Archive for May, 2012

Hearing on SRO Bill is June 6

Thursday, May 24th, 2012

According to an articles in Investment News and AdvisorOne, the House Financial Services Committee is set to begin hearings on the Investment Adviser Oversight Act of 2012 (the “Act”) starting June 6th.

The Financial Services Institute (which favors the Act) is set to testify at the hearing; the Investment Adviser Association (which is opposes to the Act) has not been asked to appear.  Regardless, the IAA is planing to send individuals on June 7th to congressional offices on Capitol Hill to argue against the Act.

It is anticipated that the Bill will be market-up by June 28, before Congress goes on break for the 4th of July holiday.

OCIE to newly registered hedge fund advisers: expect to be examined

Thursday, May 24th, 2012

On May 11, 2012, OCIE’s Deputy Director, Norm Champ, gave a speech to the NYC Bar titled, “What SEC Registration Means for Hedge Fund Advisers.”  Essentially, registration means “a coordinated series of examinations of a significant percentage of the new registrants [focusing] on the highest risk areas of their business….”

According to Champ, registered private fund advisers reported total assets of $8 trillion (representing 16% of total assets managed by all RIAs) on Form ADV, which is likely a factor contributing to these looming examinations.  Champ highlighted special considerations for hedge fund advisers.  For instance, advisers should allocate fees and expenses fairly especially when deals are undertaken among funds under common management.  Advisers should also identify conflicts of interest and make sure they are properly mitigated and disclosed.  Examples of failures to disclose conflicts include not disclosing to clients that the adviser receives additional compensation if the client switches from one series of a fund to another as well as not disclosing to clients the adviser’s investment of their funds in entities in which the adviser’s principals have interests.

Champ ended his speech with 10 recommended actions for the registered advisers to hedge funds:

  1. Review control and compliance policies and procedures annually
  2. Assess and prepare for Form PF requirements – “Form PF may require voluminous data…located in various places throughout the firm.”
  3. Identify risks
  4. Enhance your expertise – “Make sure your employees are knowledgeable about their work.”
  5. Verify client assets
  6. Get rid of any silos, identify conflicts – “Open communication among divisions and offices where appropriate and legally possible.”
  7. Provide clear, complete, and accurate disclosure in performance and advertising
  8. Verify portfolio management compliance
  9. Address your complaints
  10. Check your IT security – “Ensure that clients’ assets and information are not at risk.”

NASAA President Slams SRO Bill

Tuesday, May 22nd, 2012

During a recent panel on compliance at FINRA’s annual conference, Jack Herstein, president of the North American Securities Administrators Association (NASAA), criticized Spencer Bachus’, R-Ala., recent bill that would subject advisers to oversight by an SRO.

InvestmentNews quoted Mr. Herstein as saying “[t]he approach Chairman Bachus has taken is overreaching.  The states have a sovereign obligation to provide oversight.  State-registered [investment advisers] should be exempt from the bill.”  He further criticized the slew of exemptions that are written into the Bachus bill. Those include, among others, passes for hedge funds, mutual funds and those who have institutional clients.  Mr. Herstein highlighted the fact that while this bill is being touted as a way to prevent another Madoff scandal, “[Under] this bill as drafted, Madoff would not be examined by an SRO.”

The NASAA President said that an SRO would add higher costs and an extra layer of regulation for advisers.  Rather, the state regulators favor bolstering the SEC budget to increase adviser oversight.

FINRA comes up with cost projections for its SRO and the CFP Board blasts them

Tuesday, May 15th, 2012

According to an article in RIABiz, the Boston Consulting Group Inc. (“BCG”) and FINRA are battling over the cost of creating an SRO for advisers.

In December 2011, BCG issued a study (funded by adviser advocacy groups including the CFP Board, the Financial Planning Association, Investment Adviser Association, and the National Association of Personal Financial Advisors, and sponsored by TD Ameritrade Institutional) that found that the cost of FINRA as the SRO for advisers would be double the cost of increasing the SEC’s funding.  FINRA responded that BCG never consulted with it regarding this analysis and issued their own report in April, saying its start up costs would be about 10% of what BCG estimated and the ongoing costs would be less than 50% of BCG’s projections.

