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Complying With The Broker Protocol When Changing Firms Or Going Independent

August 22, 2016 07:01 am 4 Comments CATEGORY: Practice Management

While advisors working at broker-dealers typically think of the clients they work with as “their” clients, the legal reality is that they are clients of the broker-dealer, not the broker themselves. As long as the broker continues to work at that broker-dealer, this may be a distinction without a difference. But as soon as a broker wishes to change broker-dealers or break away to an independent RIA, significant issues arise, from violating employment contracts by soliciting clients for a new firm while you still work for a new one, to rules protecting client privacy that prevent a moving broker from taking any client information with them.

In the early 2000s, litigation related to broker-dealer recruiting and changing broker-dealers had reached such a fever pitch, the major wirehouses Smith Barney, Merrill Lynch, and UBS executed a form of “cease fire” treaty, dubbed the “Protocol for Broker Recruiting”, and stipulating the terms under which a broker could depart a broker-dealer, and take (limited) client information, without spurring the litigation and temporary restraining orders that were common at the time.

Since 2004, the Broker Protocol has expanded from 3 founding firms to nearly 1,500, and is the essential roadmap for how a broker can leave their current broker-dealer in the cleanest and most efficient manner possible. The good news is that in the years since the Broker Protocol agreement was first signed, thousands of brokers have made successful transitions away from their original broker-dealer. However, the broker-dealers have still made it clear that any broker who does not fully and perfectly comply with the Broker Protocol may still be the subject of aggressive lawsuits seeking to limit their actions.

In this article, we look at the details of what the Broker Protocol is, what exactly brokers must do to comply with its terms and requirements, and the best practices and issues to consider when preparing for a transition away from a broker-dealer to another firm, or when going independent altogether.

Weekend Reading for Financial Planners (Aug 20-21)

August 19, 2016 02:51 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news that just two weeks after the Social Security Administration launched a privacy protection initiative that would require seniors to use two-factor authentication via their cell phones to log onto MySocialSecurity, it's backing off the initiative and making it optional, as senior advocacy groups have pointed out a large number of seniors can't even receive a text message. Also in the news this week is a new SEC filing from Vanguard that it's exploring the potential launch of a new series of transparent active ETFs, bucked the trend of competing asset managers who have insisted that active ETFs must be more opaque to prevent front-running.

From there, we have several financial advisor marketing articles this week, from a look at how to find the "perfect" client fit (through specialization), the "must have" elements for a modern financial advisor website, the indirect reasons why many financial advisors are struggling to get new clients (without realizing the turn-offs they're unwitting conveying), and a discussion of whether sponsorship deals really pay off as a form of financial advisor advertising (the short answer: yes, but only if you leverage it for networking purposes).

We also have a few practice management articles this week, including: various types of personality assessment tools you can use when hiring a new financial advisor (from DISC and StrengthsFinder to Caliper and Profile XT); an overview of the marketplace of RIA strategic acquirers and what the different types do (and don't) provide in the deal for those who want to sell; and why an employee "sponsorship" program is even better than just establishing a mentorship relationships for your top employees.

We wrap up with three interesting articles: the first is coverage about a new study that finds it really is detrimental for clients to watch the financial media, as even when we know the quality of the information is low, we still can't help but give a disproportionately high weighting to the "noise"; the second is a critique of FINRA's big push for its BrokerCheck system, suggesting that more promotion of BrokerCheck when FINRA still hasn't resolved issues from expungement of serious complaints to not verifying or giving context to frivolous ones means FINRA's efforts are primarily about helping FINRA show its relevant, rather than actually help consumers; and the last is an striking suggestion from financial advisor Tim Maurer about why it's better to plan to take one long 10-day vacation, rather than splitting up two weeks of vacation throughout the year - most substantively, because with the rapid pace of today's work environment, it takes at least half of a 10 day vacation just to unwind and relax enough to actually enjoy it and harvest its restorative value!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week includes coverage of two big integration deals that robo-advisor-for-advisors Vanare recently announced (with Redtail CRM and Apex Clearing), and enhanced calendar and contact data gathering features in Salesforce (from its Tempo and RelatedIQ acquisitions).

