I previously reported on the status of the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408 and S. 2882) introduced in the House and Senate by Rep. Jim McDermott (D-WA, 7th) and Senator John Kerry (D-MA), respectively. The core provisions of these bills make it more difficult for employers to classify workers as independent contractors. Among other things, the proposed legislation would remove an important safe-harbor provision in the U.S. Tax Code, Section 530 of the Revenue Act of 1978, and give the IRS reason to question the independent contractor status of independent financial advisors affiliated with independent broker-dealers.
This legislation is still pending in Congress and may not move forward until the November elections take place. However, the preservation of the independent contractor status of financial advisors remains one of TPA’s top advocacy priorities. The Financial Services Institute (FSI) continues to educate Members of Congress about the proposed legislation’s potential unintended consequences for independent financial advisors and the broker-dealers that serve them. For example, FSI arranged meetings during the August Congressional recess between FSI members and members of key Congressional committees. Additionally, FSI filed an amicus brief in Taylor, et al. v. Waddell & Reed, Inc., et al. FSI‘s brief explains what the independent broker-dealer model is, how independent financial advisors function as independent contractors, and the broker-dealer supervision requirements of federal and state laws, and self-regulatory rules and regulations.
Tags: business, independence, Legislation
Posted in: Legislation, business management, independence by Doug Tarella
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The number of financial advisers in the country fell from 314,000 in 2004 to 310,000 at the end of 2008, according to a study by Cerulli Associates. Given that the average financial advisor is 49 years old and that 14 percent of advisors are over 60 years of age, the decline is expected to accelerate as more brokers reach the age of retirement. “As the Baby Boom advisers retire, the financial advisory industry runs the risk of not being able to meet” investors’ demands, analysts at Cerulli wrote.
The perceived problem is the lack of young trainees- paraplanners- assistants- who want to take over for these retirees. But there are other critical mega-trends, beginning with the definition of “financial advisory industry.” Traditionally, that has meant a human being who manages investments. But the term must be expanded to include any media from which an individual investor obtains information upon which they rely for investment decisions. Many people- for good or bad- will get advice from a television show or magazine or online web site. For them, in their mind, the financial advisory industry is alive and well.
But let’s look at the traditional method of delivering financial advice. Why aren’t more individuals called to this profession? The first reason may be the general distrust in our financial system. With all of the negative publicity over the past few years, ranging from Madoff to mortgage brokers, is it any surprise that young people are opting for a career path that is less littered with problems?
Another consideration is that most financial advisors “came of age” during the introduction of financial planning and the accompanying boom in the mutual fund industry. Previously, the American public saved their money in banks; now, they invest through 401(k) plans and mutual fund accounts. Thus, for people younger than 40 years old, investing isn’t something new. They are comfortable with it and feel they can do it themselves, without the need for a financial advisor. And if they don’t see the need for an advisor, why would they choose that career path?
Finally, technology has impacted the investment world significantly. In the 50’s and 60’s, people who did invest would wait until they read their newspaper the next day to see how their stocks performed. Brokers were valuable simply because they had access to information not readily available to the public (e.g., company conference calls were restricted to analysts). But in today’s age of instant information, computers are a necessity. Younger investors are more apt to access a database than rely on a human being for financial advice.
Does this mean the death of the financial services industry as we know it? Yes and no. The need for financial advice and guidance will always exist. But the delivery method will be more technology-intensive. Older- and wealthier- investors will continue to prefer a personal touch. But as wealth is transferred to the next generation and subsequent generations after that, the preferred method of receiving financial advice may be via a mobile device.
To be successful, financial advisors must embrace technology and incorporate it into their practice. They must also become more transparent- sharing their research and conclusions with clients rather than keeping it a closely guarded secret. And finally, they must show the next generation why their profession deserves to survive.
Tags: business, clients, Investments, Marketing
Posted in: Investments, Marketing, business management by Doug Tarella
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Yesterday, the Senate voted 60-39 to approve the 2,315 page financial regulatory reform bill. The President is expected to sign the legislation sometime next week. The final Dodd-Frank bill requires the SEC to conduct a comprehensive study of all the issues involved in harmonizing the regulation of all providers of retail financial advice, including a fiduciary standard of care and enhanced supervision of RIAs. When signed by the President into law, the SEC would be required to report the results of the study to Congress within six months. At the conclusion of the study, the SEC may promulgate rules that would impose an obligation to act in the best interest of the client without regard to the financial or other interests of the broker, dealer, or investment adviser providing the advice.
“After almost two years of legislative activity, the real work begins as implementation of regulatory reform falls to the SEC and other regulators,” said Dale Brown, President & CEO of the Financial Services Institute. “We are already working to articulate unintended consequences and to bring the unique perspective of independent broker-dealers and financial advisors to this process.”
