress has "huge" implications for advisors, says Deena Katz, professor at Texas Tech and chairman of Evensky & Katz Wealth Management. She implores every advisor to "start talking to your Congressman and Senator, because they are woefully misinformed about what we do." Katz got her chance to tell lawmakers her views about boomers' needs when she testified before the Senate Committee on Aging in March. Katz says Congress is "beginning to listen to planners, which is not something we've seen too much of in the past," and believes the Financial Planning Coalition is "doing a good job...to present a united front" before Congress, which she says is crucial if planners are to fight being put under FINRA's oversight.--Melanie Waddell
Keeping to the plan is the strategy this year for Tim Kochis, CEO of California market dominator firm Aspiriant. Not only has Aspiriant not laid off any employees, it has actually expanded its staff, having added five new positions last year and two in 2009. Kochis is also pleased to note that the firm is on pace through the first quarter in terms of attracting new clients.
While attrition has been a little higher than usual, he adds that "it takes an awful lot of pain for people to decide that they would be better served elsewhere. In those few cases where clients have decided to leave, it hasn't been because they distrusted our expertise or our independence or objectivity or our desire to be of real service to them. It was sort of exhaustion."
Unlike many firms, Aspiriant separates its asset management fees from those for its financial planning, wealth management, tax preparation, and other services, meaning it's been hit less hard by declining asset levels than other firms that include those services in their AUM fee. "Those revenue streams not only did not decline," he reports, "they increased, because there is even more need for planning and integration and those streams have amounted to about 25% of our total revenue."
While he thinks more firms will adopt a similar pricing structure, he admits that it would be hard to do right now because "it's going to appear to their clients to be a little opportunistic" in this environment.
"We've always justified it...by the following arguments: If we charge for it, you take it seriously and we can tie our services to a revenue stream, which means we can be held to account for being truly expert in these other arenas, and be held to account for actually delivering [those] services."
Aspiriant hires people with the skills to address issues like insurance, taxes, and estate planning, as well as providing continuing education in those and other areas. "Clients get it," Kochis explains. "They may balk at first and say other people give that stuff away for free. We say, in so many polite words, you get what you pay for."--Robert F. Keane
As CEO and president of Calvert Group, Barbara Krumsiek has presided over a period of dramatic growth for socially responsible investing both in terms of assets and number of investment options available. "The growth that we've seen ...will not hold a candle to the growth we're going to see," she predicts. Although SRI data has only been collected through 2007, Krumsiek says the trends are very encouraging, noting that between 2005 and 2007 SRI assets grew from $639 billion to $2.71 trillion.
She says that growth is due to three things: trust, transparency, and responsibility. Those have all been values at Calvert since its founding, but as Krumsiek observes, "now these are words that matter to every advisor, every client, and every investor."--Robert F. Keane
There's a lot of talk in the advisor community these days on how this is a great time to attract new clients. Ross Levin, founding principal of Accredited Investors Inc., in Edina, Minnesota, cautions however, that they still have to be the right clients.
"We don't want to bring in clients indiscriminately," he says. "If a client got rid of their last advisor because the advisor was an idiot, we don't want to be the next idiot," says Levin, who literally wrote the book--The Wealth Management Index--on how to run a wealth management firm. "It's really hard to turn away clients in this environment when our revenue is down," he admits, "but we still want to make sure we're working with the right people."--Robert F. Keane
Unfortunately, Bernie Madoff will not be remembered as a former chairman of the Nasdaq exchange or as a noble philanthropist. Instead he will be recalled as the man who on March 12, 2009, pleaded guilty to 11 felony counts and admitted to engineering a global Ponzi scheme that the government has said cost investors $64.8 billion. Madoff's scam hurt thousands of individuals and institutions, but the damage is more than monetary. As FSI president Dale Brown succinctly put it, "His crimes undermined the confidence of many, many clients in their fine, upstanding, and honest financial advisors." As individuals begin to question whether their money is really safe with anyone, it could take years to rebuild the level of trust between advisors and their clients.--Robert F. Keane
In retirement planning, no one has conducted more rigorous academic research than Moshe Milevsky of York University in Toronto, including seminal work on variable annuities in the 1990s that questioned their value. However, Professor Milevsky also ventures out of academia to address the big retirement issues--including in 2007 a positive reassessment of Vas, and later presciently explored the issue of whether the insurance companies writing annuity contracts were in fact dangerously undercharging for those annuities.
