Transitions Magazine - February 2010

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Business Management for Independent Financial Advisors TABLE OF CONTENTS

Emancipation from the Wirehouse

Letter from the Editor ..................... 1 In the News .................................... 2 Wirehouse Rep Movement ............ 5 Calendar of Events ........................ 6 Emancipation from the Wirehouse.. 7

by Scott Winters

Page 7

How to Set Up Your Independent Business: Part I ............................ 11 Top 10 Tips for Lowering Your Workload .. .....................................15

by Stephen Wershing M&A Outloook for 2010 .................. 17

by Daniel B. Seivert The Exit Planning Process: III ........21

by David Leitner, Esq. Beyond Reproach ........................ 25

by David Loeper, CIMA速 "High Five" NEXT Financial The NEXT Challenge ...................... 27 Book Review: A Colossal Failure of Common Sense ........................... 28 author: Lawrence G. McDonald

NEXT Financial "The Next Challenge" Page 27

Independence Made Easy .......... 29

by BrokersXpress

The Downfall of Lehman Bros

Risky Business: The Three Primary Elements of Risk ............. 31

by Geoff Davey

Book Review Page 28

1.

Limit e-Mail Checking

Legislation: Preparation and Knowledge is Key ........................ 35

by Daniel J. Young, CLU, ChFC

TOP TEN TIPS To Make 3.

Document Your Job Processes Easier 6.

Outsource Something

"High-Five"

Page 15

Subscribe today and receive a FREE eBook: "Valuing and Selling Your Business"

A Conversation with John Peluso CEO, Wells Fargo Advisors Financial Network ............................. 37

by Sydney LeBlanc RIA Central: A Community of Like-Minded Peers ........................ 39

by Sydney LeBlanc Grin and Bear It! ........................... 41 Resource Directory ...................... 42

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Transitions Magazine

From the Editor Dear Readers/Friends,

Change. This is what it is all about today; in our industry, our economy, our markets, our country, the world.

I don’t need to tell you that the industry’s survival depends on its ability to meet the increasing demands of clients and to be able to provide you with the tools you need to maintain and grow your business. Firms must encourage and empower their advisors to compete on the basis of the value they provide clients. I truly believe that some firms will never step up to the plate, and that will force you to make a decision to either leave your current wirehouse environment and go independent, or if you already are independent, you may be forced to choose another B/D, or go the RIA route.

If your firm does not step up to the plate in a big way, YOU will have to work harder, compete for fewer HNW clients, and have a difficult time articulating your value to them.

Change is the hard process of closing one door behind you and cautiously opening another. Many of you have already discovered — by moving through the anxiety and the fear---that change is simply a process we all must go through to accelerate our growth. It is painful, frightening, and absolutely necessary.

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Not being afraid to make a change.

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Not being afraid to step outside of the familiar.

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Not being afraid to grow.

Making the transition to owning your own independent business is a big leap, but one that can be made in small, careful steps. Or you can make a clean break and go for it, like quitting smoking or saying goodbye to a relationship in which you’ve stayed too long.

You may already know the “why” but not the “how.” Through the pages of Transitions with the experts we showcase, it will help move you forward into the business model of the future. We will continue sharing the secrets of making a successful transition, as well as how to maintain and grow your independent business. (Please see our article on “How to Set Up Your Independent Business” on page 11.) We will also continue providing you the advice and counsel of leading marketing, technology, business and practice management experts — people who have helped some of the most successful advisors in the business get where they are today.

From the Editor s

I’m always amazed at how — after taking the time to think and talk clearly and logically about certain life-changing issues — things always seem to follow the path they were meant to take. Our industry is seeing this change. Many are embracing it, and those with vision are carefully mapping out the steps they need to take for the process.

Recognizing “change,” and its importance to your business, and the fact that clients are demanding fiduciary standards of care, and they want and need to trust you, is a huge first step toward your continuing success. We hope you enjoy this issue, and will email or call us anytime. sydney@ffpublish.com or 760 929 1301.

www.transitions-mag.com

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Industry News Publishers Lyn Fisher & Sydney LeBlanc

FPA Conference March 1-3, Dallas, Texas

25 Weeks of Caring, Giving and Sharing.

FPA Business Solutions is a conference that gives financial advisers the opportunity to learn what it takes to run a more profitable business directly from leading business consultants and practice management experts.

