Best Interest and Best Intentions

An SEC vote aimed at helping retail investors could end up adding to their confusion.

Tomorrow, the Securities and Exchange Commission (SEC) will vote on a package of rulemaking proposals aimed at protecting retail investors by, among other things, requiring brokers to act in the best interest of their customers. While the SEC’s intentions are good, I fear that the focus on labels (broker versus adviser) and on legal distinctions (“best interest” versus “fiduciary duty”) will only add to the confusion faced by many retail investors.

The world of wealth management can be a confusing, daunting place for the average investor. At the same time, there has never been more information available to the investing public. This apparent paradox is a problem that regulators and consumer advocacy groups have tried to address for years by, among other things, mandating more disclosures and imposing “plain English” requirements. Unfortunately, even the best intentions often have unintended consequences. Recent regulatory efforts seem to have added to the confusion by moving the concepts of “suitability” and “fiduciary duty” to the forefront, and those with a financial interest in the confusion (i.e. broker-dealers, investment advisers, and other financial professionals) have taken advantage.

Let’s take a step back and examine where all the confusion comes from. The financial services industry is populated by several types of financial professionals, including financial planners, insurance agents, accountants, estate planning attorneys, brokers, and investment advisers. Each of these professionals has different duties and legal obligations, including the fiduciary duty owed by investment advisers to their clients (which means they are held to the highest standard of conduct and must act in the best interest of their clients) and the duty of fair dealing owed by a broker to a customer (which, in part, means that they will only make recommendations to buy securities that are suitable for the customer).

These various players used to stick to their own turf and serve distinct needs of the investing public. For example, brokers typically buy and sell securities for their customers and, in return, the customers pay the broker commissions on the transactions. As long as a transaction is suitable for a customer (i.e. appropriate for the customer’s investment objectives), a broker can recommend a security that paid the broker a higher commission even if there were suitable alternatives that were cheaper for the customer (and therefore generated smaller commissions).  On the other hand, investment advisers provide regular and continuous investment advice, usually to high net worth clients, for a fixed, asset-based fee. While there can be other fees involved, all fees have to be clearly disclosed to a client before the advisory relationship begins.

These days, any given financial professional or entity might offer two or more products or services (insurance, financial planning, estate planning, stock trading, and investment management), this includes companies that are registered as both investment advisers and broker-dealers. These so-called “hybrids” act as investment advisers in some situations and as brokers in others. Needless to say, the duties, legal obligations, and compensation structure of such companies can be murky at best.

The SEC introduced its current proposals way back in April of 2018 in an attempt to clear up the confusion. These proposals are intended to “enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.”[1]  Easier said than done.

The most ambitious of these proposals, known as Regulation Best Interest, has garnered the most attention. It would require broker-dealers to “act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer [and] … make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.”  Another proposal is “an interpretation to reaffirm and, in some cases, clarify the [SEC’s] views of the fiduciary duty that investment advisers owe to their clients,” which, as the SEC says, includes the obligation to “act in the best interest of its client.”[2]  The SEC believes that “[by] highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers’ legal obligations.”

As an aside, it seems reasonable to assume that any investment professional will act in the best interest of their clients or customers. However just because they are supposed to act a certain way doesn’t mean that they will. The SEC’s website is full of enforcement actions against investment advisers that failed to uphold their fiduciary duties.

These two proposals have yet to be implemented by the SEC, but they have already sparked a fierce debate among brokers and advisers, some of whom believe that all financial professionals should be held to the fiduciary standard and others who think there was nothing wrong with the status quo. The proposals also appear to have spurred a new wave of marketing, with some firms touting the fact that they are fiduciaries and that they don’t accept commissions and others talking more about their low brokerage fees.

The additional disclosure and marketing prompted by the SEC’s proposals is great, but I fear that in all the noise of the suitability/broker vs. fiduciary/adviser argument that the real jewel of the SEC’s proposals is being missed. People who are looking to hire a financial professional shouldn’t do so based on a label, the label is only one part of the equation. Investors needs to take a deeper look under the hood to find out exactly what they are getting.

The SEC’s third proposal aims to allow investors to do just that by requiring brokers and advisers to provide their clients with a new short-form disclosure document, referred to as Form CRS (short for client relationship summary), that would “provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional” and supplement other, more detailed disclosures. For advisers, those detailed disclosures would be those found in Form ADV, which advisers are already required to provide to their clients. For brokers, the detailed disclosures would be those required under Regulation Best Interest (which, again, has not been enacted).

I believe that Form CRS would make a real difference in the industry by laying out the key distinctions between an independent investment adviser (i.e. an investment adviser that is not also a dually registered has no broker-dealer affiliation) and a broker-dealer. Moreover, for clients of an investment adviser, the ADV is typically the primary source of the adviser’s disclosures. But the ADV can run dozens of pages long and is often drafted by a law firm hired by the adviser. They often contain so much legalese and such detailed disclosure language that it can be very difficult for most people to read and understand, if they even bother to read it at all. As a result, it is easy to miss a lot of the important disclosures relating to fees, conflicts of interests, and regulatory events. Form CRS can be a better vehicle for disclosing these key issues in a simple, straight-forward way. Form CRS is supposed to be no more than four pages long and would disclose the services offered, fees and costs, conflicts of interest, and any regulatory disclosures such as disciplinary events and complaints.

