Game Changer

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 44^th 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 111^th 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.

WALT BETTINGER

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

MAX BAUCUS

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

SHEILA BLAIR

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

WAYNE BLOOM

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

JOHN BOGLE

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

TOM BRADLEY

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

DALE BROWN

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

GENE DIEDERICH

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

CHRIS DODD

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

GREG FRIEDMAN

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

BARNEY FRANK

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

TIMOTHY GEITHNER