When Mary Schapiro took the helm as CEO and chairman of the NASD last September, it was a moment of relative calm before the storm. Since then, she’s been the guiding light in the effort to dissect and rewrite the rules of the NASD and NYSE into a single rulebook for all 5,100 broker/dealers, and to merge the regulatory arms of NYSE and NASD into a single self-regulatory organization–which Schapiro will lead.
The sweeping changes to regulation that are underway now are likely to influence, for years to come, everything from how broker/dealers conduct their businesses, to how individuals invest, and ultimately, how comfortable many Americans will be in retirement–and whether they can retire at all. For those reasons, the editors of Investment Advisor agree that this year, Mary Schapiro leads the list of the IA 25 in the pages that follow, the most influential individuals in the industry.
As Schapiro took over at NASD on September 1, “we were already deep into the discussions with the New York Stock Exchange,” she said in a interview in her New York office in March. “I haven’t yet had a normal period of being the NASD CEO–it’s been really kind of a whirlwind.” A lawyer by training, Schapiro, 51, has a long career as a regulator, including a stint as an SEC Commissioner, and being named acting chairman of the SEC in 1993. She began her tenure with NASD in 1996, becoming vice chairman in 2002.
Now that the widely lauded NYSE-NASD regulatory merger is scheduled to close sometime in the second quarter, Schapiro has a moment to discuss its impact on the industry: “It’s been incredibly exciting, I feel so good about having been able to move this forward in such a positive way, because this is so much in the interest of good public policy, of investors, and certainly of the industry, to get this simplification of our regulatory regime done.”
That said, Schapiro is a touch wistful about being less involved in the details of policy-making. “I miss getting to the nitty-gritty of a lot of policy discussions and decisions because that’s what I really loved.” Now, however, she gets to set the entire agenda for the NASD and the combined SRO. Recently that has meant speaking about three principal issues: the education and safety of investors, especially those saving to retire; moving away from “one-size-fits-all rulemaking,” by clarifying the rules and helping firms comply; and changing the B/D examination process, moving to a more risk-based approach.
There still are many challenges for the industry, especially those that “revolve around the change in demographics. There is a tremendous desire among the public for advice and for solutions to their financial problems,” she argues. “The challenge is going to be developing products that are very sound–I’m not talking about taking the risk out out of investing; we’ll never do that nor should we even attempt to do that–but tapping into these changing demographics with products that are in the investors’ best interests and ensuring that they are sold appropriately.”
Schapiro says the outlook for the industry is very positive. “The future of this country in some ways is very much dependent on the success of the financial services industry, and the success of citizens–their ability to retire well, to educate their children, to take care of their healthcare needs–this industry is an enormous component of that all happening.”–Kathleen M. McBride
One of the clear signs of the growing value of advisory firms is the number of acquirers of such firms, and one of the fastest-growing such firms is Focus Financial Partners, headed by CEO Rudy Adolf. However, Focus is not a rollup firm, stresses Adolf with some heat in his voice, “rollups are an excuse for overpaying for underperformance.” Focus Financial Partners, he says, only invests in “very, very successful firms” who retain control over the advice they give to their clients. Among those very, very successful firms is St. Louis-based Buckingham Asset Management, which was acquired by Focus Financial earlier this year. With that deal–the 10th since Focus Financial opened its coffers in January 2006–Adolf says Focus is now the largest independent fiduciary wealth manager in the country, with $17 billion in client assets. Only Ken Fisher’s Fisher Investments is larger, with $35 billion under management, but Adolf points out that Fisher’s is an asset management model, not wealth management. Adolf, a 44-year-old former McKinsey consultant, says Focus Financial helps its acquired partners to recruit senior talent and in business development and public relations. That business development could take the form of organic growth plus sub-acquistions by its partners, to which Focus Financial may deploy some of its own capital. Focus Financial is itself well capitalized with $2.5 billion in venture capital funding from its private equity and VC investor, Summit Partners.
Partners in those acquired firms retain day-to-day operating responsibility have “direct ownership in the cash flow their own businesses,”Adolf notes, “and have an economic interest” in the other partners. Adolf stresses that Focus Financial is not for everyone. For one thing, firms need at least $300 million in assets, must pass an extensive due diligence process, and be focused on growth. “The partners are making a bet that they’ll continue to grow,” he says, “and they have to make a bet on the Focus business model.”–James J. Green
The biography on the Research Affiliates Web site about company chairman Robert Arnott mentions his “willingness to challenge conventional thinking,” and that’s no exaggeration, considering that he’s shaking up the world of index-based investing with his firm’s fundamentally weighted indexes, which use companies’ sales, cash flow, dividends, and book value to determine the companies’ weightings in the indexes, rather than companies’ market caps, as cap-weighted indexes like the S&P 500 do.
Charles Schwab launched three new fundamental index-based mutual funds on April 2, based on Research Affiliates Fundamental Indexes (RAFI), with Chairman and CEO Charles Schwab himself calling the indexes “simply better than our old version of indexing.” It’s pretty clear that he’d use this as a central strategic initiative for the next few years,” says Arnott, tickled that Chuck Schwab was so interested in the new kind of indexing. “Chuck has personally been a pioneer in this business,” Arnott notes, “and to have him enthusiastically embracing this idea is just really exciting.”
