Making Sense (And Dollars) After The Plunge

“If you go to a doctor because your elbow hurts, the doctor isn’t going to treat you heart or hand,” says Craig Israelsen. “He’ll treat your elbow. That’s what advisors need to do with clients now.”

“It’s not like a client’s entire portfolio is hurt,” says Israelsen. “It’s just part of it.”

Israelsen, an associate professor at Brigham Young University and frequent contributor to Financial Planning Magazine, likens the market crash of 2008 to a client’s elbow that's taken a very unfunny blow to the funny-bone.

Israelsen will speak about how the market cataclysm affects rebalancing at this Friday’s 4 p.m. EDT session of the Financial Crisis Webinar Series.

Israelsen says that advisors who did not have retiree or pre-retirees holding age-appropriate cash positions before the global economic crisis decimated stock prices are vulnerable but have no one but themselves to blame. He has always argued that it was misguided to think of cash as being a drag on portfolios. “No one thinks cash is a drag now!”

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Smart Marketing For Tough Times

I received a call from an advisor last Friday that taught me a lesson, one that perhaps many advisors can also learn from.

The call was from a longtime client of Advisor Products. We don’t speak often, but I
always enjoy it when we do.

On Friday, she opened my eyes to the fact that Advisor Products needs to do more to educate advisors about what we offer. So I’m going to host a monthly webinar about how Advisor Products helps advisory firms retain clients and gain prospects.
Please join me for the first session Wednesday, April 15 at 4 p.m.

Back to the lesson I learned and how you might be able to learn from it.

The advisor who called me is responsible for marketing at the firm, but she didn't know about important ways we could help her firm.

She didn’t know we just completed an interface with the CRM software used by her firm (
XLR8) that enables her firm to assign her clients To-Dos in XLR8 and programmatically update them in a client’s personal portal. She didn’t know that Advisor Products 18 months ago more than doubled the number of articles available for newsletters and websites from 20 a quarter to 50. She didn’t know we now provide marketing videos or that we added search engine marketing services.

Advisor Products constantly updates advisors about how to benefit from what we do via:

  • MarketingSmart, an email newsletter with updates on all new services and advisor marketing tips

  • My blog, which I post almost every day

  • The weekly Financial Crisis Webinars Series that helps advisors manage the wrenching downturn

  • A sales team tasked with calling each of our clients every six months

  • A CRM system that records all email correspondence with each client and stores notes by our staff about every phone call

  • A “BackOffice” for each advisory firm to manage their newsletter and website and that prominently displays updates about our products and my blog

The list could go on but there’s no need to beat the point to death.

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Compliance Issues Posed By Linkedin, Twitter & Social Networks

Yes, advisors can use Linkedin, they can blog, and they can even tweet on Twitter. Whether you’re a register rep or an IA rep, you can network online with friends and prospects, but you do have to follow the same compliance rules that govern other advertising materials.

To prepare for a webinar about compliance issues posed by social networking sites, the subject of this Friday’s Financial Crisis Webinar, I interviewed Brian Hamburger and Dan Bernstein of MarketCounsel, a compliance consulting firm serving independent advisors nationwide. (The 4 p.m. webinar on Friday is free but you must register to attend.) Below are some of what these experts said.

With regard to Twitter:

When an IA rep uses Twitter to send a link to an article from an online magazine, newspaper, or other site to clients and prospects "following" him, that communication is subject to SEC advertising rules. However, Bernstein says that merely sending a link is not advertising—as long as you don’t give your opinion.

· If a rep sends links to articles, however, it could be deemed advertising, which means some broker/dealers may require pre-approval of a tweet with a link. It depends on your BD. Many BDs allow reps to re-circulate articles. Most BDs will permit it, so long as the rep does not add content. Your BD may require you to print it out and retain each tweet in hard copy.

· IA reps have it a easier than registered reps. There is no preapproval required of IAs in any of the SEC rules.