Enjoy the "light" reading!

Financial Adviser Vs Advisor – What’s The Difference?

August 18, 2016 07:58 am 18 Comments CATEGORY: Client Trust & Communication

Financial advisor vs financial adviser vs financial planner vs financial consultant vs investment adviser or advisor. The financial services industry uses a remarkably wide range of labels to describe what are substantively similar job titles that are meant to convey the person is in the business of giving financial advice. But does it actually matter which label you use, or is it simply about individual preference?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the question of why there's a distinction between financial advisor vs adviser, how the labels have evolved over time, and why it actually can matter which spelling you use, at least some circumstances.

Because the reality is that while most financial advisor labels are just thrown around for marketing purposes, the Investment Advisers Act of 1940 does actually define the terms RIA (registered investment adviser) and IAR (investment adviser representative), and those are spelled adviser with an E-R at the end. Because that's how Congress wrote it into the original law, nearly 75 years ago.

Of course, in the end whether an individual must actually register as an investment adviser or not is dictated by what he/she does, and whether that person is in the business of giving investment advice for compensation. If that's true, becoming an IAR of an RIA is a regulatory requirement, regardless of whether it says financial advisor vs financial planner on your business card.

Nonetheless, in today's environment, where advisor with an O-R seems to be the dominant spelling, arguably the decision to use financial adviser actually does connote some distinction - a sense of greater formality, perhaps, giving the Old English roots of the E-R spelling of the word. So while financial advisor vs adviser have the same dictionary definition, and regulators will ultimately judge you by what you do, you may still want to choose the spelling that fits with the kind of brand you want to communicate. But remember, any time you're actually writing out the definition of the acronyms RIA or IAR, use the adviser with an E-R spelling, because that's the way it's written in the law itself!

Why It’s A Bad Idea To Borrow Based On What The Lender Will Allow

August 17, 2016 07:01 am 6 Comments CATEGORY: Debt & Liabilities

In a world where most major purchases – such as buying a house or a car – cannot be done with cash, the practical constraint to the question “how much can I afford to buy?” is usually based on “what monthly debt payment can I afford to make?” As a result, lender thresholds for the maximum amount to borrow – such as the popular 28/36 debt-to-income-ratios – are typically used to determine affordability.

However, the reality is that what’s good for the lender may not necessarily be good for the borrower. After all, lenders lend money assuming that at least some people will default, and that the rest will do ‘whatever it takes’ to repay the loan, even if that means significantly curtailing lifestyle. In other words, lending guidelines are based not on fiscal prudence, but the maximum amount of pain the borrower is anticipated to tolerate without causing mass defaults!

In turn, this suggests that when evaluating how much a borrower can really “afford”, without potentially making themselves miserable, lender guidelines should not be relied upon. Or at least, it suggests that consumers need a #FinTech tool for themselves, that can evaluate the financial risk of their borrowing, but based on prudent borrowing that minimizes the risk of default, rather than maximizing the level of “acceptable” default loss for the lender!

Of course, ideally the determination of spending levels shouldn’t be based on what you can afford (by borrowing against the future!) in the first place, but what is “enough” to bring about a comfortable lifestyle. Though in a world of trying to “keep up with the Joneses”, that is clearly easier said than done!

Who Watches The CFP Board Watchers?

August 15, 2016 07:01 am 20 Comments CATEGORY: Planning Profession

In the nearly 10 years since Kevin Keller took over as the CEO of the CFP Board, the rolls of CFP certificants have grown by over 35%, even amidst a global financial crisis and an advisor demographics challenge that has contributed to a nearly 15% decline in advisor headcount over that time period.

In Keller’s early days, the CFP Board’s focus was squarely on rebuilding trust with its various stakeholders, from a relationship that had suffered greatly from a string of 6 CEOs in the preceding 6 years before Keller took over. It was a time filled with growing communication from the CFP Board to CFP certificants, where initiatives were extensively vetted for stakeholder opinion and feedback, and more than half a dozen different public comment periods for various rules changes.