Public pension funds are already investing in the fundamental indexing strategy, including CalPERS, Sweden’s largest pension fund, “one of the three largest pensions in Australia, and one of the three largest pensions in Canada,” according to Arnott.
He sees the main challenge to advisors as being able to provide “spending power to investors for as long as those clients need spending power. That means that the number one challenge has nothing to do with investments whatsoever: to get investors to spend at a pace that they can sustain without running out of money.” He says taxes, and helping investors keep more of what they earn are the number two and three challenges for advisors. “Look to the clients’ bottom line net of all expenses and taxes and find ways to improve what the clients keep, not what they earn.”
Looking toward the future for advisors and firms, he says that the next bear market will “shake out the weak players” in the industry and that the “defining characteristic of the winners will be the ones who put the client’s interests first, the classic definition of a fiduciary.
One of the things Arnott loves to do and misses as he trots around the globe turning the index world upside down is writing; he is an award-winning writer and has been editor of the Financial Analysts Journal. “I think that’s the one, big, missing item out of my schedule.”–Kathleen M. McBride
The senior Senator from Montana took over the chairmanship of the Senate Finance Committee when the 110th Congress convened in January and has a number of items on his agenda that are likely to affect the advisor community. High among his priorities are dealing with the AMT, reform of estate taxes, and expanding federal funding of the State Children’s Health Insurance Program (S-CHIP).
The 65-year-old attorney from Helena, who spent two years as a legal assistant with the SEC early in his career, is not known as an ideologue but rather a conservative populist who reflects the population of his home state and often drives his Democratic colleagues to apoplexy, as when he supported President Bush’s 2001 tax cuts or when he was one of only two Democrats invited to participate in “closed-door Medicare talks.”
After initially pushing for a total AMT repeal, Baucus is now in favor of a two-year patch, also favored by Senate Budget chair Kent Conrad, which would keep an estimated 20 million taxpayers from being subject to the AMT over the next two years. According to a Joint Committee on Taxation report released in March, without the patch, 49% of Americans earning between $75,000 and $100,000 a year would have to pay the AMT without the patch; with it, the number drops to 1.6%.
The big question with the AMT is where to get revenue to replace that which would be lost by eliminating the tax. He’ll also have to go toe to toe with House Ways and Means Committee chair Charles Rangel who wants a permanent repeal of the AMT.
Whether the AMT patch is used, with a loss of $90 billion in revenue over 10 years, or the tax is repealed, with $1 trillion in lost revenue, Baucus has his work cut out for him. And that’s before even considering the $50 billion in funding he’s looking to give S-CHIP over the next five years.–Robert F. Keane
A new president at Charles Schwab & Co. would always be news. But the impact gets ratcheted up significantly with two other factors that accompanied the naming in February of Walt Bettinger, 46, to the position of president and COO of Schwab. The first is that 2007 marks the 20th birthday of Schwab Institutional, the division of the San Francisco-based firm run by two-time IA 25 honoree Debby McWhinney that is the business partner of 5,000 RIAs who custody slightly more than $500 billion at SI. The second is that as president, Bettinger becomes the heir apparent to founder, chairman, and CEO Chuck Schwab in the chief executive’s position; Schwab turns 70 this year. Since 2005, Bettinger has been executive VP and head of Schwab Investor Services.
While he’s still getting his feet wet as president, Bettinger responded to a number of questions by e-mail. As to biggest challenges for advisors, he lists “clients’ desire for broader services like trust and alternative investments; the challenges inherent in managing their strong organic growth as investors increasingly look for the independence and objectivity a professional investment advisor can deliver, and long term succession planning.” Bettinger believes that boomers and subsequent generations expect their advisors to be objective, a faith that benefits independent advisors, and they also “appreciate that investment advisors are often visible and active members of the communities in which their clients live and work.” As for where Schwab Institutional fits into the bigger picture at Schwab, Bettinger pledge that strategically, “our business serving investment advisors is core to our efforts to meet the needs of affluent investors,” while financially, “our advisor business is key, making up about 25% of our revenue and slightly more than that percentage of our profits.”–James J. Green
A top his perch as executive director and CEO of the Financial Services Institute (FSI) in Atlanta, Dale Brown has a bird’s-eye view of the independent broker/dealer world. The lobbying group he leads has been active and very effective as an advocate for independent B/Ds.
Brown, 45, lists “navigating the increasingly complex and burdensome regulatory environment” and its “consequences, unintended and otherwise,” as the industry’s greatest challenge as well as “an impediment to growth.” “Every independent broker/dealer CEO understands that creating, implementing, and pursuing a culture of compliance in his firm is essential to his business success.” The overturn, in March, of the SEC’s broker/dealer exemption rule will undoubtedly affect members of FSI, even though, he explains, “the independent broker/dealer was never really the intended target.” Regulatory challenges aside, FSI supports combining the NASD and NYSE into one self-regulatory organization, asserting that FSI members are “big proponents of healthy self-regulation.”