BCG then fired back at FINRA, citing discrepancies in FINRA’s calculations. BCG said “FINRA’s numbers were inaccurate and didn’t include all costs”.  FINRA responded that “[BCG] is inventing numbers out of thin air.” The CFP Board also got involved, stating “[t]he organization that appears to be pulling numbers out of thin air is FINRA.”

To provide some context:

BCG’s Cost Estimate (from December 2011 Report)

  • FINRA as an SRO would cost $550 million to $610 million per year, including start-up and continuing costs (which would be $200-$250 million in start up and $460-$510 million in annual costs)
  • Enhancing the SEC would cost $240 million to $270 million per year
  • Newly created SRO would cost $610 million to $670 million per year

FINRA’s Cost Estimate (from April 2012 report)

  • $12 million to $15 million for start-up
  • Continuing costs of $150 million to $155 million annually

The difference in these costs appears to relate in part to FINRA’s ability to leverage off its existing infrastructure, cost of new employees (both during the start-up and ongoing phase), costs of enforcement, and various other factors.


Aggregator deals back on the rise in first quarter

Tuesday, May 15th, 2012

According to RIA Biz, roll-up firms accounted for 53% of RIA merger and acquisition deals in the first quarter of 2012.  The information in the article is based on a report released by Schwab Advisor Services.

The article then provides further insight into some of these statistics:

  • There were 17 M&A deals involving RIAs, an increase from 14 deals in the last quarter of 2011. According to Schwab’s report, the entire calendar year 2011 saw 57 M&A deals.
  • Of the 17 deals reported, 9 were from advisors looking to go independent.  The article implies that these advisors partnered with a roll-up firm.  Of these 9 deals, 5 were advisors who went to HighTower.
  • Of the 17 deals reported, 7 of them were firms with greater than $1 billion in AUM.

RIA Study Group on adviser growth created

Tuesday, May 15th, 2012

RIA Biz is reporting that a group of six RIAs have formed a study group – aRIA (The Alliance for RIAs) to investigate inorganic growth.  The six current members have a combined $18 billion in assets.

The group is managed by John Furey, principal of Advisor Growth Strategies LLC, who also created the group.  aRIA will meet on an ongoing basis to discuss ideas and suggestions. The idea was to find advisers with different business models and varying investment philosophies, which allows the firms to share ideas (including how to onboard new advisers) without competing for the same advisers.

According to the article, the current group members include Brent Brodeski, CEO of Savant Capital Managment, John Burns, principal at Exencial Wealth Advisors; Ron Carson, CEO of Carson Wealth Management Group; Jeff Concepcion, CEO of Stratos Wealth Partners Ltd; Matt Cooper, president of Beacon Pointe Wealth Advisors LLC; and Neal Simon, CEO of Highline Wealth Management LLC.

According to John Furey, aRIA may look to bring on an additional adviser later this year and possibly consider roll ups in the future.

Betterment accidentally pulls an inflamatory blog post

Tuesday, May 15th, 2012

According to an article on RIA Biz, BettermentLLC, an online investment adviser, has removed a post from its website after RIAs expressed “outrage” over a picture that appeared to equate pigs and advisers.  However, Betterment’s founder said it was a technical glitch – and not public pressure – that resulted in the post begin removed from their website.

The title of the post was “Financial Advisors are Bad for your Wealth” and it was originally posted on April 12th.  The post, in part, cites a study by the National Bureau of Economic research that found that many advisors will reinforce harmful behavior of their clients because it is in their interest to do so.  The motivation for this, according to the post, is larger commissions, which results in the “advisor/broker encourag[ing] bad behavior like frequent trading and higher-fee funds.”  The original post was updated a few days later on April 17th to clarify the term “financial advisor” meant advisors who receive commission payments for brokering products, and Betterment “respect[s] and appreciates[s] the work of good investment advisors”.