Most recently, Milevsky is urging advisors to build "personal pension plans" that will pay a guaranteed income for life, and to incorporate a client's human capital, in the form of a lifetime's earnings power, into building portfolios.--James J. Green
Don Phillips sees a "danger spot" on the horizon this year: fixed-income funds. The managing director of Morningstar says that given the market upheaval, due diligence on funds is more important than ever, but particularly so on bond funds because they are going to grow in popularity as investors' appetite for risk wanes. The current disclosure regime and level of transparency "work fine if you're dealing with blue chip stock funds or funds that are investing in more conventional, mainstream securities," Phillips says. However, "I'm not sure that the disclosure that we have--the four snapshots per year of a fund's portfolio--is anywhere near adequate to understand what can happen on the fixed-income part of a client's portfolio."
Because bond funds are still sold largely on the basis of yield, Phillips says, this "often causes managers to take risks [that may result] in some small incremental gain but at some disproportionate amount of risk." This happened last year, he says, "in certain fixed-income categories where the category average might have been down 20%, but you had individual funds that were down more than 70%, and others that were flat--all within the same category." Phillips says that not only are fixed-income managers under pressure to "stretch for yield," but they also have new securities and derivatives at their disposal now, making them prone to take more risk.
The bottom line for Phillips: more fundamental research is required in fixed income to "help people make smart decisions." Phillips, recently named president of fund research at Morningstar, says the company's bond task force "spends a lot of time tearing apart the portfolios that we have, looking at performance numbers to see if there's something that jumps out, or is abnormal, about a fund."
In the wake of the bear market, investors will be much less willing to take on risk, and instead will focus on "the income part of total return as opposed to appreciation," Phillips says. When building portfolios for clients going forward, advisors, too, "are going to stress the income stream they can create as opposed to long-term promises of total return and capital appreciation." --Melanie Waddell
SEC Chairman Mary Schapiro plans this year to harmonize the rules that apply to broker-dealers and advisors and to institute a fiduciary standard of care for all advice givers.
In an exclusive interview April 13, Schapiro said that while these plans are still intact, they may take some time to implement. This year, she said, "We'll make progress both on the rule set for advisors and broker-dealers coming more into alignment and the fiduciary standard coming more into alignment. I can't tell you specifically what that will look like." She said the SEC now is "more focused on trying to fill some of the gaps on advisor regulation that have become apparent in the last year...about custody, verification of assets...but over the longer term we're likely to spend some time and attention on trying to get to the ultimate goal of people who provide the same service to investors having the same standards applied to them."
The SEC will recommend "in the next couple of months," Schapiro said, a rule requiring certain investment advisors to have third-party compliance audits as well as one that would require a senior officer from each firm to attest to the sufficiency of the controls they have in place to protect client assets. But, she said, "The bigger question of leveling the playing field between advisors and brokers will take a bit more time." Schapiro acknowledged that pinpointing exactly how to harmonize the rules will be tough.
Advisors may worry that Schapiro's background might lead her to designate FINRA as a self-regulatory organization for advisors. But Schapiro told IA that while she believes that an SRO "has to be a component" of any changes the SEC contemplates--along with harmonization--"I have drawn no conclusions in my mind about what the right approach is." While admitting that the SEC does "not have sufficient resources to effectively examine the more than 11,000 advisors for whom we have responsibility, that doesn't necessarily mean that we'll have to have an SRO, but it does mean we will have to leverage some third-party resources."--Melanie Waddell
The CEO of Pershing Advisor Solutions and former chairman of Moss Adams's securities and insurance niche is the only individual to make the list in all seven years of the IA 25's existences, and rightly so. Through his position at Pershing, his monthlyt Investment Advisor column, and many speaking engagements, he continues to offer common-sense practice management solutions to the problems facing all advisors.
Tibergien expects the fiduciary standard to assume a more important role as a new regulatory regime is imposed. "I would like to see an environment where the client's best interests are always considered," he says. "I'm wholly indifferent to what the structure would be, as long as whatever structure is put in place is adequately funded and staffed with experienced people."--Robert F. Keane
David Tittsworth has a tough battle in front of him, and he's the first to admit it. As executive director of the Investment Adviser Association, Tittsworth is helping to lead the charge against powerful forces--the SEC, FINRA, and likely Congress--that are bent on harmonizing broker-dealer and investment advisor rules, and having FINRA be appointed the SRO for advisors. He's not only talking with lawmakers and SEC Chairman Mary Schapiro and others at the agency, but he's "mobilizing" IAA's members to strike up their own dialogue with Congress about these issues, and joining forces with state regulators and the Consumer Federation of America. Tittsworth told Congress in March to stick to dealing with the most important issue: solving the economic crisis.--Melanie Waddell