The future of the independent B/D is “very bright,” believes Brown, adding that investors “need financial advice more than ever before,” with the enormous transfer of wealth from one generation to the next, boomers readying for retirement, and the shift from accumulating assets to distributing them.
Brown and his wife have four children, ages 6 to 14, and, as he puts it, his biggest personal challenge–as well as his greatest joy–is in “fulfilling my first priority to be a good husband and father, and not allowing anything else to get in the way of that.”–Kathleen M. McBride
To say that Linsco/Private Ledger (LPL) Chairman and CEO Mark Casady has been busy would be a serious understatement. On the heels of the sale last year of a majority stake in Boston and San Diego-based LPL to private equity firms Hellman & Friedman LLC, and Texas Pacific Group, LPL bought UVEST, acquiring 1,300 advisors who provide third-party brokerage services to banks and credit unions, as well as a third base of operations, in Charlotte, North Carolina. Now, LPL is in the midst of a deal to buy three Pacific Life broker/dealers, adding more than 2,000 advisors from Mutual Service Corp, Associated Securities; and Waterstone Financial Group. Once the PacLife deal closes as expected in June, LPL will have about 10,000 advisors.
“We see the industry consolidate, we see that scale is critically important to being successful, and we think diversification of ability or capabilities is really important. Those are our three drivers,” Casady, 47, explains, “and the journey we’re headed on is to keep pushing those drivers hard.” Those three issues–consolidation, diversified firm capabilities, and scale–will “define the next three to five years pretty well,” he argues.
One of the biggest issues facing independent B/Ds is to “continue to educate lawmakers,” he says, “and consumers, about the value and the power of independent advice.” Advisors ought to consider how to “give back to their community,” through providing that advice to investors, as well as in other community-minded ways, and to think about how to provide their services “more efficiently and effectively” so they can serve more clients.
On a more personal note, Casady says “having a great family” is his finest accomplishment, while “finding the right balance between family and work,” is his personal challenge: “both are demanding.” Being able to spend time with his wife and four children, who range in age from 10 to 23, is very important to him. He’s looking forward to spending more time on the Cape, boating, and “getting up to speed with the latest groups” in music.–Kathleen M. McBride
Ask Bob Clark what role he thinks he plays in the advice business, and for a second–but just a second–he’s lost for words. Then he’s off and running. “I think I provide some historical basis, some context, a collective memory–we forget what happened in the past–a broader perspective, a broader context.” Clark, 52, provides that perspective for Investment Advisor each month as the latest stop in a long journalism and consulting career, railing one month about the CFP Board, the next about how to value practices, the next about the virtues of smaller practices. Here are some recent (unpublished) nuggets. On independent B/Ds: “They’re extremely adaptable to what their reps want. Eventually, they’ll all be custodians, but with twists–like you’ll still be able to do annuities.” On which firms he valuess. “I have a great deal of respect for Raymond James, since it’s still essentially a family-owned business. On the FPA’s big win vacating the Merrill Lynch Rule. “We all love winners. The biggest challenge is that the majority of people–and journalists–don’t grasp the difference” between a stockbroker and a fiduciary advisor. On the biggest challenge to the profession: “Sooner or later there’s going to be re-regulation of the advisory business. It’s important for independent advisors to position themselves as the good guys, so that whoever is writing the regs looks to the independent advisors as the pinnacle of the profession.”–James J. Green
In the less than two years since Christopher Cox took the helm at the Securities and Exchange Commission, he has strived to make the financial world more transparent and less risky for investors. Certainly his tenure so far has been a surprise to those who expected his appointment to signal an easing of demands for increased corporate accountability.
Among the achievments of which the 54-year-old Cox is most proud is the reform of disclosure on executive compensation, which beginning this year will make it much easier for shareholders to determine what the various forms of compensation add up to. Big on his agenda for this year is an increase in the Commission’s efforts to protect senior citizens from fraud, taking full advantage of technology to help investors and simplifying disclosure statements so that they are in plain English.
In a speech to the Mutual Fund Directors Forum Seventh Annual Policy Conference in Washington last month, Cox addressed the use of 12b-1 distribution fees by mutual funds and the adequacy of disclosures by mutual funds and other investment vehicles in 401(k) plans. Cox feels that the use of 12B-1 fees has strayed from the original purpose of covering a fund’s advertising and distributions costs and have become a way for fund companies to advertise as “no load” while still in effect charging a commission to investors. “The transformation of the 12b-1 fee from a distribution subsidy to a sales load drag is now so nearly complete that the primary purpose to which the $11 billion in 12b-1 fees last year were put to was to compensate brokers,” he said. He also noted that some funds have been using the fees to pay for administrative expenses and that even some funds which are closed to new shareholders continue to collect 12b-1 fees.
“With an emphasis on both the disclosures by the constituent investments in the 401(k), and the aggregate disclosures by the plan, we aim to make it far easier for busy Americans to understand the expenses they’re being charged in connection with their investments, and the after-tax, after-inflation returns they’re actually getting compared to an appropriate index,” he continued.
