Archive for November, 2011

Knowing Your Worth, Financial Planning Magazine

Monday, November 21st, 2011

According to an article in Financial Planning, Knowing Their Worth, advisors should know the value they bring to their clients and not be afraid to charge for it.  The article largely discusses a guidebook by Pershing Advisor Solutions, Pricing Strategies to Create Growth: An Independent Advisor’s Guide, which notes that many advisors are squeamish about taking anything other than a flat percentage fee for assets under management.  However, Kim Dellarocca, head of Pershing practice management, stated that advisors are delivering a lot of services beyond asset management and not charging a fee.  In order to remedy this, Pershing recommends advisors charge a quarterly minimum service fee to shore up their firm’s profit base.  Pershing note that as firms grow, they will inevitably deal with increasing compliance responsibilities such as advisor monitoring, procedural management, licensing and insurance expenses, and new technology.

Still, Pershing noted that even when advisors realize a minimum or value-driven fee is warranted, they sometimes feel awkward about broaching the topic with clients.  For that, Pershing has come up with prompts to help advisors handle objections.  Specifically, if a client has a portfolio that has produced low performance numbers over the last three years, an advisor could remind the client that returns are expected to vary over the course of long-term investment horizons.  Further, the advisor could point out that the firm has also provided estate planning and other holistic planning services that incur costs.  Should a long-standing client object to a new minimum, the advisor could point to technological improvements at the firm intended to upgrade the client’s access to financial information.

Nontraded REITs a hot property — but FINRA warns investors

Monday, November 21st, 2011

In an article in InvestmentNews, this morning, the Financial Industry Regulatory Authority Inc. issued an alert to investors that outlines the products’ features and potential drawbacks, such as high fees and a lack of liquidity. As the name suggests, nontraded REITs aren’t listed on a national exchange.

Such REITs are sold exclusively through independent broker-dealers, though executives with nontraded REIT sponsors said in private discussions that they intend to negotiate with the wirehouses also to sell the products.

Last month, FINRA issued a rule proposal that would drastically change how the value of nontraded REITs appeared on client account statements, a nettlesome issue for independent broker-dealers that sell the products and the sponsors that create them. FINRA’s new proposal takes aim at brokers’ commissions and other upfront costs.

Nontraded REITs are generally illiquid, often for periods of eight years or more,” FINRA said. “Early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total returns.”

Front-end fees can be as much as 15% of the per-unit price, FINRA said. Front-end underwriting fees for publicly traded REITs may be 7% or more of the offering proceeds, plus a brokerage commission for investors who buy shares in the open market, according to FINRA.

The regulator in its alert highlighted a number of “complexities and risks” associated with the product.

DOL to Repropose Fiduciary Rule

Monday, November 21st, 2011

According to an article by AdvisorOne, the Department of Labor’s Employee Benefits Security Administration (“EBSA”) will repropose its rule amending the definition of fiduciary under the Employee Retirement Income Security Act (“ERISA”).  The new rule is expected to be issued in early 2012.

Assistant secretary of EBSA, Phyllis Borzi, stated that “[the EBSA] will take the time to get this right to ensure that we provide the strongest possible protections to business owners and retirement savers in plans and IRAs.”  She also stated that “investment advisers shouldn’t be able to steer retirees, workers, small businesses and others into investments that benefits the advisers at the expense of their clients.  The consumer’s retirement security must come first.”

Borzi also offered details on the area of the rules that will likely be revised:

  • Provisions of the rule, including clarification that “fiduciary advice is limited to individualized advice directed to specific parties, responding to concerns about the application of the regulation to routine appraisals, and clarifying the limits of the rule’s application to arm length’s commercial transactions, such as swap transactions.”
  • Exemptions addressing concerns about the impact of the new regulation of the current fee practices of brokers and advisers, and clarifying “the continued applicability of exemptions that have long been in existence that allow brokers to receive commissions in connection with mutual funds, stocks, and insurance products.  According to Borzi, ESBA will “carefully craft new or amended exemptions that can best preserve beneficial fee practices, while at the same time, protecting plan participants and individual retirement account owners from abusive practices and conflicted advice.”
  • EBSA also seeks to amend a 1975 regulation, which defines when a person providing investment advice becomes a fiduciary under ERISA, and to adapt the rule to the current retirement marketplace.  Borzi stated that the goal “is to ensure that potential conflicts of interest among advisers are not allowed to compromise the quality of investment advice that millions of American workers rely on, so they can retire with the dignity that they have worked hard to achieve.”