On the topic of blogging:

· Yes, advisors can write blogs. Twitter is a microblog. However, a blog is like any other communication, and a rep needs it pre-approved, which makes blogging difficult.

· Some BDs regulations do not allow blogs. But it is a manpower issue and cost issue.

· Blogging is easier for IA reps because they do not need pre-approval of the material.

· A blog from an IA rep can discuss typical clients and situations that are hypothetical. You can “make up” a client and talk about his issues and problems and how you solved them—as long as you disclose that these are hypothetical abstracts and not real situations.

· Blogging about the economy, financial planning, or market commentary is less likely to pose compliance problems, but market commentary must avoid predictions.

· Commenting on your blog is permissible. But any commenting should be screened, so that you can take down a comment or edit it.

· You must be able to remove blog comments that are testimonials from clients.

If an advisor is using Linkedin:

· A "recommendation" on your Linkedin profile by a client does indeed constitute a testimonial and, thus, violates SEC rules prohibiting RIAs from using client testimonials in advertising.

· If a client writes a recommendation praising you as a moral or religious person, it will be construed as a testimonial—even if it does not address your skills as a professional investor.

· The testimonial prohibition is commonly thought to pertain specifically to clients. There is not a lot of guidance about using testimonials from non-clients. But the fact that there has not been many enforcement actions for using testimonials by non-clients indicates that using testimonials from non-clients may be within SEC rules. But the SEC may ask you to remove such recommendations from Linkedin. For instance, if you are on the board of directors at your church or synagogue, another board member could write a recommendation for you in your capacity as a board member and that would probably not be construed as a violation of the rules.

Because social networking is so new, there is no body of enforcement actions and rulings that you can reference. The SEC will be busy in coming months addressing the many issues posed by advisor use of social media .

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New PMS System For RIAs!

advisorPMS, a portfolio management software system, is being officially launched today, promising to usher in a a new era for advisors.

advisorPMS costs $1,000 a year for unlimited users, just a fraction of the licensing fees charged by industry leaders Advent Software Corp. and Charles Schwab. The program, which received rave reviews from technology writers at all advisor trade publications, is being offered in a desktop application and also runs on a web server hosted by advisorPMS for $10 a month. In addition, advisorPMS offers a CRM add-on and financial planning module for free.

“We know we will take a loss on the early adopters,” says advisorPMS founder and CEO, Brad Slavemen, who also runs a successful financial planning practice in Angola, Texas. “But we will make it up on volume.”

advisorPMS website

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Custodian Succeeding With Small RIAs

Amid the gloomy landscape stands an oasis: Shareholder Services Group.

About a year after Peter Mangan left TD Waterhouse Institutional in 2002, he along with Barry Boyte and a few other veterans of the RIA custody business started Shareholder Services Group (SSG). (See my April 2003 article.)

Initially, I had my doubts. Could a custodian focusing on small advisors compete? It was the middle of a bear market, and the established custodians were still struggling in the aftermath of 9/11. I feared they'd fall flat on their faces. Boy was I wrong.

SSG is now a custodian to 480 RIA firms and it is experiencing a boom amid the economic bust. While the $1.7 billion amount of assets SSG custodies for RIAs is dwarfed by the big-name custodians—Fidelity, Pershing, Schwab, and TD Ameritrade, SSG has built a profitable business around smaller RIAs that the larger custodians don’t value as much.

According to Boyte, since the market meltdown about 15 to 20 new RIA firms have been signing on with SSG each month.

About 75% of the new RIAs are registered reps coming from BDs, Boyte says, and the vast majority are dropping their securities licenses. With a new regulatory regime likely (see previous post), these registered reps seem anxious to move to a fee-only or fee-based business-model now rather than wait.

These advisors are probably moving now because they have less to lose. The stock market meltdown has eroded the value of their 12b-1 fees, making it easier to walk away from them.

Other custodians are saying they’re seeing an influx of new assets, too, but the details of SSG’s growth tell a compelling story.

“It’s a good business model,” says Boyte. “Peter Mangan laid it out in a business plan in 2002 and we’ve adhered to it very closely because it works. First and foremost, it’s about giving good quality service.”