Roundtable discussions on both issues are planned for the next few months, with formal rule proposals to follow later in the year.–Robert F. Keane
Peter F. Drucker
If the only contribution that Peter Drucker ever made to the business world was his assertion that labor should be viewed as an asset, not a cost, his exalted place in the consulting firmament–and on the advisor’s bookshelf–would be assured. But the wisdom of Drucker, who died at age 95 in November 2005, has so much more to offer a profession filled with passionate practitioners who are nevertheless struggling to build businesses. For instance, in the first page of his seminal 1967 management classic, “The Effective Executive” (republished in paper last January), he wrote that “effectiveness can be learned,” and he constantly preached the value not just of time management, of documenting how you spend your time, but of where you spend your time–too many executives (read principals, if you’d prefer) spend too much time completing functions that someone else could do just as well. He also railed against the tendency of organizations to become complacent, especially when it came to technology, and argued that to stay competitive, you had to use new technology. But perhaps his greatest passion point had to do with building systems that could efficiently address recurring issues that a business faces. Such issues are generic in nature, and “could only be solved through a rule, a principle.” He was not impressed with leaders who laid claim to “pragmatism,” which he argued was simply a “refusal to develop rules.” Finally, Drucker wanted to develop “effective” executives, not “brilliant” ones. Not all of us can be brilliant, but we all can be more efficient.’–James J. Green
There’s little mystery why Bill Gross is called the Bond King. As founder and CIO of Pacific Investment Management Co. (PIMCO), Gross is still the undisputed champion when it comes to bond investing for both his outperformance over his bond money manager peers over time, his keen insights, backed up by the research strength of PIMCO’s analysts, into where to find total return within the fixed income universe, and his sheer success in attracting investors of all stripes to his flagship PIMCO Total Return Bond fund, which had about $102 billion in its coffers in April. That universe will loom even larger for advisors as their clients age and look for income as well as portfolio appreciation (and as they become more risk averse), and as the equity risk premium shrinks (as most experts expect will be the case). But Gross would perhaps put it a little differently. Last October in one of his investment outlooks, he wrote that “Bond managers are paid not to lose money and it will probably ever be thus; but they’re also paid to outperform and justify their fees–returning more to clients than themselves.” Then he paints a picture of a brave new world of investing: “In a low yield/single digit return world, increased daily volatility which, with skill, leads to increased Alpha should be considered by bond managers and accepted by clients as a wave of the future should they choose to outperform in the same magnitudes as in prior years.”–James J. Green
Angie Herbers has come a long way since her first business–a lemonade stand she started at 14 years old that expanded into six concession stands across Western Kansas by the time she was 21, when she sold the enterprise to fund her college education. Now, at 29, Herbers has already run four businesses, including her current company, Financial Advisor Resource Inc.–a Web-based recruitment firm specializing in independent financial planning companies. “I discovered that there was a need for young talent; a need for employees to be managed and trained,” Herbers explains. “I started the company four years ago with the primary goal of helping advisors hire, train, and create a successor in the financial planning practice, using the next generation of talent.” Herbers now works with ten companies, representing over $1 billion in client assets, calling herself a virtual COO. “We manage, hire, train, and retain talent and do practice management,” she notes. “Hopefully in the next 7-10 years, those company owners will be able to retire and their successors–employees that we cultivated and trained in the company–will be able to take over the practices.”
According to Herbers, there’s a huge opportunity in connecting the two generations. “The biggest mistake the industry would make is not educating the young or seeing their ability, and on top of that, losing the wisdom of the older generation. You have to connect them. I’m living proof that if you take the wisdom of the older generation and transfer that wisdom, there’s a lot of success to be had.” Herbers attributes her success to other people in the industry that have guided her, naming previous IA 25 honorees Bob Clark and Sheryl Garrett. “I consider it an honor to be mentored and guided by some really unique personalities in the industry. If you had asked me three years ago where my company would be today, it would be nowhere close to where it is now. We have a ten-year plan and we already exceeded it. The point that I want to drive home is that I couldn’t operate a company in such a huge industry without having the guidance, support, and mentoring that I have. The older generation has helped me and that’s what the younger generation is looking for.”–Kara P. Stapleton
After selling Undiscovered Managers, LLC, his mutual fund company, to JPMorgan in 2004, Mark Hurley quickly realized many of his former advisor clients were faced with a similar problem: how to prepare for their own retirement. “Unless they wanted to cash out,” he says, “there were really no other options.”
At 48, Hurley is credited with developing a unique buy/sell structure for investment advisors who don’t want to close up shop upon their retirement. His new firm, Dallas-based Fiduciary Network, LLC, helps RIAs gradually transition their practice to the next generation of planners.
“We aren’t selling the firm. We are simply filling the gap from one generation to the next,” he says. “It’s a very complicated process and emotional for both the owner and buyer.” Hurley says it can take years to draw up the specifics of a transition. “It’s a very capital effective structure,” he says. And even though Fiduciary fronts the money for the purchase, it has no voting stock in the firm. As a result, Hurley only selects businesses with “quality people and a solid foundation.”
In fact, his structure is so appealing that two of the most recognizable RIA firms in the business have penned deals with Fiduciary: Evensky & Katz Wealth Management in Coral Gables, Florida, and Regent Atlantic Capital LLC in Chatham, New Jersey, and he’s got several other deals underway.