At Spotlight Asset Group, we felt so strongly that Form CRS is the direction the industry needs to go that we came up with our own document ahead of the SEC finalizing any of these rules. Our “Prospect Proposal” is a two-page document that highlights all of the information we feel is important for prospects to know before they sign up with us as a client.  This includes the services we will provide, the fees they will be charged as both a percentage and as a dollar amount, any additional costs like trading commissions or expense ratios, any material conflicts of interest we may have, and how their individual investment adviser representative is compensated. If at some point we have a regulatory or disciplinary item that should be disclosed, we would disclose it in our Prospect Proposal. We are working to implement the use of the Prospect Proposal across the firm because we believe that it is important to be completely transparent with our clients at the outset of the relationship. Not only is this fair, it serves to set the tone for an open dialogue and cooperative partnership with our clients. As noted in a recent Intelligent Investor editorial by Jason Zweig of the Wall Street Journal, this dialogue is the real key to a good relationship between a financial advisor and their client.[3]

I think such upfront disclosures are vitally important and should become the standard for all financial professionals. While the current disclosure documents lay out an adviser’s duties or a broker’s obligations, in my 15 years in the investment business I can count on one hand the number of clients who have asked questions about disclosures in an ADV or other document. It doesn’t happen often because a lot of people don’t read them. Wouldn’t it be better if a financial professional had to proactively go through all relevant information with a prospective client or customer before they signed on the dotted line? That is the argument we should be focusing on, not a confusing discussion about who is a fiduciary and what that means.

[1] See  SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals at https://www.sec.gov/news/press-release/2018-68 (April 18, 2018) (emphasis added).

[2] See Regulation Best Interest, Release No, 34-83062, available at https://www.sec.gov/rules/proposed/2018/34-83062.pdf  (April 18, 2018) (emphasis added).

[3] Jason Zweig, A New Rule Won’ Make Your Broker an Angel, available at https://www.wsj.com/articles/a-new-rule-wont-make-your-broker-an-angel-11559313036?mod=hp_lead_pos11 (May 31, 2019).

Stephen Greco, CEO

Join the Spotlight Asset Group Newsletter

An SEC vote aimed at helping retail investors could end up adding to their confusion.

Tomorrow, the Securities and Exchange Commission (SEC) will vote on a package of rulemaking proposals aimed at protecting retail investors by, among other things, requiring brokers to act in the best interest of their customers. While the SEC’s intentions are good, I fear that the focus on labels (broker versus adviser) and on legal distinctions (“best interest” versus “fiduciary duty”) will only add to the confusion faced by many retail investors.

The world of wealth management can be a confusing, daunting place for the average investor. At the same time, there has never been more information available to the investing public. This apparent paradox is a problem that regulators and consumer advocacy groups have tried to address for years by, among other things, mandating more disclosures and imposing “plain English” requirements. Unfortunately, even the best intentions often have unintended consequences. Recent regulatory efforts seem to have added to the confusion by moving the concepts of “suitability” and “fiduciary duty” to the forefront, and those with a financial interest in the confusion (i.e. broker-dealers, investment advisers, and other financial professionals) have taken advantage.

Let’s take a step back and examine where all the confusion comes from. The financial services industry is populated by several types of financial professionals, including financial planners, insurance agents, accountants, estate planning attorneys, brokers, and investment advisers. Each of these professionals has different duties and legal obligations, including the fiduciary duty owed by investment advisers to their clients (which means they are held to the highest standard of conduct and must act in the best interest of their clients) and the duty of fair dealing owed by a broker to a customer (which, in part, means that they will only make recommendations to buy securities that are suitable for the customer).

These various players used to stick to their own turf and serve distinct needs of the investing public. For example, brokers typically buy and sell securities for their customers and, in return, the customers pay the broker commissions on the transactions. As long as a transaction is suitable for a customer (i.e. appropriate for the customer’s investment objectives), a broker can recommend a security that paid the broker a higher commission even if there were suitable alternatives that were cheaper for the customer (and therefore generated smaller commissions).  On the other hand, investment advisers provide regular and continuous investment advice, usually to high net worth clients, for a fixed, asset-based fee. While there can be other fees involved, all fees have to be clearly disclosed to a client before the advisory relationship begins.

These days, any given financial professional or entity might offer two or more products or services (insurance, financial planning, estate planning, stock trading, and investment management), this includes companies that are registered as both investment advisers and broker-dealers. These so-called “hybrids” act as investment advisers in some situations and as brokers in others. Needless to say, the duties, legal obligations, and compensation structure of such companies can be murky at best.

The SEC introduced its current proposals way back in April of 2018 in an attempt to clear up the confusion. These proposals are intended to “enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.”[1]  Easier said than done.

The most ambitious of these proposals, known as Regulation Best Interest, has garnered the most attention. It would require broker-dealers to “act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer [and] … make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.”  Another proposal is “an interpretation to reaffirm and, in some cases, clarify the [SEC’s] views of the fiduciary duty that investment advisers owe to their clients,” which, as the SEC says, includes the obligation to “act in the best interest of its client.”[2]  The SEC believes that “[by] highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers’ legal obligations.”

As an aside, it seems reasonable to assume that any investment professional will act in the best interest of their clients or customers. However just because they are supposed to act a certain way doesn’t mean that they will. The SEC’s website is full of enforcement actions against investment advisers that failed to uphold their fiduciary duties.

