Archive for March, 2014

Former NAPFA Chairman Spangler Gets 16 Years in Prison

Thursday, March 27th, 2014

According to numerous articles, former NAPFA Chairman Mark Spangler has been sentenced to 16 years in prison for defrauding clients.  In addition, Spangler was ordered to serve three years of supervised release and pay $19.8 million in restitution.

The Spangler Group moved $46 million of client assets into Terahop Networks and Tamarac through a fund it managed.  Mr. Spangler was a founder of Terahop which was a failed manufacturer of wireless devices.  Mr. Spangler was also a co-founder of the more successful Tamarac. The firm did not disclose the nature of the investments, instead saying the fund invested in publicly traded securities and sending phony account states showing profits.  In a classic Ponzie move, Spangler then used other investor assets to pay for withdrawing clients until there was no money left to move.

This is another example of the additional risk associated with firms with custody, especially those that don’t allow for client transparency.  This fraud would have been more difficult or impossible in the case of an adviser managing assets held in clients’ names at a qualified custodian.

MarketCounsel Helps Launch Billion-Dollar ‘Startup,’ Lebenthal Wealth Advisors @finplan

Wednesday, March 26th, 2014

Lebenthal Wealth Advisors recently acquired Carrie Galloway and Andrew Stern, a $1.2 billion breakaway team from Morgan Stanley. Although young, the firm’s Wall “Street” cred is distinguished, and this acquisition serves as a major jump start.  Behind the scenes, the advocates for independence at MarketCounsel were hard at work, engineering the launch with Felix Rivera and @RBC.

Click here to read more.

What Went Down at the SEC’s Cybersecurity Roundtable

Wednesday, March 26th, 2014

The SEC has named “cybersecurity” as a priority in a number of publications and speeches in 2014.  In furtherance of that priority, the SEC conducted a roundtable with members of the private sector as well as government agencies to discuss the current state of cybersecurity in the securities industry.

The roundtable covered four primary areas:  1) the general landscape of cybersecurity; 2) public company disclosures; 3) market systems; and 4) broker-dealers, investment advisers, and transfer agents.  In general, the roundtable provided a lot of basic information and broad opinions as opposed to any actionable items or guidance on SEC activity and expectations.  The first three sessions primarily focused on areas that don’t impact investment advisers, partially because they focused on different industries, but also because they discussed much larger companies with different risks than a typical entrepreneurial investment adviser.

The following are some of the areas worth noting that came out of the roundtable, primarily from the fourth session that partially covered investment advisers:

  • There was a general consensus that cybersecurity should be covered as part of a firm’s privacy policy, identity theft red-flags program, and business continuity plan.  While the panel mentioned the fact that many state have breach response requirements, it ignored, or wasn’t familiar with, the aggressive data protection regulations in many states like Massachusetts.
  • Firms should concentrate on limiting access to the firm’s information to those that need access.  This includes employees as well as service providers.  Many security breaches come from those you let in the door.
  • Cybersecurity should be as much an operations/business focus as an IT/security focus.  This includes the need to explain technical issues to non-technical people.
  • Newer fishing scams include going after employees of a firm to get client access.
  • Account takeovers (getting a client’s information and using it to get a firm to disbursing assets or other activities) are still the most comment issue.
  • Bad guys are constantly changing their attacks.  Firms need to keep up with trends.
  • Breaches are a big concern for investment advisers.  When Target is hacked, people go back to Target.  Will they continue to work with an adviser?
  • Pay attention to your “bad leavers.”  Employees that cause breaches with their departure.
  • At the end of the fourth session, each panelist was asked where the SEC should go from here.  None took issue with additional rulemaking.  One even referenced the SEC’s lack of any movement on Reg SP amendments, but all implored the SEC to make any rule principles-based in order to avoid being instantly out of date.

So in summary, investment advisers should focus on policies and procedures they already have in place.  The adviser’s privacy policy, identity theft red-flags plan, data protection plan, and even its business continuity plan should cover the SEC’s “cybersecurity” focus.  Like all compliance areas, however, they must be kept up to date and accurate based on the firm’s specific risks.


Fiduciary Opponents Point to UK Experience

Monday, March 24th, 2014

InvestmentNews published an article with quotes from opponents of the Department of Labor’s proposed fiduciary changes.  In particular, these opponents point to the lack of advice-based options that are now available in the UK for smaller investors.  The UK split its financial services regime to allow professionals to charge a fee for advice or a commission for the sale of securities.  Upon that change, most of the banks that had provided advice to clients have left the space.

James Hammond, managing director for Europe at Franklin Templeton Investments told an audience at the Investment Company Institute’s Mutual Funds and Investment Management Conference that “the mass market has been left behind.”  He said that investors with modest assets aren’t showing any enthusiasm for advice fees, and instead turning to online self-directed accounts.  Mr. Hammond provided no guidance on whether the fees that would be charged would be more or less than the commission those consumers paid in the past.  Therefore, there is no way to know if the consumers have really been left behind or if they’re just not getting proper education.