“I love the guys I work with. Do you know how great it is to work with people who genuinely care about their clients? They are so pure they’re almost missionaries,” he laughs. “You know they are always going to do the right thing and take their time making decisions.”–Megan L.F. Robert
“You take some of the knowledge and you take some of the experience and you tailor it to the situation and the environment that you’ve been given. That’s exactly what I’ve done,” notes the COO of Pershing Advisor Solutions, John Iachello, who has been at the custodian for RIAs for four years and also serves as managing director of Pershing LLC and on the executive committee of Pershing. Under Iachello’s direction, Pershing Advisor Solutions (PAS) has been growing rapidly. At the end of 2005, PAS had $41 billion of advisors’ assets under administration, which had grown by year-end 2006 to $59 billion, and to about $69 billion as of early April. At age 52, Iachello’s commitment to assist more RIAs continues unabated. “It’s becoming pretty obvious to us that the RIA community needs to break the back of the operating inefficiency that they are subject to. Right now, there’s no question that they have less and less return on their investment as they bring in new clients, since they have greater operational overhead,” he points out. “We need to free them up by giving them operational functions that we can support, leaving them free to manage their clients’ assets and worry about their [current] clients and new clients. If we can do that successfully, we will allow them to bring on more clients, particularly the smaller, baby-boomer clients. That’s the key to the future. “
Iachello is a firm believer in servicing RIAs regardless of where an advisor keeps securities. “Traditionally, custodians have done very well with training and performance reporting where the securities are custodied, but once the advisor custodies securities in various places, [custodians] wash their hands of it and it’s up to the advisor to run their own front-end trading system and aggregation system. That’s where the inefficiencies come in,” he says. “We have to reach past the assets that are only kept with us and be able to offer a full package of services to let those RIAs have a better-run business.” As part of the this belief, among other products, Pershing provides interactive data feeds to third-party systems so the advisor can report back to a client, independent of where some of the client’s assets are held. “It is a way of being a better partner and helping them build a more effective and efficient business. That’s exactly where we are.”–Kara P. Stapleton
“I feel that it’s time for us older advisors to stop complaining about the next generation and start being invested in their future–which means the future of our companies,” says Deena Katz, chairman of Evensky & Katz. The 57-year-old recently joined Texas Tech University as an associate professor where she teaches both graduate and undergraduate courses, and is in charge of the internship program. “If you just take a look at the Pension Protection Act of 2006, you’ll see that we’re probably 60,000 planners short of helping this next generation of the public get to where they want to be,” notes Katz, “That means we’re going to have to educate, train, and mentor the next generation to take this responsibility sooner rather than later.” Katz believes her current challenge is to bring the corporate world together with the academic world to help build educational and experiential learning programs for the industry. “At Texas Tech, we’re planning a big effort to build our program and invite the academic world into the profession and vice versa. I think we spend a lot of time on parallel paths,” she points out. “We do a lot in the profession that the academics aren’t aware of, and the academics are doing some research that will help us grow our practices that we don’t necessarily know about. I’m looking to get those parallel paths intersecting.” Katz likens the financial profession to that of the medical world, saying that it takes an old doctor and a young physician to provide really good medical care. “I advise the next generation to find an ‘old doctor’–someone who has been in the financial profession for a long time with a lot of experience and brings a lot of expertise to the table, but needs that new invigorating energy, ideas and, creativity to help the practice move along.”
As for the future of the profession, Katz believes advisors have a responsibility to educate the public, and believes it won’t be long before a mandate from the government directs that planners get involved in the education process and improve financial literacy in the country. “We just need a huge force of planners and it’s a wonderful position to be in, but it means we will have to do a lot of work getting the next generation attuned to this profession.”–Kara P. Stapleton
Don’t call Tim Kochis a financial planner. As the CEO of Kochis Fitz in San Francisco, his wealth management firm instead focuses on both financial planning and investment management for individual clients. “We do comprehensive planning for first-generation wealth creators,” he explains. “[Our clients] are accomplished in their own lives and have very complex needs.”
Serving corporate executives and the like for the majority of his career, Kochis, 61, has a thorough understanding of the ins and outs of this specialized niche. “[Corporate execs, bankers, and so forth] tend to make a lot of transactions [regarding their wealth],” he offers. “And they need and value help with those decisions.”
With a thoughtful approach, Kochis tackles any issue his clients have. “People today have accumulated more wealth [than previous generations],” he continues. “They are looking at additional opportunities for philanthropy and ways to effectively transfer their wealth to members of their family.” However, like most investors, they are concerned with possible changes in tax and regulatory laws, something Kochis believes “will not be as favorable as it has been in the last few years.”