These two proposals have yet to be implemented by the SEC, but they have already sparked a fierce debate among brokers and advisers, some of whom believe that all financial professionals should be held to the fiduciary standard and others who think there was nothing wrong with the status quo. The proposals also appear to have spurred a new wave of marketing, with some firms touting the fact that they are fiduciaries and that they don’t accept commissions and others talking more about their low brokerage fees.

The additional disclosure and marketing prompted by the SEC’s proposals is great, but I fear that in all the noise of the suitability/broker vs. fiduciary/adviser argument that the real jewel of the SEC’s proposals is being missed. People who are looking to hire a financial professional shouldn’t do so based on a label, the label is only one part of the equation. Investors needs to take a deeper look under the hood to find out exactly what they are getting.

The SEC’s third proposal aims to allow investors to do just that by requiring brokers and advisers to provide their clients with a new short-form disclosure document, referred to as Form CRS (short for client relationship summary), that would “provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional” and supplement other, more detailed disclosures. For advisers, those detailed disclosures would be those found in Form ADV, which advisers are already required to provide to their clients. For brokers, the detailed disclosures would be those required under Regulation Best Interest (which, again, has not been enacted).

I believe that Form CRS would make a real difference in the industry by laying out the key distinctions between an independent investment adviser (i.e. an investment adviser that is not also a dually registered has no broker-dealer affiliation) and a broker-dealer. Moreover, for clients of an investment adviser, the ADV is typically the primary source of the adviser’s disclosures. But the ADV can run dozens of pages long and is often drafted by a law firm hired by the adviser. They often contain so much legalese and such detailed disclosure language that it can be very difficult for most people to read and understand, if they even bother to read it at all. As a result, it is easy to miss a lot of the important disclosures relating to fees, conflicts of interests, and regulatory events. Form CRS can be a better vehicle for disclosing these key issues in a simple, straight-forward way. Form CRS is supposed to be no more than four pages long and would disclose the services offered, fees and costs, conflicts of interest, and any regulatory disclosures such as disciplinary events and complaints.

At Spotlight Asset Group, we felt so strongly that Form CRS is the direction the industry needs to go that we came up with our own document ahead of the SEC finalizing any of these rules. Our “Prospect Proposal” is a two-page document that highlights all of the information we feel is important for prospects to know before they sign up with us as a client.  This includes the services we will provide, the fees they will be charged as both a percentage and as a dollar amount, any additional costs like trading commissions or expense ratios, any material conflicts of interest we may have, and how their individual investment adviser representative is compensated. If at some point we have a regulatory or disciplinary item that should be disclosed, we would disclose it in our Prospect Proposal. We are working to implement the use of the Prospect Proposal across the firm because we believe that it is important to be completely transparent with our clients at the outset of the relationship. Not only is this fair, it serves to set the tone for an open dialogue and cooperative partnership with our clients. As noted in a recent Intelligent Investor editorial by Jason Zweig of the Wall Street Journal, this dialogue is the real key to a good relationship between a financial advisor and their client.[3]

I think such upfront disclosures are vitally important and should become the standard for all financial professionals. While the current disclosure documents lay out an adviser’s duties or a broker’s obligations, in my 15 years in the investment business I can count on one hand the number of clients who have asked questions about disclosures in an ADV or other document. It doesn’t happen often because a lot of people don’t read them. Wouldn’t it be better if a financial professional had to proactively go through all relevant information with a prospective client or customer before they signed on the dotted line? That is the argument we should be focusing on, not a confusing discussion about who is a fiduciary and what that means.

[1] See  SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals at https://www.sec.gov/news/press-release/2018-68 (April 18, 2018) (emphasis added).

[2] See Regulation Best Interest, Release No, 34-83062, available at https://www.sec.gov/rules/proposed/2018/34-83062.pdf  (April 18, 2018) (emphasis added).

[3] Jason Zweig, A New Rule Won’ Make Your Broker an Angel, available at https://www.wsj.com/articles/a-new-rule-wont-make-your-broker-an-angel-11559313036?mod=hp_lead_pos11 (May 31, 2019).

Women Investors on the Rise

While perusing various financial websites, and social media platforms like LinkedIn and Facebook, I’ve noticed that the topic of women and their approach to financial matters comes up more frequently these days. Recent data has caused me to take a step back and look at the topic in a whole new way. According to a 2015 report by the BMO Wealth Institute, women in the U.S. controlled at least $14 trillion of U.S. household finances, representing 51% of all personal wealth in the U.S. By 2020, women are projected to control $22 trillion.[1] Globally, as of 2018, women account for an estimated 40% of all wealth.[2]

As you can see, these numbers keep growing. But why? Several factors are at play here and they highlight the successes women have had and how far we have come over the last 60 years. According to a study by Prudential, in 1960 women were the breadwinners in only about 11% of U.S. households. Today, that number has grown to 44%.[3] We are also seeing more female business owners and entrepreneurs. In fact, 4 out of every 10 businesses in the U.S. are owned by women.[4]  Other, more circumstantial factors that contribute to women’s control of a larger portion of personal wealth include the divorce rate, which continues to hover around 50% of all marriages, and the fact that women tend to outlive men and, therefore, will eventually be the financial decision maker in their household.

Women’s growing economic power is a good thing. However, as they say, with great power comes great responsibility. One potential issue is the fact that, according to the Prudential study, only 20% of women feel “very well prepared” to make wise financial decisions. Further, while a high percentage of women profess an understanding of basic financial products like savings accounts and health insurance, that percentage drops significantly when discussing more complex financial products like 401(k) plans, mutual funds, and annuities. Ladies, if we are in control of a substantial amount of the dough, we must know how to roll it, pat it, and bake it! You can wake up one day and your entire life can change, how awesome would it be to not have to worry about your finances, because you are well prepared in that area, so you can focus on whatever else life is throwing at you. There are a lot of charlatans out there who would love to take advantage of someone in such a situation in order to gain control of their money, be smart and be prepared so that it does not happen to you.