Amidst all the backlash against Betterment, Steve Lockshin offered support of Betterment, who he said can serve unsophisticated and smaller investors through their “fantastic” technology.

California RIA fires off a letter to Senator Bachus decrying FINRA as SRO pick

Monday, May 7th, 2012

RIA Biz is highlighting a letter sent to Senator Bachus from Neil C. Hokanson regarding FINRA becoming an SRO for investment advisers.  Mr. Hokanson is the president of Hokanson Associates Inc., an RIA based in California with $440 million of assets under management.  A few of the highlights from the letter are as follows:

“I’m sure you are a busy man, so I will cut to the chase: Continued regulation by the SEC, or by a yet-to-be established SRO, is acceptable to the great majority of investment advisors — in fact, by a ratio of 4 to 1. Regulation by FINRA, however, is not an acceptable alternative.

The reasons are essentially twofold. One is that FINRA as an organization does not meet a professional standard acceptable to ethical advisors, while the second is that U.S. consumers would be poorly served by having the broker-dealer community regulate their primary competitor — independent advisors.

…FINRA not only missed Ponzi scammers Madoff and [R. Allen] Stanford (the SEC shares blame here), but it failed with respect to regulating firms in what should be its area of core competency, such as Bear Stearns, Lehman Brothers and Merrill Lynch.

Over the years, a better-informed American public has made a clear choice towards greater transparency and more consumer-friendly alternatives. [The letter then goes on to cite the trend in movement from the wirehouses and broker-dealers to the independent space].

…The broker-dealer model — not unlike FINRA itself — is rife with conflicts of interest and lack of clear disclosure of conflicts and fees faced by American consumers of financial advice.

In summary, not only is FINRA an anachronistic organization doing a poor job of serving the public welfare, but allowing FINRA to regulate its primary competitor industry — which has grown so rapidly on the basis of greater transparency, lower fees, more disclosure and fiduciary standards absent in the broker-dealer world — would result in a huge step backward for the U.S. consumer and for our country.”

U.S. lawmaker Bachus cleared in insider trade probe

Monday, May 7th, 2012

According to an article by Reuters, the board of the Office of Congressional Ethics unanimously recommended that the House Ethics Committee dismiss allegations that Representative Bachus may have traded on insider information.  As a result of the political backlash surrounding these allegations, President Obama signed legislation in March that will curb the ability of members of Congress to trade on insider information.

Mary Schapiro Speaks up About Investment Adviser SRO and Fiduciary Mandate for Brokers

Monday, May 7th, 2012

In an interview with Investment Advisor magazine in mid-march,  Mary Schapiro, chairman of the Securities and Exchange Commission,  voiced her thoughts on two of the top issues affecting the investment advisory space.  Ms. Schapiro stated that: (1) Brokers should be held to a fiduciary mandate, and (2) a self-regulatory organization to help the agency examine advisors must be explored.  Since Dodd-Frank gave the SEC the authority to write a rule to put brokers under a fiduciary mandate, Ms. Schapiro has been waging a battle to ensure a rule sees the light of day.  On this issue, Ms. Schapiro stated that a uniform fiduciary rule crafted by the agency would be business-model neutral- a term that has had many in the advisory community scratching their heads.  Further, on the issue of a self-regulatory organization to examine advisors, Schapiro stated that even after switching advisors with between $25 million to $100 million in assets under management to state registration come July, the SEC will “absolutely not” be able to adequately examine advisors.  Despite the fact that 3,000 advisors previously registered with the SEC will be switching, she said, the SEC will take on hedge funds and other private funds so the assets under management will actually increase and our responsibilities will be greater.

MarketCounsel would like to remind everyone that Ms. Schapiro ran FINRA and has consistently recused herself from any adviser SRO voting.  This has not stopped her from appearing to take every step possible to ensure not only that there is an SRO for advisers, but that her ex-home at FINRA becomes the only viable SRO option.