Today, Kochis, who founded his firm in 1991, has plans to install a successor and step down as CEO. “I don’t think it’s appropriate for anyone to be CEO for life,” he explains. “It’s not healthy for any organization.” This past year, Kochis was the winner of the inaugural Charles R. Schwab Impact Award, in recognition of this decades-long commitment to the profession both in this country and abroad. But we haven’t seen the last of Kochis just yet, he promises, saying he intends “to continue working for the indefinite future.”–Megan L.F. Robert
Fidelity Brokerage Company hopes to realize its own future success by being a one-stop shop for millions of Americans preparing for the years ahead. “Our goal at Fidelity is to make it easy for investors to plan for their financial futures, whether they choose to use an investment advisor, a broker, or to come to us directly,” Ellyn McColgan, Fidelity Brokerage’s 53-year-old president, told IA recently. “We want to do everything we can to help our intermediary clients grow their businesses. That’s why we continue to invest aggressively in our platform of products, services, and tools for the intermediary market.”
McColgan has directed the top execs of Fidelity Registered Investment Advisor Group (FRIAG), as well as those of Fidelity Personal Investments and National Financial, to make the retirement market their top priority.
For FRIAG that strength of the company’s commitment can be evidenced by the growth in the number of advisors using FRIAG for wealth management and custody–378 fee-based advisors were added last year alonw, more than any other firm which didn’t acquire another company. FRIAG custodies more than $183 billion for advisors, second only to the behemoth known as Schwab.
As part of its effort to bring additional advisors into its fold, Fidelity has come up with a wide array of tools and services to help make the advisor’s job easier. Under a deal announced in late February, FRIAG advisors and the reps who clear through National Financial will have access to IPOs through JPMorgan. Another recent move is a pilot matchmaking program that will pair up Fidelity-affiliated RIAs with high-net-worth investors who need more sophisticated products and customized services than they can get from Fidelity’s retail division. The program is touted as a win/win/win–there’s no charge to the RIA for participating, Fidelity is paid only for the assets in its custody, and the investor gets the advice she needs.–Robert F. Keane
While he is a relative newcomer to the independent advisor space, as CEO of TD Ameritrade (TDA), Joe Moglia, 57, has already made an impression on his new colleagues. Formerly of Merrill Lynch and CEO of Ameritrade, Moglia wholeheartedly supports his RIAs. “Joe fully recognizes the importance of our investment advisory business,” says Tom Bradley, TDA Institutional’s president. “He has a good understanding of the difference between stockbrokers and investment advisors, and the [fiduciary] responsibilities they have.”
“Our position is unique and advisors recognize we are on their side,” Moglia prides. “No other custodian took the position we took in terms of the exemption rule,” referring to the broker/dealer exemption rule, aka the Merrill Lynch rule.
TDA has three client segments, Moglia explains: “the independent advisor, the long term investor, and the individual who wants to buy or sell stocks as a trader.” With RIAs representing 25% of the firm’s AUM, Moglia is especially focused on this segment. “At Ameritrade, the RIA business was still in the “embryo” phase,” he says. “Doing the merger [with TD Waterhouse] advanced us a number of years in that space.” As a result, TDAmeritrade is the third largest participant in the RIA custody market today.
Emphasizing personalized service and technology for their advisors, Moglia says he believes technology will further enhance portfolio management. “The Internet has made trades faster and cheaper and portfolio management will become the next step,” he explains. “That is certainly going to allow RIAs to provide customization and choice for their clients and at the same time do it on a scalable basis. Our job at TDA is to help them do that.”–Megan L.F. Robert
Dan Moisand has done a great job quietly and consistently driving home all the points that the D.C. District Court of Appeals seemed to agree with in vacating the SEC’s Merrill Lynch rule at the end of March after a long legal battle by the Financial Planning Association, which Moisand is serving this year as chairman. Along with the other leaders of the largest association of planners, Moisand has carefully crafted the FPA’s argument to focus on clearly defining the best way to meet the needs of consumers, not surprising for this 39-year-old client-centric planner who is a partner in the Florida firm of Spraker, Fitzgerland, Tamayo & Moisand. “This certainly brings to the forefront yet again the idea of what an appropriate standard of care is when dealing with the public,” he argues in discussing the court decision, and since “we are talking about people’s life savings, the standards should be appropriately high.”
Moisand also likes to place the issue into a broader cultural and historical context: “As Americans we love to categorize things and people and parties into nice little neat corners of the world so we can understand all the complexities that are coming at us every day.” So with the court ruling eliminating fee-based brokerage accounts, consumers will understand that “if there’s a fee charged, the underlying regulatory structure is that of an advisor. They may not understand everything that comes along with that, but there’s a bright line standard there.” As for those who worry that the FPA has shot itself in the foot by forcing change on wirehouses that may now pose more competition to planners, Moisand is sanguine. “So? That’s the way it’s been since I got into this business 17 years ago. All those people out there who need help are willing to pay for it, and they’re just looking for somebody who knows what they’re doing and who they can trust.”