Since launching Investing in Our Communities in July of last year as a way for employees to give back to their communities, Securities America has completed 13 projects benefiting 14 charitable organizations, resulting in more than 900 volunteer participants, including employees, family members and friends. The company collected more than 1,500 items from dog treats to letters to diapers, plus over 3,000 pounds of food.

Editor-in-Chief Sydney LeBlanc sydney@transitions-mag.com Managing Editor Cami Miller cami@transitions-mag.com Contributors Geoff Davey David Leitner, Esq. David B. Loeper, CIMA® Daniel B. Seivert Steve Wershing Scott Winters Daniel J. Young, CLU, ChFC

IT Directors John Weeks Shane Hansen

Advertising Sales

In the News s

• Stephanie Kunz stephanie@ffpublish.com 435.750.0062 x3 • Terri Chiodo terri@transitions-mag.com 310.375.9300 • Lyn Fisher lyn@ffpublish.com 435.750.0062 x1

Published by Financial Forum Inc. 550 North Main, Ste. 221 Logan, UT 84321 435.750.0062 • info@ffpublish.com

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Unlike other practice management conferences for financial service professionals, FPA Business Solutions 2010 offers hands-on experience, topnotch advice and a program that is applicable to practices of every size and set up.

Find out more about this year’s program and register today at www.FPASolutions.org. The final deadline to register for the year’s most advanced practice management conference is March 1, 2010.

Securities America Ends 25th Year with a Bang Independent broker/dealer Securities America completed its 25th anniversary celebration by exceeding all goals for Investing in Our Communities: February 2010

“Omaha has been an incredible place for Securities America to grow and prosper over the past 25 years, and we wanted a way to express our thanks to this city and the other communities where our employees live and work,” said Steve McWhorter, Securities America chairman and CEO. Securities America selected two projects for each month July through December: one project that employees could “do” by giving their time and a second that involved “donating” items or cash to a cause. Specific organizations were designated for the Omaha community, and employees in other locations were encouraged to select a similar organization in their community.

In November, for example, www.transitions-mag.com

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Industry News said Doreen Griffith, senior vice president and chief information officer. “We started this project as a way to give back to the community,” said Janine Wertheim, senior vice president and chief marketing officer. “Along the way we found giving together helped build even greater morale and camaraderie among our employees. We already have employees asking if we’ll continue the project or do it again next year – and we’re making plans to continue our spirit of

Other organizations that benefited from the Investing in Our Communities campaign were the American Red Cross, AnySoldier.com, Project Harmony, Keep Omaha Beautiful World O! Water Clean Up Day, Heartland Family Service Senior Center, Susan Komen Race for the Cure, Buddy Walk, Open Door Mission, A Woman’s Touch Pregnancy Crisis Center, and Together Inc. of Metropolitan Omaha.

Real Estate Investment Securities Association (REISA) Hosts Regional Meeting March 11

“I believe one of the reasons for the outpouring of volunteerism this year is that most of us have been touched by someone we know losing a job or falling on hard times,” www.transitions-mag.com

generosity.”

Visit: www.securitiesamerica. com.

Real Estate Investment Securities Association (REISA) will hold its first one-day, regional meeting on March 11 at the Hyatt Regency Irvine in Southern California.

REISA’s regional meeting will provide time during breakfast, lunch and a closing cocktail hour for attendees to network, share ideas and gain new industry knowledge. Attendees will have the opportunity to attend six different sessions on private and non-traded REITs, funds, notes, debentures, energy investments, the curFebruary 2010

rent regulatory environment and emerging real estate securities industry trends.

This regional meeting will attract hundreds of local real estate securities professionals including sponsors, broker-dealers, registered representatives, registered investment advisors, financial advisors, CPAs, attorneys, lenders and other industry-related professionals.

“Our new regional meetings will provide a venue for sponsors to network with registered reps, financial advisors and broker-dealers and create new distribution channels to grow and expand their businesses,” said Renee Brown, President of REISA. “We hope to attract new industry professionals and give them the educational tools to build investment portfolios with securitized real estate products and ultimately build their business.”