Yet since 2012, the first year that CFP Board “lost” an initiative due to negative feedback during the public comment period, the tone of CFP Board’s engagement with stakeholders has shifted. It’s now been a full 4 years since the CFP Board announced a single public comment period at all, despite engaging in numerous – and several unpopular – rules changes in the interim. And the CFP Board’s growing aspirations is leading towards an ever-growing path of mission creep, from being “just” the organization that maintains the CFP marks, into one that offers a Career Center, an academic home for CFP certificants, its own Journal, and even proposed to go into competition with its own CE providers.

Of course, ultimately any organization is accountable to its stakeholders who can “vote with their feet” to take their business elsewhere. Yet the growing dominance of the CFP marks as the financial planning designation of choice means financial planning practitioners have never had fewer real alternatives to choose from. And the CFP Board’s ongoing Public Awareness Campaign, with its “Certified = Qualified” message, implicitly impugns any CFP certificant to their clients if that individual decides to walk away from the CFP marks – which makes the limited complaints to CFP Board’s policy changes look less like tacit stakeholder affirmation, and more like acquiescence under duress.

While some might suggest this is all the more reason to step away from the CFP marks and find an alternative designation, I still believe that the CFP Board and its certification are still the best chance we have to become a recognized and bona fide profession. But it does mean that perhaps it’s time to recognize that the CFP Board’s success in growing the adoption and prominence of the CFP marks is fundamentally changing the stakes and its relationship to CFP certificants as stakeholders.

And so if the organization wants to maintain its legitimacy and authority with CFP stakeholders, it needs to (re-)adopt its use of public comment periods (and actually make the results public as other oversight organizations and regulators do!), not unilaterally force all CFP certificants to waive their right to hold the CFP Board accountable in court under any/all circumstances, and consider whether a governance model that deigns so much authority to its CEO and selects its board successors by purely internal means is really the right approach for its increasing role in the financial planning profession.

Weekend Reading for Financial Planners (Aug 13-14)

August 12, 2016 02:51 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that 7 major universities, including Duke, Yale, and MIT, were all sued this week in class action lawsuits over the investment and record-keeper expenses of their 403(b) plans, opening a new chapter in the ongoing ERISA backlash against large employer retirement plans for failing in their fiduciary duty to manage their costs for employees. Also in the news this week was discussion of the ongoing shifts in money market funds, in preparation for new rules rolling out in 2 months that could introduce redemption fees and even floating NAVs for some money market funds.

From there, we have a few practice management articles, including: a review of upstart RIA custodians Equity Advisor Solutions and Folio Institutional; how TD Ameritrade continues to maintain its lead as the RIA custodian with the widest breadth of integrations thanks to its open architecture VEO platform; how the rising tide of ERISA fiduciary lawsuits may be shifting 401(k) plans to prefer 3(38) outsourcing providers over 3(21) plan consultants; and how advisory firms should consider measuring not only the productivity and efficiency of their financial advisors, but also their operations staff.

We also have a several more technical articles, from a look at what questions and issues to consider when selecting a donor-advised fund, to how shifts in the working habits of women and mothers have decreased the relevance of Social Security's "family" benefits (and whether a new caregiver credit should be introduced for working mothers), and whether retirement income strategies that combine portfolio withdrawals and laddered annuity purchases may be more effective than either is alone.

We wrap up with three interesting articles: the first looks at how financial advisors need to burnish their public perception by showcasing the best of what financial advice can provide (to combat the slew of negative perceptions about the broader financial services industry); the second urges financial advisors to be more careful about the language they use to describe themselves, noting that if we can't appropriately distinguish between the profession and the industry, between advisors and salespeople, and between clients and customers, then what chance do consumers and the media have; and the last calls on professional financial advisors to adopt and embrace the DoL fiduciary rule, noting that all true and bona fide professions have a fiduciary duty to clients, and that the implementation of a fiduciary rule for financial advice could mark the starting point for the true emergence of the financial planning profession.

Enjoy the "light" reading!