He’s not worried about the clout of Wall Street at the SEC or on Capitol Hill, either, saying the market-based move toward financial planning is a “a fundamental juggernaut that the best lobbyists in the world can’t stop.” Moreover, he suggests that if those big firms move in the direction of providing true advisory services, everyone will benefit. So in the end he counsels his peers to “just take care of your clients. Do a good job, everything else is a bunch of garbage, and you’ll be perfectly fine.”–James J. Green
As chairman of the House Ways and Means Committee, Charles Rangel lists dealing with the AMT as his top priority. The 76-year old, 19-term Congressman who represents New York City’s 15th Congressional district definitely has his work cut out for him. While nearly everyone in Washington agrees that the AMT presents a major problem, that’s where the consensus ends. Democrats and Republicans can’t even agree on how much revenue will be lost over the next decade by eliminating the tax, with figures ranging from $250 billion to $1 trillion, never mind how to make up for the loss. For years Congress has been coming up with temporary patches to protect Americans who were not intended to be the targets of this tax, but since it has not been indexed for inflation, are now subject to it. This year it’s estimated that 4 million taxpayers will be hit with the AMT, although the number would have been 11 million if not for 2006′s temporary fix. Unless further action is taken, that number could be as high as 23 million for the 2007 tax year.
So far in this session of Congress, Rangel’s committee has held two hearings on the AMT and others are expected to follow. He’s said he hopes to have a bill ready to bring to the House floor by the end of June. According to published reports, Rangel has “all but decided” on a plan to reform the AMT so that only those earning more than $250,000 a year would have to pay it. Those earning more than $500,000 a year would have to pay an additional amount.
As far as making up lost revenue, Rangel has said that Congress may “rearrange” tax rates so that the wealthiest households pay more, thereby easing the burden on middle-income families. Possible solutions include raising the top marginal tax rate, lowering the income threshold subject to the top rate (currently $336,550), or eliminating deductions.–Robert F. Keane
Arnold Schwarzenegger may have used his action hero popularity to move from Planet Hollywood to the governor’s mansion in Sacramento, but that’s not why he made the IA 25. He’s on the list because after years of waiting for Congress to deal with the nation’s looming healthcare crisis, he’s taken matters into his own enormous hands.
In announcing his comprehensive plan to reform California’s healthcare system plan in January, the 59-year-old, Austrian-born governor noted that, “Unpaid medical bills mean billions of dollars in hidden taxes for the rest of us because those services all have to be paid for. So we pay higher deductibles, costs for treatment, premiums, and co-pays…We have to aim high and attack the entire system from top to bottom. We can create a model the rest of the nation can follow.”
That model calls for everyone in the state, including illegal immigrants, to be covered by healthcare insurance and has an estimated price tag of $12 billion in the first year. It also calls for the elimination of the estimated $1,200 a year that the average family pays in “hidden taxes” to cover the cost of treating the estimated 6.5 million Californians who go uninsured for at least part of every year.
The California plan is based on the idea that individuals, employers, and government has a shared responsibility when it comes to health. Under the proposal, everyone in the state will be required to have sufficient coverage to protect against the catastrophic costs of a major illness, which will help minimize the “cost shift” that occurs when large numbers of people are receiving care without paying the full cost. Insurers will also be required to guarantee coverage so no one has to fear losing their coverage shoul they lose their job. Very low-income individuals will be provided with expanded access to public programs like Medi-Cal and low-income working residents will receive financial assistance to help with the cost of coverage through a new state-administered purchasing pool. Health plans will be required to spend 85% of every premium dollar on patient care. For those employers who do not offer their employees coverage, a “4% fee,” which the state is careful to avoid calling a payroll tax, would be imposed.
To underwrite the cost of his plan, Schwarzenegger is looking for $3.7 billion in new federal funding, to which California says it is entitled under current Medicaid regulations, and which would bring the total to $5.5 billion.–Robert F. Keane
“We have too many investors give into the fear and enthusiasm that strikes the markets,” explains veteran financial expert Jeremy Siegel. “Investors will frequently buy and sell the wrong stocks at the wrong times instead of focusing on long term investing. If an advisor can keep impressing a long-run perspective on his or her clients,” he continues, “it would serve a very valuable purpose.”
A finance professor at the Wharton School of the University of Pennsylvania and senior investment strategy advisor to Wisdom Tree Investments, Siegel, 61, believes keeping clients focused, especially baby boomers, is one of an advisor’s most important responsibilities. “Baby boomers will be very well served in concentrating on high dividend-yielding stocks,” Siegel offers. “The popularity of dividend yielding funds, stocks, exchange traded funds, or mutual funds is in response to baby boomers nearing retirement. They realize they have to think about building their portfolio and focusing on their retirement income.”
Siegel also suggests most investors should replace some of their capital weighted funds with funds that are fundamentally weighted. “That might serve them well given their investment objectives,” he says. Additionally, Siegel says that on the basis of risk premium, stocks are very attractive today relative to bonds. “The long term normal equity risk premium will be a bit smaller at 3% than it is today at 4%,” he adds, suggesting a move toward stocks for longer term investors. “It is very favorable for stocks at the present time.”
There is, however, some concern among investors regarding inflation. “Although inflation is not good for stocks or bonds, it is better for stocks than for bonds,” Siegel says. This is a good time, he suggest, to have a mix of domestic and international equities.