REISA will host two other regional meetings in 2010 including a South regional meeting in Dallas, Texas and a Midwest regional meeting in Chicago. Additionally, REISA will hold an annual conference on October 17-19, 2010 at the Paris Las Vegas Hotel.

In the News

the Omaha office collected nonperishable food items for the Omaha Food Bank, while employees in Denver selected the Food Bank of the Rockies.

Investing in Our Communities also encouraged Omaha employees to do or donate for nonprofits in the smaller communities in which they live, whether individually or through their church, club or other organization. Many employees used the projects as a learning opportunity with their children, bringing them along to pick up trash in a park, walk to raise awareness for breast cancer or Down Syndrome, or ring bells for the Salvation Army.

REISA was formerly known as the Tenant-In-Common Association (TICA), is a national trade association for profes3

Transitions Magazine

Industry News sionals who offer and distribute securitized real estate investments. TICA was formed in 2003 to promote and support those involved in the fractional ownership or tenant-in-common industry. These offerings represent all fractional interests in land, commercial real estate, energy and natural resources including DSTs, TICs, funds, partnerships and REITs sold on a securities platform. REISA promotes the highest ethical standards to its members and provides education, networking opportunities and resources.

For more information on this regional meeting, contact Jill Delaney at jdelaney@reisa.org or go to www.reisa.org.

In the News

Marty Jensen Appointed Executive Director for Institute for Family Wealth Planning The Institute for Family Wealth Counseling (IFWC) appointed Marty Jensen to Executive Director. Ralph Adamo, founder and CEO of IFWC, made the announcement. IFWC is an organization that works exclusively with charities to help their donors with IRS-compliant, tax-advantaged tools for planned giving.

“Marty’s passions include assisting others in developing their legacy and philanthropybased ventures. The combination of Marty’s 25 years of 4

corporate and executive management experience in the financial services industry are sure to prove vital as IFWC expands,” says Adamo.

In addition to his financial and corporate management responsibilities, Jensen will be responsible for driving IFWC’s charity initiatives, fundraising, and alliance development.

Jensen will work as a strategic advisor directly with Adamo.

Jensen has worked with Fortune 500 corporations such as ASN360, United Management Group, ING Advisors, E.F. Hutton and Shearson’s Global Management Group. He founded “The PRIME advisory network” in 1990, creating advisor practice management programs and investment platforms to financial intermediaries and pioneered in providing “Prudent Expert-Fiduciary Programs” to global institutions.

Jensen is a graduate of the University of Nebraska at Lincoln, his hometown. He is a Chartered Senior Financial Planner (CSFP) and a Certified Investment Management Consultant (CIMC). He holds a FINRA Series 7, 63 & 66, life insurance, fixed and variable annuity licenses. A former past President of the Institute for Certified Investment Management Consultants (ICIMC), it has February 2010

since merged with the Investment Management Consultants Association (IMCA). Jensen is active with the Thunderbird Graduate School of Management centers of excellence in financial services and global entrepreneurship. He has lectured on wealth management and alternative investment topics at numerous trade conferences and graduate business schools including: Harvard, Wharton, Cornell, UCLA and Yale.

About The Institute for Family Wealth Counseling: The organization works exclusively with charities to help their donors with IRS-compliant, taxadvantaged tools for planned giving.They implement a proven, systematic approach that meets donor needs in ways that help the charity secure and grow its endowment. Donors happily turn their success into far greater significance. For more information please visit www.InstituteFWC.com or contact Angela York, ayork@institutefwc.com, 949-861-3377.

Frontier’s Long-Term Growth Portfolio Beats S&P 500 for 11th Consecutive Year Frontier Asset Management, LLC released year-end performance in January showing that its Long-Term Growth portfolio has outperformed its benchmark, the S&P 500 Index, for www.transitions-mag.com

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Industry News the eleventh consecutive year.

(Performance information is available on request.) Gary Miller, CFA, Frontier’s Founder and Chief Investment Officer, stated: “Our goal is solid, consistent performance over an extended time period. We believe our Long-Term Growth portfolio has achieved that objective.

It has beaten its benchmark, through up and down markets, every year since its inception date of January 1, 1999.”