How is SSG succeeding? Nothing fancy, no unbelievable tech story, no huge discounts. Just good service.

Boyte says SSG pricing is competitive versus other custodians, but what separates the firm is the deep experience of its principals and staff, and SSG’s sole focus the RIA custody business. In contrast, Fidelity, Schwab, TD Ameritrade, and Pershing are financial services behemoths with an RIA division.

Boyte says the firm is not trying to bring in more advisors because it fears service issues. SSG, he says, is able to maintain a high service level because it only hired personnel experienced in working with RIAs. “Everyone on staff here now worked with us at Jack White and TD Waterhouse,” says Boyte. “When we need a new person, we know where to go and who to speak to.”

Any advisor who is discouraged because of tough business conditions should take comfort from SSG’s story. If you’re smart enough to stay focused on your business model and on doing the right thing for people in this business, you, too, will probably be doing back-flips in a few years.

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Schapiro: “Harmonize” RIA And B/D Obligations

Testifying before the Senate Committee on Banking, Housing And Urban Affairs Thursday, SEC Chairman Mary Schapiro submitted documents saying the agency anticipates “harmonizing investment adviser/broker dealer obligations.”

“We are studying whether to recommend legislation to break down the statutory barriers that require a different regulatory regime for investment advisers and broker-dealers, even though the services they provide often are virtually identical from the investor's perspective,” Schapiro said in prepared testimony. “Some of our rules regulating financial intermediaries need to be modernized, and the Commission is considering what, if any, legislation to ask for from the Committee.”

Along with her prepared remarks addressing the SEC’s priorities and possible reforms for restoring investor confidence, Schapiro submitted an appendix to her testimony to provide “an overview of the major functions of the SEC, a summary of recent activity, and the resources allocated to each function.” The document says that “anticipated 2009 activities” of the SEC’s Division of Investment Management and Division of Trading And Markets, which regulate RIAs and B/Ds respectively, included “harmonizing investment adviser/broker dealer obligations.”

In 2008, according to the appendix submitted by Shapiro, the SEC, using risk-based targeting, conducted examinations of 1,521 investment advisors (14% of registered universe of 11,300 registered investment advisors). During the same period, the agency conducted examinations of 720 broker/dealer firms (together with FINRA, 55% of universe of 5,500 registered broker/dealers examined).

Schapiro, who served as CEO of Financial Industry Regulatory Authority, the self-regulatory organization for broker/dealers, was appointed by President Barack Obama on January 20 and was confirmed unanimously by the Senate and sworn in as SEC chairman on January 27, becoming the first woman to serve in the post.

With her strong ties to FINRA, many RIAs have speculated that Schapiro would act to bring regulation of RIAs into alignment with brokers, a development most RIAs do not welcome and most B/Ds cheer. RIAs managing more than $25 million are regulated by the SEC while those with less than $25 million under management are regulated by state securities bureaus. Brokers are licensed by FINRA and supervised by broker/dealers.

Compliance regimes imposed by most B/Ds on registered reps are generally far more invasive and bureaucratic than the compliance system faced by RIAs. However, B/Ds have a long history of violating rules governing sales to retail investors, while instances of abuses by RIAs been comparatively rare.

The $65 billion Ponzi scheme by Bernard Madoff has created an environment in which investors and legislators are demanding change to the regulatory framework, which is widely considered to have been outmoded in recent years by the growing use of complex derivatives, unregistered hedge funds, and private equity partnerships, and the conflicts of interests at credit rating agencies responsible for passing judgment on debt issues that pay huge fees to the rating giants. In her prepared remarks, Schapiro’s promised to address a number of these issues.

While Schapiro offered no details about how she might bring BD and RIA regulation into closer alignment, her remarks make it clear that a review of the regulatory framework faced by RIAs is high on her list of priorities for 2009. An area affecting RIAs that she offered some details about are instances in which an RIA takes custody of assets. While few RIAs accept custody of client assets, the Madoff fraud would likely have been discovered sooner if stricter rules had been in effect governing instances in which RIAs take custody of client assets.