Our ultimate goal has been, and remains, a standard of care that works in all client situations and in all business models, combined with an industry-funded self-regulatory organization for investment advisers. We have supported the inclusion of the SEC study in the final bill throughout the legislative process. We believe the study represents the best available opportunity to achieve our goals.
We would like to thank everyone who acted on this important issue.
Tags: business, Compliance, Legislation, regulation
Posted in: Client Relationships, Investments, Legislation by Doug Tarella
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The Professional Alliance, through the Financial Services Institute (FSI), has been working with several coalitions to influence the outcome of the independent contractor debate currently taking place in Congress (see below). TPA and FSI are supporters of the Coalition to Preserve Independent Contractor Status. The Coalition is made up of a broad and diverse spectrum of industries committed to protecting and preserving the independent contractor status of workers that many businesses rely upon. FSI is also working with a coalition made up of other financial services trade associations, including ACLI, SIFMA, and FPA.
Summary of pending legislation:
- The Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408 and S. 2882) was introduced in the House and Senate by Rep. Jim McDermott (D-WA-7) and Senator John Kerry (D-MA), respectively. The core provisions of these bills make it more difficult for employers to classify workers as independent contractors. Among other things, the proposed legislation would remove an important safe-harbor provision in Section 530 of the Revenue Act of 1978, and give the IRS reason to question the independent contractor status of independent financial advisors affiliated with independent broker-dealers.
- The Employee Misclassification Prevention Act was introduced in the House (H.R. 5107) by Rep. Lynn Woolsey (D-CA-6) and the Senate (S. 3254) by Senator Sherrod Brown (D-OH). The bills would amend the Fair Labor Standards Act of 1938 to increase the financial consequences to a company that misclassifies an individual as an independent contractor and impose new and expensive recordkeeping and notice requirements on a company that does business with an independent contractor.
FSI is meeting with key Members of Congress who are in a position to exert influence over this issue. They expect to schedule additional meetings with Congressional leaders in their home states and districts during July 4 recess. We will keep you informed of these efforts and any movement on these bills.
Tags: business, independence, Legislation
Posted in: Legislation, business management, independence by Doug Tarella
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The SEC has announced that they plan to publish a proposal to reform Rule 12b-1 in June 2010. The proposal is intended to address the SEC’s concerns that the fees no longer serve their intended purpose of supporting fund distribution, represent additional sales compensation, and are poorly disclosed to clients.
The Professional Alliance is a member if The Financial Services Institute (FSI) and we have long held the position that Rule 12b-1 provides fair compensation to financial advisors for providing middle-class Americans with critical support and guidance in planning to achieve important financial goals ranging from retirement, to college funding for children, to caring for aging parents. We have vigorously advocated for the retention of 12b-1 fees as an essential way of aligning the interests of the advisor with the interests of their fund shareholder clients. For this reason, preserving 12b-1 fees for the benefit of small investors has been a top advocacy priority for FSI since 2007, when the SEC initially announced its intention to review Rule 12b-1.
In an effort to preserve 12b-1 fees, the Financial Services Institute has meet with senior members of the SEC’s staff and held meetings with each of the five SEC Commissioners in the last month. We are closely monitoring developments and will alert you as soon as the proposal is made public.
Tags: business, clients, Investments, Legislation
Posted in: Client Relationships, Investments, Legislation, business management by Doug Tarella
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I had created this list many years ago as a guide to help me conduct the necessary due diligence on brokerage firms. I’ve updated it for today’s climate but it is by no means all-inclusive.
Is the firm owned by another company? If so, there will always be the temptation to pressure you to sell certain products that benefit the parent company’s bottom line.
The compliance record of any broker dealer can be found at www.finra.org. Pay attention to the number of infractions as well as the dollar amount of any fines. Be sure the firm is registered in all 50 states. If you are a Series 6 Rep, ask if they will accept targeted licenses such as Series 22, 52, 62 and 72.
FINRA prohibits “parking” a license, so every Registered Representative must have a profitable, viable business. But beware of a production quota, which could be a sign that the firm will intrude on your business plan when they see fit.
A number of broker dealers have gone out of business in the past year or are threatened by bankruptcy. Look at the financial statements as well as the products sold by the firm.
Payout is important, but so are miscellaneous charges that may be assessed to you. Ticket charges, technology fees, audit fees and account fees all impact your revenue.
You should be the “Rep of Record” on your accounts and you’ll want the freedom to transfer your accounts to another brokerage firm if necessary. Look at the broker dealer’s privacy policy to see how confidential information is handled.