Frontier’s President, Scott MacKillop, says: “We are pleased for our clients who have benefited from our unique investment process. There are roughly 3,300 mutual funds in

Morningstar’s database with an 11-year track record, if you don’t count money market funds or multiple share classes.

Only two of them beat the S&P 500 over the past 11 years. That puts us in rare company.”

The field of index-beating funds has narrowed dramatically in recent years. From January 1, 1999 through the end of 2007, 43 funds had beaten the S&P 500 each year. By the end of 2008, that group had been reduced to seven funds. And now, there are only two. Matthews Asian Growth & Income and Manning & Napier ProBlend Max Term S are the only funds that matched Frontier’s

impressive eleven year track record. Even more telling: of the 700+ funds in the Morningstar database that list the S&P 500 as their primary benchmark, none have beaten the S&P 500 over the past eleven years. (Manning & Napier lists the Russell 3000 and Matthews uses MSCI AC Asia Ex Japan.)

“This has been a very challenging decade for investors,” MacKillop observes. “We managed to do well for our clients by keeping our eye on the future and maintaining our discipline, despite incredible fluctuations in the markets. You never know what tomorrow holds, but we have confidence in our invest-

Discovery Database Rep Movement Update Some rep movement statistics from the month of December include: • The average predicted AUM for a rep that changed BD firms was $41,406.185.

• 1966 reps have been identified as changing BD firms in the month of November Of the 1966 reps identified, 20% have moved from within the institutional channel. The remainders are

In the News

displayed in the chart below (left).

Of the 455 wirehouse reps that have changed firms in the last month, 38% have stayed within the wirehouse channel, but switched firms. The remaining reps were dispersed among the categories listed above (right).

NOTE: Information provided by Discovery-RR database. This information is provided for informational purposes and is not to be redistributed without permission. Data provided may be delayed as specified by our data providers. www.transitions-mag.com

February 2010

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Industry News ment process. It seems to be working pretty well.”

In the News

Frontier Asset Management, LLC is an investment management firm based in Sheridan, Wyoming, with offices in Atlanta and Denver. Frontier manages or advises approximately $600 million in assets for the clients of financial advisors, individuals and institutions. Frontier offers a range of portfolios constructed using mutual funds, including a line of risk-defined portfolios, an Absolute Return portfolio and a fully tactical Focused Opportunities portfolio. For more information: Contact: Scott MacKillop, President 720-379-3590 smackillop@frontierasset. com or Chris McManus Director of Communications cmcmanus@frontierasset. com 307-673-5675 Focus Financial Partners Adds Bridgewater Wealth & Financial Management, LLC Focus Financial Partners, LLC (“Focus”) announced in January its investment in Bridgewater Wealth & Financial Management, LLC. With this partnership, Focus adds another successful firm to its portfolio and extends its presence within the Mid-Atlantic Region.

A boutique firm with institu6

tional sophistication, Bridgewater Wealth & Financial Management, LLC (“Bridgewater Wealth”) has been providing clients with comprehensive wealth management, tax planning and preparation and multifamily office services, along with business advisory services, for over twenty years. Based in Bethesda, MD, the firm services a client base in the DC area and beyond, comprising a mix of entrepreneurs, business executives and professionals, as well as athletes, media and entertainment industry professionals.

The firm is well-known for its expert handling of financial issues for first-generation wealth.

Bridgewater Wealth is the combination of two successful enterprises, an RIA and a CPA practice. The firm advises clients on $200 million in assets.

— 2010 —

CALENDAR OF EVENTS FEBRUARY Feb. 17-20 Technology Tools for Today Annual Conference San Diego, CA MARCH March 1-3 FPA Business Solutions Conf Dallas, TX OCTOBER Oct. 9-12 FPA Annual Conference Denver, CO Oct 17-19 REISA National Conference Las Vegas

Bridgewater Wealth’s investment strategy is to select and monitor best of class asset managers in a tax efficient way with the objective of creating optimal returns for clients.

Focus Financial Partners, LLC, has more than $33 billion in assets and more than 600 employees, Focus Partners provide wealth management, benefit and investment consulting services to individuals, families, employers and institutions. For more information, please visit February 2010

More Conference Info

To include your upcoming events, please email the info to info@ transitions-mag.com

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Transitions Magazine

Emancipation from the Wirehouse

By Scott Winters and William R. Nelson. Ph.D

The bad news: Wirehouse advisors’ company stock plans lost much of their value.