Let’s work together to bridge the financial knowledge gap. What I have found over the course of my career is that education helps me gain the trust of my clients because education is empowerment. I aim to teach my clients to fish, not just give them one. Educating both men and women on financial matters and including both partners in financial planning and decision making is the key to a successful financial partnership. Work with a financial advisor or advisory firm that supports a woman’s role in the process and encourages the involvement of both partners. It is also important to work with a financial advisor who can relate to both parties and who has the patience to answer all questions, simple or complex, with no judgement. At Spotlight Asset Group, we give our advisors the tools and resources necessary to educate our clients, like this blog, our podcast series, and our educational seminars that are aimed at both women and men. I am so proud to work at Spotlight Asset Group because I feel that it is a place where I can make a positive change and build the bridges necessary to close the financial knowledge gap.

[1]  BMO Report: Despite Controlling $14 Trillion in Wealth, American Women Still Have Challenges to Overcome, available at https://newsroom.bmo.com/2015-04-02-BMO-Report-Despite-Controlling-14-Trillion-in-Wealth-American-Women-Still-Have-Challenges-to-Overcome (April 2, 1025).

[2]  Global Wealth Report 2018, Credit Suisse Research Institute, available at https://www.credit-suisse.com/corporate/en/research/research-institute/global-wealth-report.html (October 2018).

[3] Financial Experience & Behaviors Among Women, Prudential Financial Inc., available at http://corporate.prudential.com/media/managed/wm/media/Pru_Women_Study_2014.pdf (June 2014).

[4] WBENC Celebrates National Women’s Small Business Month, The Women’s Business Enterprise National Council, available at https://www.wbenc.org/blog-posts/2018/10/1/wbenc-celebrates-national-womens-small-business-month (October 1, 2018).

Kristin Sweis

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While perusing various financial websites, and social media platforms like LinkedIn and Facebook, I’ve noticed that the topic of women and their approach to financial matters comes up more frequently these days. Recent data has caused me to take a step back and look at the topic in a whole new way. According to a 2015 report by the BMO Wealth Institute, women in the U.S. controlled at least $14 trillion of U.S. household finances, representing 51% of all personal wealth in the U.S. By 2020, women are projected to control $22 trillion.[1] Globally, as of 2018, women account for an estimated 40% of all wealth.[2]

As you can see, these numbers keep growing. But why? Several factors are at play here and they highlight the successes women have had and how far we have come over the last 60 years. According to a study by Prudential, in 1960 women were the breadwinners in only about 11% of U.S. households. Today, that number has grown to 44%.[3] We are also seeing more female business owners and entrepreneurs. In fact, 4 out of every 10 businesses in the U.S. are owned by women.[4]  Other, more circumstantial factors that contribute to women’s control of a larger portion of personal wealth include the divorce rate, which continues to hover around 50% of all marriages, and the fact that women tend to outlive men and, therefore, will eventually be the financial decision maker in their household.

Women’s growing economic power is a good thing. However, as they say, with great power comes great responsibility. One potential issue is the fact that, according to the Prudential study, only 20% of women feel “very well prepared” to make wise financial decisions. Further, while a high percentage of women profess an understanding of basic financial products like savings accounts and health insurance, that percentage drops significantly when discussing more complex financial products like 401(k) plans, mutual funds, and annuities. Ladies, if we are in control of a substantial amount of the dough, we must know how to roll it, pat it, and bake it! You can wake up one day and your entire life can change, how awesome would it be to not have to worry about your finances, because you are well prepared in that area, so you can focus on whatever else life is throwing at you. There are a lot of charlatans out there who would love to take advantage of someone in such a situation in order to gain control of their money, be smart and be prepared so that it does not happen to you.

Let’s work together to bridge the financial knowledge gap. What I have found over the course of my career is that education helps me gain the trust of my clients because education is empowerment. I aim to teach my clients to fish, not just give them one. Educating both men and women on financial matters and including both partners in financial planning and decision making is the key to a successful financial partnership. Work with a financial advisor or advisory firm that supports a woman’s role in the process and encourages the involvement of both partners. It is also important to work with a financial advisor who can relate to both parties and who has the patience to answer all questions, simple or complex, with no judgement. At Spotlight Asset Group, we give our advisors the tools and resources necessary to educate our clients, like this blog, our podcast series, and our educational seminars that are aimed at both women and men. I am so proud to work at Spotlight Asset Group because I feel that it is a place where I can make a positive change and build the bridges necessary to close the financial knowledge gap.

[1]  BMO Report: Despite Controlling $14 Trillion in Wealth, American Women Still Have Challenges to Overcome, available at https://newsroom.bmo.com/2015-04-02-BMO-Report-Despite-Controlling-14-Trillion-in-Wealth-American-Women-Still-Have-Challenges-to-Overcome (April 2, 1025).

[2]  Global Wealth Report 2018, Credit Suisse Research Institute, available at https://www.credit-suisse.com/corporate/en/research/research-institute/global-wealth-report.html (October 2018).