“I have asked the staff to prepare a proposal for Commission consideration that would require investment advisers with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets,” Schapiro said. “I also expect the staff to recommend proposing a rule that would require certain advisers to have third-party compliance audits to review their compliance with the law. And to ensure that all broker-dealers and investment advisers with custody of investor funds carefully review controls for the safekeeping of those assets, I expect the staff to recommend that the Commission consider requiring a senior officer from each firm to attest to the sufficiency of the controls they have in place to protect client assets.”

Schapiro said the list of certifying firms would be publicly available on the SEC's website so that investors can check on their own financial intermediary. In addition, the name of any auditor of the firm would be listed, which would provide both investors and regulators with information to then evaluate the auditors.

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Fraud Outbreak Makes Posting Form ADV A Must

The Securities and Exchange Commission took emergency action Wednesday to charge Nashville, Tenn.-based investment advisor Gordon B. Grigg, 46, and his firm, ProTrust Management, Inc., with securities fraud, and the agency obtained a court order freezing their assets.

“The Complaint alleges that ProTrust, a Tennessee corporation with offices in Nashville, is engaged in ongoing securities fraud,” according to the litigation release posted on the SEC’s website earlier today. “The Complaint further alleges that Grigg is a purported financial planner and an investment adviser who controls ProTrust.”

The SEC alleges that Grigg and ProTrust defrauded at least 27 clients out of at least $6.5 million and misrepresented that their money was invested in the federal government's Troubled Asset Relief Program (TARP) and other securities that, in reality, do not exist. The SEC alleges that Grigg bilked investors by selling them private placements and then fabricated account statements for the non-existent U.S. Government-guaranteed commercial paper and bank debt.

Grigg and ProTrust consented to the emergency relief sought by the SEC. William J. Haynes, Jr., a U.S. District Court Judge for the Middle District of Tennessee, Nashville Division, issued a temporary restraining order to prevent Grigg and his firm from further violations and froze their assets. While the ProTrust website is no longer online, the image to the right obtained by from WayBack Machine was previously on the firm's home page.

Grigg's scheme begain in 2003, according to the SEC complaint. In August 2007, the says charges, Grigg recommended that a client in North Carolina and a client in California, each of whom was a retired U.S. Air Force pilot, invest in “Private Placements.” Grigg “falsely and fraudulently” told the two piltos that the Private Placements were not available to individual investors but were available to his clients through the pooling of their funds. One client wired $237,000 and the sent $100,000 in cash.

Grigg, from approximately January 2008 through December 2008, faked monthly account statements to the North Carolina client, reporting positions in a $100,000 “Jumbo Corporate Debenture” with an 8.15% fixed annual return and a $132,000 “Kohlberg Kravis Roberts” investment product with a 14% fixed annual return. “In fact, no such investment products had been purchased by the Defendant,” says the SEC complaint, and no such KKR investment product exists.

Last month, the scheme took a new turn when, according to the SEC, Grigg mailed correspondence to the two pilots saying his firm “had access to debt guaranteed by the U.S. government through the government’s TARP program.”

ProTrust Management has been a very small participant in a partnership that is headed up by Berkshire Hathaway and Kohlberg Kravis and Roberts, or KKR,” Griggs reportedly wrote in a letter to both of pilots. “Via the partnership, ProTrust has purchased over eight million dollars worth of banking debt and commercial bank paper over the last five years with interest rates from 7.5% to14%. ProTrust was offered to participate in the latest offerings with Morgan Stanley and Goldman Sacks [sic] through investments and loans.”

Added Griggs, “I agreed with the partnerships and committed to over $5 million dollars of commercial paper offering 12.5% in government-guaranteed commercial paper and bank debt. Griggs, in the portion of the letter provided by the SEC, declared: “This is an amazing opportunity as we now have a U.S. government guaranteed 12.5% bank debt. If you do not want to participate in the 12.5% government guaranteed fund please send me the enclosed liquidation form.” An additional 25 clients were told a very similar story by Griggs, the SEC alleges.