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The good news: These advisors are no longer bound in indentured servitude by these golden handcuffs.

Wirehouse advisors are salespeople; independent advisors are businesspeople who have to organize their life to maximize their sales. The difference between the two is the number of decisions, the variety of decisions, the size of decisions, and the income potential — essentially the freedom to thrive. But the wrong decisions, despite your best efforts, will diminish your ability to survive. The purpose of this article is to guide you through some of the technology-related decisions you will face when leaving a wirehouse.

What Needs to Be Done: 22 Necessities (at least!)

Running an advisory firm requires making arrangements for most, if not all, of what is listed below.

1. Telephone service

Cover Story s

n the short term, advisors feel the pain of diminished net worth, while in the long term they will benefit greatly by seizing the golden opportunity to go independent. To go independent is the emancipation of an advisor — essentially escaping from the nest into solo flight. Opportunities to soar abound, but many trials and complications await.

2. Phone tree 3. Accounting software 4. Payroll www.transitions-mag.com

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Cover Story

5. Internet service 6.

Website design

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Archived email

8.

Financial planning software

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Customer relationship management software

10. Marketing programs

ranging from legal to information technology. Accordingly, if you want to be an independent advisor, the wisest course of action is to find providers that can supply more than one of these items allowing you to implement your solution quickly and to start transitioning clients from the old company to your new business.

What Are Your Choices?

11. Marketing brochures

There is a spectrum of firms from which a financial ad12. Asset management (Think mutual fund manage visor can operate. At one end is the wirehouse and at the other is the independent RIA, the proverbial “one ment or stock selection.) man” shop. Six characteristics make a highly-correlated 13. Asset manager research change across the spectrum: amount of administrative 14. Asset allocation design (Think of the general support, amount of infrastructure provided, degree of investment categories clients’ money should be discretion, stringency or compliance oversight, market placed in.) ing/brand recognition, and payout ratio. A wirehouse 15. Risk tolerance assessment (Think proving to provides all you need and controls what you do, and for regulators that the recommended portfolio is ap all but the top advisors even controls when you do it- propriate for the client.) hence the moniker “Mother Merrill”.

16. Investment proposal creation (This is the pri The wirehouse has a large stake in its advisors because mary sales document for money management it often trains them and receives on average about 65% services.) of the revenue generated. Of course, the wirehouse is 17. Investment policy statements going to protect its investment in both the advisors and the company brand. The control they exert is not ma18. Advisory agreements levolent, but simply prudent, given their incentives. An 19. Performance reporting independent RIA is essentially a lone wolf with the ben20. Monthly account statements efit of freedom from a boss and compliance department, 21. Client billing but with the potentially more demanding requirements of not only managing clients, but also managing how 22. Document archiving clients are to be managed.

Setting up all of the above in an SEC-compliant manner Between these two extreme alternatives are independent is complicated and time- consuming. broker dealers that provide varying levels of all charFor a small firm, the burden is overwhelming and will acteristics. Merrill provides all the items in the above almost surely reduce the amount of time the advisors list. Some independents, like LPL, while surely providhave to generate revenue by establishing and maintain- ing advisors more autonomy also offer significant sering relationships with investors. The most successful vices. Hundreds of smaller broker dealers provide much advisors specialize in relationships. Setting up an in- less infrastructure and guidance. As a small RIA shop, vestment management firm from scratch is a different you will have to make all of your own infrastructure and endeavor requiring a significantly different set of skills technology decisions.

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Cover Story Making 22 independent decisions regarding the 22 necessities listed above will consume a great deal of time and effort that would be better spent on building relationships with investors. Companies specialize in providing many of these services in a single bundle and using such a solution can save you a great deal of time and headaches. For example, if a firm provides several bundled functions then you do not have to integrate them into a working system. If you integrate unrelated vendors, then the tighter the integration is, the more fragile it will tend to be so that a change in the technology provided by one vendor might break your system or at least cause you to spend time and money updating your integration.

Vendor Suggestions Below are some recommendations for low-cost vendors that will implement quickly.