October to bring changes to OCIE as exam program continues to evolve, SEC official

Monday, November 21st, 2011

According to an article published in IA Watch, October will begin to see some changes to the examination program for investment advisers.  To start, branch managers within OCIE, known as “exam managers”, will accompany examiners in the field.

According to Mark Dowdell, an assistant regional director in the SEC’s Philadelphia Office, the SEC is no longer going to conduct full-scale examinations.  Rather, examiners will focus on areas more relevant to a firm’s risk profile.  A firm’s risk profile would first be devised by the SEC’s main office in Washington, DC, with the regional office that oversees the firm applying its own subsquent risk assessment before selecting which firms to examine.  During exams, examiners will be accompanied by experts in those areas relevant to the firm’s risk profile.  The article further states that firms can expect a post-exam letter to follow a rigid format of no more than 3 pages, with any deficiencies attached in a separate letter written in bullet point format.

Dowdell also provided a list of current SEC “hot topics”: valuation, conflicts of interest, pay-to-play compliance, certain types of advertising, best execution, insider trading, portfolio management, sale of hedge funds to unqualified clients, enterprise risk management and the custody rule.

TD Ameritrade Touts Upcoming Salesforce Product As Flexible, Open Platform

Monday, November 21st, 2011

In an article on Financial Planning.com, TD Ameritrade is touting an “open platform” as a differentiator ahead of an October launch of its Salesforce product for advisors.  TDA’s cloud-based data integration solution, built around the popular Salesforce customer relationship management system, works with more than 20 common industry technologies such as portfolio management systems, financial planning software and document management software.

TDA is fine-tuning its solution with the intent of rolling it out at its fall regional conference, slated for Oct. 27 in Washington, D.C. The company says its CRM-centric integration solution was shaped by feedback from advisors, who want to run their businesses more efficiently—but without having to switch technology solutions.

The CRM system will be integrated with Veo, TDA’s Web-based advisor platform; a single sign-on will open access to Veo and other integrated solutions.

TDA’s salesforce solution caters to advisors’ desire for efficiency with more than 50 workflow processes, such as new-account opening, change of address and electronic signature. It will feature integration with vendors including Advent, Orion, and BlackDiamond.  The solution is built to handle data from multiple custodians.

Massachusetts AG Says Having a WISP is Not Enough to Comply With Massachusetts Data Security Regulations

Monday, November 21st, 2011

According to a recent post on Proskauer Rose’s privacy law blog, the Massachusetts Attorney General’s Office has agreed to resolve allegations that Belmont Savings Bank violated the Massachusetts’ data security regulations. Under an Assurance of Discontinuance, Belmont Savings Bank agreed to pay a civil penalty of $7,500 and institute new security and training procedures.

Belmont Savings Bank experienced a data security breach in May 2011 when an employee left a computer backup tape on a desk overnight rather than securing it in a storage valut.  According to survellience camera footage, the backup tape was inadvertantly discarded by the cleaning crew.  The Attorney General’s Office said that the tape was then likely incenerated by the bank’s waste disposal company.

At the time of the Assurance of Discontinuance, there was no evidence that any customer’s information had been acquired or used by an authorized person, but the Attorney General’s office said it will reopen the matter should actual harm to customers arise.

Of note here is that Belmont Savings Bank did have a written information security program as required by Massachusetts law.  According to Attorney General Coakley “Consumers expect businesses to not only develop policies and procedures to safeguard their sensitive personal information, but to follow these procedures as well. Our office will continue to take action against companies that fail to follow protocol to protect the information entrusted to them by customers.”

Enforcement case demonstrates the risk and expense of faulty compliance policies

Monday, November 21st, 2011

According to IA Watch, the SEC has settled with Janney Montgomery Scott LLC (“Janney”), a dually registered firm for lack of compliance oversight.

According to the settlement, Janney “failed to adequately establish, maintain and enforce policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of material, nonpublic information.” In addition, Janney did not enforce certain of its policies and did not follow the policies and procedures as written.  Certain of these violations were related to their business as a broker-dealer, while others were advisory-based.

In addition to having to engage a consultant and undertake additional actions, the firm has to pay a fine of $850,000.

Consumer Federation tells Congress an SRO for advisers beats the status quo

Monday, November 21st, 2011

According to an article in IA Watch, a statement buried in Consumer Federation of America director of investor protection Barbara Roper’s written testimony states that the CFA has “been forced to reassess our opposition to the SRO approach.”  The testimony was given by Ms. Roper before the Senate’s Committee on Banking, Housing, and Urban Affairs regarding Enhanced Investor Protection after the Financial Crisis earlier this month.