Perhaps most disturbing is that Grigg was terminated as a registered representative of a broker-dealer on April 25, 2002 for multiple compliance violations. In addition, on June 28, 2006 Grigg and ProTrust were the subjects of an administrative cease-and-desist order issued by the North Dakota Securities Department. North Dakota ordered them to pay restitution and a civil penalty of $570,000 for falsely representing to a client that her funds had been invested in certificates of deposit and other securities. The state authorities found that Griggs and ProTrust had violated registration and anti-fraud provisions of the state’s securities laws.

The 2002 and 2006 charges raise questions about why regulators at FINRA and the SEC did not discover Grigg’s alleged scheme earlier. If the SEC charges are true, Grigg brashly continued his fraudulent ways two and a half years after the North Dakota securities regulators identified him as a repeat securities offender.

Grigg’s case is the latest in a series of frauds that have unraveled after the market fallout, when nervous investors began trying to redeem their money only to learn that it was gone. None of the recent fraud cases compare to the $50 billion Ponzi scheme allegedly perpetrated by broker-dealer Madoff Securities and its disgraced founder Bernard Madoff, but the number fraud cases involving investment advisors in recent weeks has suddenly escalated to what appears to be an unprecedented level.

On Monday, Nicholas Cosmo, a Long Island, N.Y. investment-firm owner, surrendered to federal authorities. Mr. Cosmo allegedly raised more than $370 million between 2006 and 2008 by promising investors 48% annual returns from funding commercial loans, according to a federal affidavit in support of his arrest. On Tuesday, authorities arrested Arthur Nadel, the missing Florida hedge-fund adviser, who was accused by federal authorities of defrauding clients of millions of dollars. Less than two weeks ago, A Hamilton County Indiana Superior Court judge froze financial advisor Marcus Schrenker's assets and those of his wife after Schrenker reportedly parachuted out of his company-owned plane over Alabama Sunday while the plane continued flying on autopilot before crashing into Florida swampland two hours later. After a manhunt, Schrenker was apprehended and is now in custody.

As of today, Advisor Products, a leading developer of websites for for financial advisors, is recommending that all Registered Investment Advisers it serves post a Form ADV on their website, or a link to the SEC’s Investment Adviser Public Disclosure website where consumers can view the Form ADV. In both the Cosmo and Grigg cases, prosecutors allege the advisory firms were unregistered. So a Form ADV provides assurance to clients and prospects that you are properly registered and subject to SEC inspections.

Latest news about the Grigg case.

Latest news about the Cosmo case.

Latest news about the Schrenker case.

Latest about the Nadel case

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A Must-Read For Advisors

Clients demand and deserve a well-informed advisor. To help you stay on top the news and best thinkers, you may want to consider purchasing an Amazon Kindle.

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Indiana Financial Advisor Jumps From Airplane To Fake Death, Then Vanishes

A Hamilton County Indiana Superior Court judge froze financial advisor Marcus Schrenker's assets and those of his wife late yesterday, after Schrenker reportedly parachuted out of his company-owned plane over Alabama Sunday while the plane continued flying on autopilot before crashing into Florida swampland two hours later. A manhunt is under way, according to reports.

Click here for the latest news about this strange incident.  

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Video Explosion

Everyone knows that TV and the Web are melding. Videos are increasingly being used on the Web. yesterday reported that U.S. Internet users viewed 12.7 billion online videos in November 2008, a 34% increase over the same time a year earlier. On YouTube this past November, 5.1 billion videos were viewed; more than 146 million U.S. Internet users watched an average of 87 videos each, and the average online video viewer watched 273 minutes of video.

What’s really scary is that in my lifetime, we’ll probably be able to click on the couch that Oprah sits on and see its manufacturer and lowest price vendor. (My wife will bankrupt me!)

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