• For phone service, try Skype www.skype.com. Their business control panel allows you to create and control user names, allocate subscriptions ($2.83 per month for unlimited calls to U.S. and Canada and $36.31 per year for a phone number which can accept incoming calls from your phone tree.) Google Voice www.google.com/voice is also an interesting service, but not business-ready so we recommend the use of B. below.

• For phone tree, Grasshopper (www.grasshopper. com ) is a useful and reasonably-priced option. The company used to be called Gotvmail. Most firms will find the $9 or $49 per month plans appropriate.

• Quickbooks Online (http://quickbooksonline.intuit. com/) is a good choice for accounting software for a small firm because you don't have to worry about keeping an archive and it's an industry standard.

• Website design is a differentiated product and comes down to the individual with whom you are working. Ask for referrals from other business owners you trust. Consider using a template (http:// www.transitions-mag.com

templates.entheosweb.com/Financial-Advisor.asp) to save time and money, and to reduce the risk that you won't like the finished product.

• Internet access options are expanding. Consider running your office on a wireless router to eliminate the cost of cabling. WiMAX options such as Clear (www.clear.com) are also potentially attractive though they still suffer from limited coverage.

• What financial planning software will you use? The options are nearly limitless, but beware of the danger presented by too complicated an option. Clarity sells better than confusion so don't get enamored of the bells and whistles when a relatively simple goal-based system such as eMoney Advisor (www. emoneyadvisor.com ) will likely do the trick.

• How you manage your clients’ assets is likely the most important decision you will make and this will define your practice. Some of the options you’ll need to consider include fee-based versus commissions; insurance, securities or both and in what percentages; what to use for clients’ “safe money” versus their growth capital.

Potentially even more critical to your ability to raise assets will be how you plan to market your services. What sales collateral will you use, such as brochures and investment proposal systems?

How will you ensure that your investment-management paperwork remains in compliance? The requirements of investment policy statements, advisory agreements, and billing statements are moving targets. Monitoring the paperwork is ongoing and time-consuming for a small firm.

We recommend that most advisors simplify their lives and increase their productivity by choosing a turnkey asset management platform (TAMP) that can fulfill functions 10-22. The immediate benefit of doing so is the ability to start converting your book away from the wirehouse within days while projecting a professional image. Over time, a TAMP will allow you to focus on

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Cover Story

building relationships with investors, which is for what you are primarily paid.

Without a TAMP, much of your time will likely be consumed by the need to keep your asset management solution running and compliant. The automation services provided by the TAMP, such as billing, reporting, and document archiving, will reduce your administrative costs and compliance burdens, freeing up more money for marketing while preserving your profit margins. The time saved will allow you to gather more assets or simply spend more time with your family or on the golf course. TAMP options worth investigating include SEI, Envestnet, Lockwood, Genworth, Advisorport, and of course our firm, Eqis Capital.

Enjoy your newfound freedom and opportunity! uuu

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Dr. William R. Nelson is the Chief Financial Strategist of Eqis Capital. Scott Winters is National Sales Director of Eqis Institutional.

Eqis Capital provides a turnkey asset management platform that delivers enhanced power, flexibility and efficiency. Based in San Rafael, California, the company enables Registered Independent Advisors (RIAs) and Registered Representatives (RRs) to engineer portfolios that combine diversification, sophistication and world-class insight. Eqis provides pioneering technology with a global reach. For more information, visit us at www.eqiscapital.com or call us for escape advice at 800.949.9936. Our business building/transition consultants will be happy to speak with you.

February 2010

William R. Nelson

Scott Winters

www.transitions-mag.com

Transitions Magazine

How to Set Up Your Independent Business: Part I First Two Steps: 1. Choosing Local CPAs, Attorneys and Other Professionals to Help You. 2. Selecting a Legal Business Structure

Editor’s note: This is a great article that originally was published in a book Lyn Fisher and I wrote in 2005 for John Peluso, President, Wachovia’s FiNET division. The book is called “Independent Business Ownership: Navigating to Your New Destination.” We think you will find it very helpful when starting up your new business.

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oing independent is not as easy as cleaning out your desk and switching off the lights in your office.

Making the move requires careful planning from start to finish. This ensures that you’re protected legally, and helps guarantee that your transition to independence goes as smoothly as possible.