[3] Financial Experience & Behaviors Among Women, Prudential Financial Inc., available at http://corporate.prudential.com/media/managed/wm/media/Pru_Women_Study_2014.pdf (June 2014).

[4] WBENC Celebrates National Women’s Small Business Month, The Women’s Business Enterprise National Council, available at https://www.wbenc.org/blog-posts/2018/10/1/wbenc-celebrates-national-womens-small-business-month (October 1, 2018).

Where Does Your Advisor Get Their Clients?

Understanding how an RIA gets clients can be an important factor for prospective clients or for advisors looking to join an RIA.

Every registered investment adviser (RIA) is looking for the same thing, more clients. Understanding how an RIA gets their clients can be an important consideration for prospective clients of an RIA and for individual financial advisors looking to join an RIA.

RIAs use various tools to develop clients and grow their business. The particular business development model used by an RIA can give you valuable insight into, among other things, how the company may work with you and what is important to them. So, let’s take a look at the different models and how they can affect you as an end user …

Organic Referrals

One of the most common ways RIAs get new clients is through what I will refer to as “organic” referrals from existing clients. An organic referral typically involves an existing client of an RIA who provides the RIA with a potential client introduction without receiving anything of value in return. Most RIAs use organic referrals as at least one component of their business development plan, and indeed for some it is their only avenue for growth. What does that tell a prospective client or an advisor looking to join the RIA? Usually, if an RIA is receiving a lot of organic referrals from existing clients, it is reasonable to assume that they are doing a good job for their clients. Otherwise, clients wouldn’t be referring friends, family members, and colleagues and risking those relationships. So, it is worthwhile to ask an RIA about the percentage of their client growth that comes through organic referrals from existing clients.

Similar to an organic referral from an existing client, an RIA might also receive referrals from a professional service provider, such as an estate planning attorney or certified public accountant, with whom the RIA has an existing relationship. In some such cases, the attorney or CPA simply does so to develop a relationship with the RIA with the hope that the flow of referrals will go both ways.

Paid Referrals/Solicitations

On the other side of the spectrum, an RIA might obtain new clients through paid leads. For example, an RIA also might get new clients from affiliated broker-dealers who serve as custodians for the RIA or perform other services. Most of the discount brokerage companies (e.g. Fidelity, Schwab, TD Ameritrade) have referral programs where they send certain clients to pre-screened RIAs for wealth management services. In return, those brokerage companies may receive a portion of the fee paid by the client to the RIA, typically 0.25%. In some situations, this referral fee might continue for as long as the client stays with the RIA. While there may be several other factors that lead a broker to refer a client to a certain RIA, the possibility of a referral fee is certainly one that should be considered when a client is deciding whether to hire a particular RIA. Therefore, it is important to ask the broker who makes the referral if they have sales targets they need to meet and/or if they personally benefit from the referral. Don’t just assume they are doing it out of the kindness of their heart. Another example is a situation similar to that which I described earlier where an attorney or CPA refers his or her own clients to an RIA, but the RIA pays the attorney or CPA either a flat fee or a percentage of the fees billed to the client.

RIAs can also use third-party solicitors to find new clients. In this scenario, the RIA pays a cash fee to someone who is not an employee of the RIA to find clients and make introductions. Oftentimes this fee is a portion of the advisory fee charged to the client for a certain period of time. There is nothing inherently wrong with such arrangements, or other referral situations in which an RIA pays for client leads. However, such arrangements should be disclosed to the client so that they can evaluate the potential conflict of interest and make an informed decision. Such referral arrangements should be disclosed in two ways. First, the person making the referral (and being paid for it) should provide the prospective client with a document that discloses certain information about his or her arrangement with the RIA, including the fee to be paid. Second, the RIA should disclose such arrangements in the Form ADV that they file with the SEC, which can usually be found at www.adviserinfo.sec.gov.

A paid solicitation is different from an unpaid referral, and a prospective client might have a very different perception of client growth based on referrals from people who expect nothing in return versus growth based on paid solicitations. This is just one more piece of information that a prospective client should have in hand when deciding whether to hire an RIA.

Mergers & Acquisitions

Lastly, advisors can grow through acquiring, or merging with, existing advisory firms. There are several firms out there that will buy out an existing firm entirely. Such a model can be efficient and effective because, as you create economies of scale and grow larger and larger, it gets easier to bring on more RIAs to take advantage of that scale. There also are a handful of companies out there that have become the predominant players in what is considered the “roll-up” market for advisors. There are a number of reasons that a prospective client should know if the RIA they are considering is one of these companies. For example, the rate of an RIA’s growth might impact their ability to provide services to their clients at the same level if the RIA is not built to handle that scale.

So why is all of this important? The bottom line is that, for many people looking for someone to help them with their financial planning and investments, size matters. At the same time, a lot of the marketing and promotional aspects of the investment advisory business focus on size, specifically the amount of assets under management, or AUM, of an RIA. For example, rate of growth is one of the primary ways that advisors are ranked by various publications. Therefore, while size can be important for many reasons, it is important to look deeper into the metrics one uses to evaluate an RIA’s size.

It is important to understand where an RIA’s growth is coming from in order to evaluate if they are truly living up to the expectations of their clients. One of the most impressive growth indicators for a company is if they are receiving a substantial number of referrals from existing clients. However, that growth might be viewed differently if they are growing because of paid solicitation programs. Similarly, if they are expanding because they are acquiring other advisors, it could lend a different interpretation of rapid growth in AUM.