The trend is away from commissions and toward fee-based accounts. This can be valuable to the client and result in much higher valuations when you sell your business.
Broker dealers will limit the types of products available based on several factors, including the sophistication of their advisors. Be sure alternative products are available and that there are no proprietary products (to avoid a conflict of interest).
Does the firm attract product salespeople or advisors? Divide gross revenue by number of Reps to find average production. Look at magazine surveys for additional information.
Technology should help you do your job more efficiently. Does the firm require you to use specific financial planning software or other program? Is forms population available?
Tags: business, Compliance, independence
Posted in: Compliance, business management by Doug Tarella
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The Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408) was introduced in the House on July 30, 2009 by Rep. Jim McDermott (D-WA 7th). Senator John Kerry (D-MA) introduced a bill by the same name in the Senate (S. 2882) on December 23, 2009. The substantive language of the House and Senate bills are identical. On February 1, 2010, President Obama released the Administration’s 2011-2012 budget proposal, which contains sections that would repeal protections afforded by Section 530 of the Revenue Act of 1978 (Section 530).
The bills and the proposed budget would have serious consequences for independent broker-dealers by taking away an important safe harbor provision in Section 530. They seek to eliminate the “longstanding recognized practice” safe harbor and to increase financial tax penalties for employers who misclassify workers as independent contractors without a reasonable basis. Additionally, the bills propose to place the burden of proof on the taxpayer to demonstrate that the worker is properly classified and authorize an independent contractor to petition the IRS for a review of the contractor’s employment status. The House bill has been referred to the Ways and Means Committee, the Senate bill has been referred the Finance Committee, and the Administration’s 2011-2012 budget has been submitted to Congress for review and approval.
These items are particularly important to labor unions concerned about the misclassification of workers as independent contractors in certain industries. As a result, the labor unions have identified the issue as a top priority in their legislative agenda. The legislation may also gain momentum as legislators seek new sources of tax revenue. The misclassification of workers as independent contractors is an attractive target since it is estimated to result in billions in unpaid payroll taxes.
Independent broker-dealers and independent financial advisors operate in a heavily regulated and documented industry in which cash payment for services is strictly prohibited. They are not involved in the industries of concern to the proponents of the legislation, responsibly pay their taxes, and are properly classified as independent contractors. In fact, financial advisors choose to affiliate with independent broker-dealers so they can own and operate their own small business and exert greater control over the means of its operation. Nevertheless, the Financial Services Institute1 is concerned that if these items were passed into in their current form, it would have serious unintended negative consequences for independent broker-dealers, independent financial advisors, and their middle class clients.
For more than thirty years, the independent broker-dealer industry has provided the investing public with comprehensive and affordable financial solutions. The lynchpin of the independent broker-dealer industry is a network of financial advisors who operate with maximum flexibility and are responsible for the entirety of their business operations. These independent financial advisors are small business owners and entrepreneurs who benefit from a decentralized business structure. As small business owners, these financial advisors usually own or rent their own office, employ their own staff, and are subject to independent broker-dealer inspection primarily for the purposes of complying with securities laws. In the U.S., approximately 180,000 financial advisors – or approximately 61.7% percent of all practicing registered representatives – operate as self-employed independent contractors, rather than employees, of their affiliated broker-dealer firm.3 A careful analysis of the relationship between a registered representative and an independent broker-dealer firm makes it clear that registered representatives associated with independent broker-dealer firms are properly classified as independent contractors for purposes of employment taxes.
The independent broker-dealer business model focuses on offering financial solutions to clients who constitute the backbone of America’s investor class. Financial advisors associated with independent broker-dealers primarily serve “Main Street Americans” – families able to invest tens or hundreds of thousands – rather than millions – of dollars. The independent broker-dealer model provides those investors with access to products and services that maximize their ability to achieve their financial goals. The independent broker-dealer industry is able to efficiently serve consumers and offer services at affordable prices because the primary business relationship is between the financial advisor and the consumer.
The negative impact on independent broker-dealers, financial advisors and their clients would be significant. Section 530 has functioned effectively for over thirty years. Congressional efforts to repeal it add great uncertainty and new expenses for entrepreneurs, falling heavily on small businesses. Eliminating the safe harbor would discourage entrepreneurship and damage the economy. These general concerns would be heightened in the independent broker-dealer industry.
If independent broker-dealers were forced to reclassify their financial advisors as employees, the additional costs and compliance burdens would cripple their ability to remain profitable while also providing the services needed by their advisors and their clients. Independent broker-dealers would be exposed to unnecessary IRS scrutiny of their classification of workers, potentially subjecting them to substantial back taxes, penalties, and interest payments.