This concept that smaller investors will be left behind if the DOL’s fiduciary definition is changed, however, has picked up steam in Washington, DC.  Last week Representative Gwen Moore, D-WI mentioned a report that is circulating around Capitol Hill that points to the UK results.

Much of these same arguments have been made in opposition to the SEC extending a fiduciary duty to broker-dealers.  While there is certainly a corollary, there are differences as well.  The UK based their regime on compensation types, deciding that commissions were too much of a conflict to give independent advice.  Assistant Labor Secretary Phyllis Borzi made a strong counter point in mentioning that the DOL is not looking to ban commissions.  Neither would the SEC, but it would further confuse consumers who are already confused.  MarketCounsel continues to believe that commissions remain an important compensation structure for certain relationships.  The US securities’ regime is properly set-up to allow commission-based advice where a broker-dealer registers as an investment adviser.

@RIABiz Once Again Touts the Unmatched Quality of the MarketCounsel Summit in a Feature on Our Friends at @Addepar #MSUM13

Monday, March 24th, 2014

Former president, Mark Paulus has left Addepar to found his own start-up, Malta, in the midst of the industry’s intrigue as to where Addepar stands in the RIA market. From where we stand, Addepar has the team, technology and relationship skills to make it in this business, as exhibited by their attendance at the MarketCounsel Summit:

Bill Winterberg, principal of FPPAD adds that Addepar’s small splash in the RIA business does not relate to the quality of its software, which he judges to be top-notch.  Rather, Addepar has yet to reconcile itself to just how relational RIAs are in how they do business and that they buy people as much as technology when a software purchase occurs.  For example, Addepar did not have a booth at T3. (They were present at the MarketCounsel Summit in Las Vegas in December).

Click here to read more.

Brian Hamburger Clears Up Concerns on Duration to Breakaway Profitability @FinAd_IQ

Monday, March 24th, 2014

Today, the Financial Times’ AdvisorIQ @FinAd_IQ addressed the age old (pun intended) question: how old is too old to breakaway from a wirehouse?  As it turns out, it appears that this isn’t answered by a number, but more so by the adviser’s current situation and vision for the future.  Brian Hamburger counters concerns that the ship has sailed for aging advisers or hasn’t yet arrived for some younger ones:

“As for profitability, breakaways return to the black within one to two years,” according to Brian Hamburger of MarketCounsel, a company that helps RIAs sort through business challenges.  In his view, “no wirehouse advisor with a healthy book of business should ‘stay captive’ out of fear it will take too long to make serious money.”

Click here to read more.

SEC Issues Alert About Firms Falsely Claiming Registration

Friday, March 21st, 2014

The SEC periodically puts out Investor Alerts when there is a pattern of fraud that may impact investors.  The SEC recently published an alert warning investors of firms misrepresenting that they are registered with the SEC.

The SEC referenced a recent case of a private placement issuer that marketed itself as registered with the SEC while referencing its Form D filings.  The alert tells investors that Form D and other types of filings are not “registrations” unlike those of Broker-Dealers and Investment Advisers.  The alert pointed investors to BrokerCheck or IAPD to check on registration status.

“You should not trust any individual or firm that points to a Form D filing as evidence of registration – in any capacity – with the SEC.  If individuals or firms falsely claim that they are registered with the SEC, do not trade with them, do not give them any money, and do not share your personal information with them.”

DOL Proposes New 408(b)(2) “Guide” Requirement

Friday, March 21st, 2014

The Department of Labor has proposed an amendment to 408(b)(2) that would require service providers, including investment advisers, to provide a guide to their disclosures.  The DOL is apparently concerned that some disclosures are too long or spread out over multiple documents, making them too difficult for smaller plan sponsors to understand.  The guide would require the provider to specify the location of all of the 408(b)(2) disclosures, including the document’s name and page number.

The guide is only required, however, where the 408(b)(2) disclosures are not provided in one document or if the document is more than a certain number of pages long.  The number of pages will be specified at a later date.  Investment advisers are generally including their disclosures in either their client agreements or Form ADV.  Neither of these documents are particularly long, so hopefully the DOL will set their limitation at a reasonable number.  In that case, this guide would only be required by investment advisers dividing the disclosures into multiple documents.

Harmonization Prioritization, Examining the Never-Before Examined, and FINRA Moves on 5 New Initiatives

Friday, March 7th, 2014

All covered in this month’s MarketCounsel Adviser Squawk Box.  Click here to grab a seat in the office and listen to Brian Hamburger and Dan Bernstein discuss these latest developments affecting investment advisers.

MarketCounsel Welcomes mfp Strategies to the RIA Institute for Compliance Management

Wednesday, March 5th, 2014

Another multi-billion dollar firm joins MarketCounsel’s robust compliance management program.  Welcome aboard…. you’re going to really like it here.