In the coming years, Siegel says investment advisors should be cognizant of the lower capital gains and dividend tax rates that are set to expire. “We should all be very active in terms of what kind of tax code we want,” he says. “We have to be ready to find what we think is right and to be able to encourage people to save, invest, and re-invest, and to encourage firms to pay dividends so there will be income for the baby boomers when they retire.”–Megan L. F. Robert
John Simmers may just be the busiest man in the financial services business, as CEO of ING Advisors Network in El Segundo, California; chairman of the Financial Services Institute, the independent broker/dealer advocacy group; and a governor of the NASD, which is undergoing enormous change this year as it combines with NYSE’s regulatory arm and morphs into a super SRO. “I’m just very lucky,” he says, “to be actually playing a role in the formation and development of three financial services industry organizations.”
Looking at financial services on all of those levels gives Simmers, 57, a broad view of the independent broker/dealer industry and how it’s evolving. “Customers are changing in terms of what their needs are, i.e., societal changes; the industry is changing in terms of its regulatory focus,” perhaps to regulation that’s “more interpretive; there is confusion; there’s conflict, inter-industry. The challenge is putting all this together and coming out of it as an industry that is more transparent and effective in terms of establishing its credibility.”
All this change is creating “unprecedented opportunity” for advisors, Simmers notes. But one issue that he says he finds particularly challenging is “enforcement actions that I don’t understand, that are designed to effect change but seem to be hurting one person over everyone else. The top three firms get penalized, according to Simmers, “and everyone else gets a free ride–they just get the change. I think there’s a better way.”
The March 30 rollback of the broker/dealer exemption rule is “very interesting that it turns the clock back and lets us do over. Not many times you get a do-over.” However, it won’t affect most of ING’s advisors because, as Simmers explains, “most of us already operate as investment advisors; very few of us deal with fee-based brokerage.” His advice to advisors is simple: “Always put the customer’s interest ahead of your own or what he perceives as his own; do the right thing. If the customer is looking for advice, give him advice. If he’s looking for a recommendation, give him a recommendation–but be sure it’s the right advice and the right recommendation.”–Kathleen M. McBride
It’s certain that he wasn’t thinking of himself when naming his firm Legend Financial Advisors, but in fact, the naturally modest Lou Stanasolovich is somewhat of a legend among advisors, which is but one of the reasons why for the third time in the five years that the IA 25 has been compiled, the 50-year-old Pittsburgh native has made the list.
Stanasolovich founded his firm in 1994, ten years after receiving his CFP designation. He’s a co-founder of The Alpha Group, and a member of a variety of advisory boards including: TD Ameritrade President’s Council; TIAA/CREF Institute’s Advisory Council; the FPA National Convention Program Advisory Board; and the IA Leaders Council.
He might have an impressive resume, but Stanasolovich is not one to rest on past laurel.s. He’s constantly using verbs such as “striving” and “struggling,” when talking about making his business better, sounding more like a young man trying to change the world than an industry pro who’s helped make the advisory profession what it is today.
Lots of people talk about the importance of building the next generation of advisors, but at Legend the talk is put into practice. Stanasolovich hires interns for paid positions in finance, business administration, marketing and communications, and information technology that run 18 to 20 hours during the school year, and he offers the best of them jobs upon graduation. He makes it clear that the reason the intern program works is because the firm is strongly committed to educating everyone who works there. He’s also developed a clear career track for every position in the firm to the point where even he wouldn’t qualify for some jobs. “I can’t be a Senior Wealth Advisor in my own firm, because I don’t have a CFA designation,” he recently told IA. That doesn’t make him any less of a legend.–Robert F. Keane
Most observers of the investment advisory/financial planning universe, and its practitioners, would agree that building businesses out of practices would help advance the profession and provide the principals of those firms with more buck for their sweat equity bang. But only Mark Tibergien positions the issue as a moral one. “We have to learn to be more responsible as an industry,” he argues. “You just can’t create co-dependency” with your clients–”you have so many people depending on you”–”and then say ‘Good Luck.’”
Tibergien believes it’s one thing to have “a nice practice, a nice lifestyle, you can make a nice living and your clients can appreciate you. Now whether they can appreciate the fact that you haven’t provided for any continuity if something bad happens to you . . .”
For Tibergien, 55 and the only five-time honoree on the IA 25, putting on the mantle of a fiduciary requires that you build a business that will endure not simply so you have as lucrative an exit strategy as possible, but to continue to serve your clients when you’re no longer around. He calls it a “gross mistake on the part of so many people, in this day of fiduciary responsibility, where people agree we have an obligation to clients, how people don’t appreciate the hypocrisy of the message: ‘It’s okay to build a business not to last.’ It’s hypocrisy that’s maddening and confusing. It drives me crazy that people think this is responsible behavior.”
In his writing, Tibergien says he tries to make the point that “if you’re serious about running a business, here’s what you have to do. If you’re not serious about it, that’s okay, too, that’s the choice you’re making, but quit trying to delude yourself that you’re building an entity of great value. It’s either one or the other.”
Tibergien speaks easily and confidently on a number of topics of interest to independent advisors, but he’s not glib. His fingertip control of Moss Adams’s vaunted data, his hands-on work with hundreds of advisory firms around the country, and his keen analytical mind allow him to speak with quiet authority on everything from the Merrill Lynch rule to the culture of accountants to the prices being paid for advisory firm these days. That’s why he has been on the IA 25 for every year it’s existed.–James J. Green