None of these models are necessarily good or bad for prospective clients, but it is something to keep in mind. It is also important that your RIA is upfront with you about these and other issues. At my firm, Spotlight Asset Group, we have found clients through both referrals from existing clients and by bringing on existing advisory firms or individual advisors. While we don’t currently participate in any paid solicitation programs, it is something that we would consider under the right circumstances. No matter what approach we take, we always ask ourselves how it best serves both our existing clients and prospective clients.

Stephen Greco, CEO

Join the Spotlight Asset Group Newsletter

Understanding how an RIA gets clients can be an important factor for prospective clients or for advisors looking to join an RIA.

Every registered investment adviser (RIA) is looking for the same thing, more clients. Understanding how an RIA gets their clients can be an important consideration for prospective clients of an RIA and for individual financial advisors looking to join an RIA.

RIAs use various tools to develop clients and grow their business. The particular business development model used by an RIA can give you valuable insight into, among other things, how the company may work with you and what is important to them. So, let’s take a look at the different models and how they can affect you as an end user …

Organic Referrals

One of the most common ways RIAs get new clients is through what I will refer to as “organic” referrals from existing clients. An organic referral typically involves an existing client of an RIA who provides the RIA with a potential client introduction without receiving anything of value in return. Most RIAs use organic referrals as at least one component of their business development plan, and indeed for some it is their only avenue for growth. What does that tell a prospective client or an advisor looking to join the RIA? Usually, if an RIA is receiving a lot of organic referrals from existing clients, it is reasonable to assume that they are doing a good job for their clients. Otherwise, clients wouldn’t be referring friends, family members, and colleagues and risking those relationships. So, it is worthwhile to ask an RIA about the percentage of their client growth that comes through organic referrals from existing clients.

Similar to an organic referral from an existing client, an RIA might also receive referrals from a professional service provider, such as an estate planning attorney or certified public accountant, with whom the RIA has an existing relationship. In some such cases, the attorney or CPA simply does so to develop a relationship with the RIA with the hope that the flow of referrals will go both ways.

Paid Referrals/Solicitations

On the other side of the spectrum, an RIA might obtain new clients through paid leads. For example, an RIA also might get new clients from affiliated broker-dealers who serve as custodians for the RIA or perform other services. Most of the discount brokerage companies (e.g. Fidelity, Schwab, TD Ameritrade) have referral programs where they send certain clients to pre-screened RIAs for wealth management services. In return, those brokerage companies may receive a portion of the fee paid by the client to the RIA, typically 0.25%. In some situations, this referral fee might continue for as long as the client stays with the RIA. While there may be several other factors that lead a broker to refer a client to a certain RIA, the possibility of a referral fee is certainly one that should be considered when a client is deciding whether to hire a particular RIA. Therefore, it is important to ask the broker who makes the referral if they have sales targets they need to meet and/or if they personally benefit from the referral. Don’t just assume they are doing it out of the kindness of their heart. Another example is a situation similar to that which I described earlier where an attorney or CPA refers his or her own clients to an RIA, but the RIA pays the attorney or CPA either a flat fee or a percentage of the fees billed to the client.

RIAs can also use third-party solicitors to find new clients. In this scenario, the RIA pays a cash fee to someone who is not an employee of the RIA to find clients and make introductions. Oftentimes this fee is a portion of the advisory fee charged to the client for a certain period of time. There is nothing inherently wrong with such arrangements, or other referral situations in which an RIA pays for client leads. However, such arrangements should be disclosed to the client so that they can evaluate the potential conflict of interest and make an informed decision. Such referral arrangements should be disclosed in two ways. First, the person making the referral (and being paid for it) should provide the prospective client with a document that discloses certain information about his or her arrangement with the RIA, including the fee to be paid. Second, the RIA should disclose such arrangements in the Form ADV that they file with the SEC, which can usually be found at www.adviserinfo.sec.gov.

A paid solicitation is different from an unpaid referral, and a prospective client might have a very different perception of client growth based on referrals from people who expect nothing in return versus growth based on paid solicitations. This is just one more piece of information that a prospective client should have in hand when deciding whether to hire an RIA.

Mergers & Acquisitions

Lastly, advisors can grow through acquiring, or merging with, existing advisory firms. There are several firms out there that will buy out an existing firm entirely. Such a model can be efficient and effective because, as you create economies of scale and grow larger and larger, it gets easier to bring on more RIAs to take advantage of that scale. There also are a handful of companies out there that have become the predominant players in what is considered the “roll-up” market for advisors. There are a number of reasons that a prospective client should know if the RIA they are considering is one of these companies. For example, the rate of an RIA’s growth might impact their ability to provide services to their clients at the same level if the RIA is not built to handle that scale.

So why is all of this important? The bottom line is that, for many people looking for someone to help them with their financial planning and investments, size matters. At the same time, a lot of the marketing and promotional aspects of the investment advisory business focus on size, specifically the amount of assets under management, or AUM, of an RIA. For example, rate of growth is one of the primary ways that advisors are ranked by various publications. Therefore, while size can be important for many reasons, it is important to look deeper into the metrics one uses to evaluate an RIA’s size.

It is important to understand where an RIA’s growth is coming from in order to evaluate if they are truly living up to the expectations of their clients. One of the most impressive growth indicators for a company is if they are receiving a substantial number of referrals from existing clients. However, that growth might be viewed differently if they are growing because of paid solicitation programs. Similarly, if they are expanding because they are acquiring other advisors, it could lend a different interpretation of rapid growth in AUM.