David Tittsworth, executive director at the Investment Adviser Association, is quoted in the article as saying “[t]he proposition that [CFA has] done an about-face … is an overstatement.”  According to Mr. Tittworth, the CFA’s first preference is to fully fund the SEC to pay for investment adviser examinations (which Ms. Roper confirmed).  According to the article, this is more of a case of the CFA’s position having evolved from a strict opposition to an SRO to supporting one if it’s the only option Congress will consider.

Learning To Socialize

Monday, November 21st, 2011

In an article in the July 2011 editon of Financial Advisor Magazine, David Lawrence discusses the value to firms for using social media.  “For many advisors, the questions remain about how to integrate social media successfully into their practices. Can every financial practice benefit, for instance, from a Facebook page? Is Twitter really necessary? And perhaps most important, how can they be used efficiently without giving a financial advisor or staff extra work?

The answers lie in what sort of financial practice the advisor has, what the demographics of the clientele are and to what extent these tools can be efficiently integrated with the other technology already in use at the firm.

For example, if a financial advisory firm has created a Web site for its practice but never tried to discover who is visiting the site, what’s being looked at (through page counts) or how often people are returning, then the firm will have no idea whether what it has posted is resonating with clients or the public. Running statistics on a client base and/or surveying clients to determine their interests could be two ways to begin the process of understanding what content should be on the Web site. Once this is determined, adjusting the content to match these wants and/or needs can have a remarkable effect on the site statistics.

The same is true for a Facebook page. Though different in character from a traditional Web site, it is still a communication medium, and the content, posts and other information should be carefully reviewed to determine its effect on the visitors to that Facebook page. Without this sort of feedback, the advisor will have no clue about whether the effort of creating the Facebook page was successful.

And quite frankly, setting up such venues without consideration of an overall strategy for the firm is a mistake. Consideration should be given in any messaging medium to have clear, consistent messaging that reflects the firm’s long-term strategic goals. If your Web site suggests that you focus on wealth management and your Facebook page emphasizes your role as primarily an insurance firm, it is inconsistent messaging that will confuse visitors rather than clarify who you are and what you do.

Consistency in communication is the key. Web sites, social media sites, printed material, newspaper ads, radio advertising and other forms of communication with the public should have a consistent theme that reflects the message you wish to convey to that public. And while not all of these venues may be appropriate for advertising, all can be used for some form of messaging and communication.

Facebook can be used for more than just simple messaging. One of the many features of Facebook that can be leveraged in a practice is the creation of groups. Creating a group is easy and there are three levels, private, open and secret. With private, anyone can see the group, but only selected “friends” can post to it. (‘Friends’ could be your clients, for example.) Many advisors are using groups to create a kind of private blog for their clients. However, care must be taken not to violate the rules on what constitutes improper ads or misleading claims with such a feature.

Events can also be created. This is a feature in Facebook that could be used to announce fund-raising activities or to organize a client appreciation dinner or another event. The feature is free, and if your clients use the site, it is an inexpensive way to draw attention in a new and compelling way (photos can be added). Facebook is certainly not the only tool in the social media world. But it is currently very popular and well known. Thus, it is probably more likely to be used by your clients than a lesser-known site.

And yes, Facebook offers ads. Perhaps the most tempting aspect is the possibility of accessing the more than 600 million users. Yet this is the area that concerns the regulatory agencies the most. As with any communication medium, Facebook and other social media sites have many great potential benefits for financial advisors, but care must be taken in adopting its use in a financial practice to ensure that it complies with the rules and that it enhances the overall image of the firm. In the end, the use of social media should be integrated with all other communication forms in an efficient manner for it to complement an overall communication strategy.”

Database for standardized RIA exams nears roll-out to the states

Monday, November 21st, 2011

According to an article in IA Watch, “NEMO” (or the NASAA Electronic Examination Modules) is in the final phase of being tested.  The application is designed to assist state examiners while conducting adviser examinations.

Michael Huggs, the director of the Mississippi Secretary of State’s Securities and Charities Division, expects that every state will use this application.  According to the article, Huggs has taken the lead on the project and expects to demo the application during NASAA’s annual IA training in August before rolling out the free software at NASAA’s fall conference. States would then be able to download the software and begin using it on exams in January.

According to Huggs, the database contains virtually “every question you could possibly ask of your adviser.”  The database is spread across 18 sections (including books and records, financial information, trading, and adherence to the investment contract) and also contains hints to help the examiner during the review.

NASAA would be able to use certain data collected during examinations to determine overall examination trends and deficiencies.