If the IRS forced independent financial advisors to become employees of their broker-dealer, they would lose much of the independence that is so vital to the advice, products, and services they provide their clients by undermining their entrepreneurial spirit. Additionally, repeal would wipe out the “sweat equity” independent financial advisors have built in their own practices and eliminate their ability to exert control over how they best serve their own clients. This would be a tragedy for middle class investors who have come to rely upon the unbiased professional financial services they receive from their local independent financial advisor.
For these reasons, we believe independent broker-dealers and financial advisors should be exempted from the H.R. 3408, S. 2882 and other attempts to narrow or eliminate the safe harbor provision of Section 530.
Tags: business, Legislation, regulation
Posted in: Legislation, business management, independence by Doug Tarella
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Market volatility has recently returned and I’m sure the number of phone calls from your clients has picked up as well. Hopefully, you have used the past year to prepare your clients for this type of environment (i.e., a secular bear market). The bottom line is diversification- but that doesn’t mean a whole bunch of stocks and bonds! It means using many different non-correlated asset classes that possess different risk characteristics.
It’s safe to say that the days of picking one mutual fund family and putting all of the client’s eggs in that basket are over. Your clients are counting on you to help them preserve and grow their savings, so be sure you’re using all of the investment tools available to you. I have been talking for some time about this current bear market, economic recession, and the problems that sovereign debt presents to us. As professional advisors, we need to look towards alternatives in this type of environment. Let’s assume that the typical investor’s portfolio is 60% equities and 40% fixed income. What if you allocated 30% of that portfolio to a diversified blend of alternative investments? I think you’ll be surprised by the result. I encourage you to review these alternative trading strategies and see how a blend of active trading strategies might optimize your clients’ portfolios. Alternative investments may include absolute return and/or tactical managers as well as managed futures and structured CD’s. Remember, an ounce of prevention is worth a pound of cure.
Tags: asset management, clients, Investments
Posted in: Client Relationships, Investments, Marketing by Doug Tarella
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At first glance, your reaction may be, “Duh- of course asset management is important- it’s what we do!” But let’s look a little deeper into the whole concept of managing investments and how the decisions we make as financial professionals will have a profound impact on our clients’ lives- and our livelihood.
Asset management should begin with compliance. From selecting appropriate investments to knowing your client’s risk tolerance, everything we do must be in the best interest of the person(s) we are serving. Recently, there has been discussion about increased fiduciary standards for financial professionals. Whatever course legislation takes, it is fairly certain that our compliance burden will increase- perhaps significantly.
Some advisors are going back to the classroom and obtaining securities and/or insurance licenses that enable them to provide clients with products and services that better meet their needs. This is a trend that makes a great deal of sense in the current economic climate and one that will ultimately benefit both the client and advisor.
The decision whether to manage assets yourself or to hire a money manager is another critical element. Some professionals want the freedom to select investments and create a portfolio they can manage themselves; like a conductor, they prefer to lead the orchestra. But other advisors choose to delegate investment selection to a money management firm with substantial resources; in so doing, they concentrate on the client relationship rather than the minutiae of portfolio management.
Finally, the type of investments and insurance products we use with clients will continue to evolve. Diversification does not mean stocks and bonds. Strategies such as absolute return and tactical management will become more familiar as clients demand- and we provide- a more favorable risk/return scenario.
There has never been a better time to be a financial advisor!
Tags: asset management, business, clients
Posted in: Client Relationships, Investments, business management by Doug Tarella
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On March 22, 2010, the Senate Banking Committee (Committee) approved the Restoring American Financial Stability Act of 2010 (RAFSA), S-3217, by a party-line vote of 13 to 10. I am pleased to report that the bill passed by the Committee contains a provision directing the Securities and Exchange Commission (SEC) to study all the issues surrounding harmonization of broker-dealer and investment adviser oversight. We supported the inclusion of this study in RAFSA because it will provide the SEC, investor advocates, financial services industry professionals, and other stakeholders with an opportunity to shape these important regulatory reforms without a rush to judgment in a politically charged atmosphere. We support the creation of a new universal standard of care and an industry-funded self-regulatory organization for investment advisers. We believe the study represents the best available opportunity to achieve our goals.
On April 12, 2010, the Financial Services Institute submitted a letter to all Senators urging them to support the SEC study in the final version of RAFSA. RAFSA is expected to make its way to the Senate floor in the next couple of weeks.
Many of you have responded to our Calls to Action by letting your Senator know how you feel about important aspects of this legislation. We are grateful for your support and involvement in the process. It does make a difference!
Tags: business, independence, regulation
Posted in: Compliance, business management, independence by Doug Tarella
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