None of these models are necessarily good or bad for prospective clients, but it is something to keep in mind. It is also important that your RIA is upfront with you about these and other issues. At my firm, Spotlight Asset Group, we have found clients through both referrals from existing clients and by bringing on existing advisory firms or individual advisors. While we don’t currently participate in any paid solicitation programs, it is something that we would consider under the right circumstances. No matter what approach we take, we always ask ourselves how it best serves both our existing clients and prospective clients.

How Do You Manage Risk With Time?

By Aaron CFP®, Managing Director

 

“Successful investing is about managing risk, not avoiding it.”

-Benjamin Graham

There are many ways to manage risk.  One way is with time.

Take a look at the green bars in this chart, representing the range of investment returns for U.S. stocks from 1950 through 2018 (as represented by the S&P 500 Shiller Composite).   On the left side of the chart we see that since 1950 the worst one-year performance for U.S. stocks was a loss of -39% and the best year for stocks was a positive return of 47%.   That is a dramatic range.

Now consider the 5-year rolling period.  Notice how the range narrows significantly from -3% to 28% and how the risk of loss is significantly lower than any one-year period.  If you invested in the worst 5-year period for stocks since 1950 your loss would only be -3%.

When we look at the 10-year and 20-year rolling periods, the range of returns continues to narrow.  From 1950 through today, a period of time that included several major market disruptions (the 1973 oil embargo, Black Friday, the tech bubble, and the Great Recession, to name a few), the worst 10-year period for the U.S. stock market resulted in a loss of just -1%. The worst 20-year period since 1950 resulted in a positive return of 6%.

What we learn from the data is that time is an important consideration when we consider investment risk.  If you plan to invest for a short period of time your risk of losing money by investing in stocks is significantly higher than if you have a longer time horizon.  Structuring your investments with time in mind may help mitigate risk.  Is it worth the risk to invest money in the stock market if you need that money in the next 12 months?  Probably not.  But what if you are investing money that you don’t need for 10 or 20 years- is it worth the risk of investing that money in the stock market?  It may be.

Talk to your Spotlight wealth manager about structuring your investment portfolio around your time horizon.  Don’t avoid risk; use risk management strategies instead.

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

By Aaron CFP®, Managing Director

 

“Successful investing is about managing risk, not avoiding it.”

-Benjamin Graham

There are many ways to manage risk.  One way is with time.

Take a look at the green bars in this chart, representing the range of investment returns for U.S. stocks from 1950 through 2018 (as represented by the S&P 500 Shiller Composite).   On the left side of the chart we see that since 1950 the worst one-year performance for U.S. stocks was a loss of -39% and the best year for stocks was a positive return of 47%.   That is a dramatic range.

Now consider the 5-year rolling period.  Notice how the range narrows significantly from -3% to 28% and how the risk of loss is significantly lower than any one-year period.  If you invested in the worst 5-year period for stocks since 1950 your loss would only be -3%.

When we look at the 10-year and 20-year rolling periods, the range of returns continues to narrow.  From 1950 through today, a period of time that included several major market disruptions (the 1973 oil embargo, Black Friday, the tech bubble, and the Great Recession, to name a few), the worst 10-year period for the U.S. stock market resulted in a loss of just -1%. The worst 20-year period since 1950 resulted in a positive return of 6%.

What we learn from the data is that time is an important consideration when we consider investment risk.  If you plan to invest for a short period of time your risk of losing money by investing in stocks is significantly higher than if you have a longer time horizon.  Structuring your investments with time in mind may help mitigate risk.  Is it worth the risk to invest money in the stock market if you need that money in the next 12 months?  Probably not.  But what if you are investing money that you don’t need for 10 or 20 years- is it worth the risk of investing that money in the stock market?  It may be.

Talk to your Spotlight wealth manager about structuring your investment portfolio around your time horizon.  Don’t avoid risk; use risk management strategies instead.

Escalator Up, Elevator Down

By Aaron CFP®, Managing Director

“Escalator up, Elevator down” is a good metaphor to describe movements in the stock markets.

On September 20, 2018 the S&P 500 Index peaked at 2930.  The index gained approximately 17% over the previous 12-month period.   It took only three months to wipe out that gain.

We can sometimes forget that stock markets are volatile (as described in detail in our October 30, 2018 post That Was Fast! by Stephen Greco, CEO).  2018 was an average year for volatility but it seemed worse because 2017 was unusually calm.  The standard deviation (a measurement of volatility, for those of us who didn’t fall asleep in statistics class) for the S&P 500 Index from 1926 – 2017 is 18.7%;[1]  in 2017 it was a mere 6.7%.[2]

It can be a challenge for us to ignore short-term fluctuations with around-the-clock investment news but it is important to keep your focus on long-term results.  Speak with your Wealth Manager about how volatility affects your investment portfolio and your long-term financial plan.

 

 

[1] See: DST Systems Inc. (n.d.). Evaluating Investment Risk at http://fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088

[2] See: Forbes (December 12, 2018). Market Volatility: A Return To The Old Normal at https://www.forbes.com/sites/sarahhansen/2018/12/12/market-volatility/#4e346efd71f0

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

By Aaron CFP®, Managing Director

“Escalator up, Elevator down” is a good metaphor to describe movements in the stock markets.

On September 20, 2018 the S&P 500 Index peaked at 2930.  The index gained approximately 17% over the previous 12-month period.   It took only three months to wipe out that gain.

We can sometimes forget that stock markets are volatile (as described in detail in our October 30, 2018 post That Was Fast! by Stephen Greco, CEO).  2018 was an average year for volatility but it seemed worse because 2017 was unusually calm.  The standard deviation (a measurement of volatility, for those of us who didn’t fall asleep in statistics class) for the S&P 500 Index from 1926 – 2017 is 18.7%;[1]  in 2017 it was a mere 6.7%.[2]

It can be a challenge for us to ignore short-term fluctuations with around-the-clock investment news but it is important to keep your focus on long-term results.  Speak with your Wealth Manager about how volatility affects your investment portfolio and your long-term financial plan.

 

 

[1] See: DST Systems Inc. (n.d.). Evaluating Investment Risk at http://fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088

[2] See: Forbes (December 12, 2018). Market Volatility: A Return To The Old Normal at https://www.forbes.com/sites/sarahhansen/2018/12/12/market-volatility/#4e346efd71f0

Avoid These Tax Scams

By Aaron CFP®, Managing Director

According to the IRS, thousands of people have lost millions of dollars to tax scams, but you don’t have to be a victim.  There is plenty of information on the IRS website (www.irs.gov) that can help you avoid these scams.  Here are four of the IRS “Dirty Dozen” tax scams for 2018 that you, your family, and your friends should know about:

Phishing

This scam involves fake emails or websites in which criminals attempt to steal personal information. Scam emails and websites can also infect a taxpayer’s computer with malware. Avoid opening emails or clicking on web links claiming to be from the IRS.

The IRS does not initiate contact with taxpayers via email about a bill or tax refund.  Do not click on links or download attachments from unknown or suspicious emails.

Phone Scams

The IRS has seen a surge of phone calls by criminals impersonating IRS agents who threaten taxpayers with police arrest, deportation, license revocation, and other penalties.  They demand cash through a wire transfer, prepaid debit card, or gift card.

The IRS does not initiate contact with taxpayers via phone and never calls to demand immediate payment using a specific payment method.  The IRS typically will first mail a bill to any taxpayer who owes taxes.  The IRS does not threaten to bring in law enforcement to arrest you for not paying.  The IRS cannot revoke your driver’s license, business license, or immigration status.

Identity Theft

Taxpayers need to watch out for identity theft at all times, and during tax time when some criminals file fraudulent returns using someone else’s Social Security number.

Always use security software on your computer with firewall and anti-virus protections, and use strong passwords.  Learn to recognize and avoid phishing emails, threatening phone calls, and texts from thieves posing as legitimate organizations such as a bank, credit card company, or government organization (including the IRS).

Fake Charities

There are groups masquerading as charitable organizations that solicit donations from unsuspecting contributors.  Many of these fake “charities” use names similar to familiar or nationally-known organizations.

Take a few minutes to research an organization to ensure your hard-earned money goes to legitimate charities. The IRS website has tools to check out the status of charitable organizations.

For More Information

See the article “IRS wraps up ‘Dirty Dozen’ list of tax scams for 2018; Encourages taxpayers to remain vigilant”
https://www.irs.gov/newsroom/irs-wraps-up-dirty-dozen-list-of-tax-scams-for-2018-encourages-taxpayers-to-remain-vigilant

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

By Aaron CFP®, Managing Director

According to the IRS, thousands of people have lost millions of dollars to tax scams, but you don’t have to be a victim.  There is plenty of information on the IRS website (www.irs.gov) that can help you avoid these scams.  Here are four of the IRS “Dirty Dozen” tax scams for 2018 that you, your family, and your friends should know about:

Phishing

This scam involves fake emails or websites in which criminals attempt to steal personal information. Scam emails and websites can also infect a taxpayer’s computer with malware. Avoid opening emails or clicking on web links claiming to be from the IRS.

The IRS does not initiate contact with taxpayers via email about a bill or tax refund.  Do not click on links or download attachments from unknown or suspicious emails.

Phone Scams

The IRS has seen a surge of phone calls by criminals impersonating IRS agents who threaten taxpayers with police arrest, deportation, license revocation, and other penalties.  They demand cash through a wire transfer, prepaid debit card, or gift card.

The IRS does not initiate contact with taxpayers via phone and never calls to demand immediate payment using a specific payment method.  The IRS typically will first mail a bill to any taxpayer who owes taxes.  The IRS does not threaten to bring in law enforcement to arrest you for not paying.  The IRS cannot revoke your driver’s license, business license, or immigration status.

Identity Theft

Taxpayers need to watch out for identity theft at all times, and during tax time when some criminals file fraudulent returns using someone else’s Social Security number.

Always use security software on your computer with firewall and anti-virus protections, and use strong passwords.  Learn to recognize and avoid phishing emails, threatening phone calls, and texts from thieves posing as legitimate organizations such as a bank, credit card company, or government organization (including the IRS).

Fake Charities

There are groups masquerading as charitable organizations that solicit donations from unsuspecting contributors.  Many of these fake “charities” use names similar to familiar or nationally-known organizations.

Take a few minutes to research an organization to ensure your hard-earned money goes to legitimate charities. The IRS website has tools to check out the status of charitable organizations.

For More Information

See the article “IRS wraps up ‘Dirty Dozen’ list of tax scams for 2018; Encourages taxpayers to remain vigilant”
https://www.irs.gov/newsroom/irs-wraps-up-dirty-dozen-list-of-tax-scams-for-2018-encourages-taxpayers-to-remain-vigilant