Planning Ahead It’s important to create a checklist of your first steps to keep yourself on track as you prepare to make your move. These critical steps should be completed before the proposed launch date of your new business (obviously). Make your own list and create a timeline for your process, noting the approximate time you believe it will take to complete each step. We’ll discuss the first two steps in this article and the rest in articles that will follow.

1. Choose local CPAs and attorneys 2. Select the right legal business structure 3. Determine your plan for, and selection of, office space/building 4. Create banking relationships 5. Structure your business relationships

Setting Up Your Business

By Sydney LeBlanc

6. Filing and registration considerations 7. Examine Federal, State and Local compliance issues 8. Study tax issues 9. Research insurance options www.transitions-mag.com

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Setting Up Your Business

10. Select a business bookkeeping and accounting system

Step One: Choosing Local Experts to Help You According to William G. (Bill) Beattie, managing director with Richmond, Virginia-based Keiter Stephens, a CPA and consultant firm for emerging businesses, one of the first things you need to do when starting your own business is to carefully select your local experts. Bill explained that these choices are crucial to your future success because they will be in your primary circle of consultants helping you during the various stages of launching your new business. These specialists, of whom there are four, include a real estate agent, a Certified Public Accountant (CPA), an attorney, and an insurance agent.

Since these individuals represent a critical component of your future plans, you don’t want to feel rushed when deciding who to choose. Haste really does make waste at this stage of the game, so feel free to interview as many candidates as necessary until you discover the individuals who are best suited for the job, and who you feel comfortable with.

Your real estate agent can provide an inside scoop on zoning credits or perks available within the county or city where you are thinking of setting up shop.

Be sure to have your real estate agent sign a non-disclosure agreement.

Your CPA provides a valuable link to all things financial relating to your journey to independence. In addition to advice on managing your business finances, your trusted CPA will offer tax tips, tax return preparation, cash flow requirements and forecasting. Your accountant will also assist you in securing a Federal Employer ID number (FEIN) that will identify your firm on all federal and state tax documents

Your consultants don’t like unexpected surprises and neither should you, which is why you must communicate with each other on a regular basis. Insist that they provide you with a detailed account of expenses incurred along the way to ensure they remain in line with your budget. Let them know in advance that you expect to be notified whenever potential budget variances appear. Finally, make sure they provide detailed billing statements for any and all transactions.

Your attorney is responsible for drawing up the entity registration documents such as any operating agreements and buy/sell agreements you may require. Your attorney also acts as your knowledge base in establishing a legal structure compatible with the guidelines of your particular state.

Your insurance agent can provide guidance in creating an insurance strategy that meets your company’s specific needs. The agent can assist you in designing a Business Owner’s Policy (BOP) which, traditionally, combines essential insurance coverage in one package. Your agent can also advise you on additional plans that would be prudent for your business.

As you will no doubt turn to your lawyer on numerous occasions at the beginning and throughout the course of your transition to business owner, a “transactional” attorney is recommended for this most important role in your future. This way you will have access to ongoing legal counsel regarding all manner of current and future concerns, including the formation of 12

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Setting Up Your Business your business, real estate, lease contracts, employment issues, as well as securities and regulatory matters.

Your insurance agent will steer you in the right direction in formulating an insurance strategy that goes hand-inhand with your new company’s specific requirements.

As mentioned above, your insurance agent will also help in creating your Business Owner’s Policy (BOP), which typically bundles essential insurance coverage under one umbrella. As with your real estate agent, your insurance agent will also need to sign a non-disclosure statement.

Regarding fees you can expect to pay, CPAs and attorneys typically bill by the hour or via a monthly retainer.

Knowing this, it is prudent to obtain a quote that includes a detailed list of services before your initial meeting.

Step Two: Which Legal Structure Should You Choose?

Before diving into the deep end of the pool it is necessary for you to decide under which type of legal entity you will be doing business. Factors to consider here include future plans for your business, as well as tax issues, and whether or not you ever intend to add partners somewhere down the line and how that might affect your decision.

You have four options to choose from when setting up a small business venture: • Sole Proprietorship • General Partnership • S Corporation

Advantages of a Sole Proprietorship: • Easy to organize • You have complete control • You receive all income • Profits flow directly to your personal tax return • Business is easy to dissolve, when appropriate Disadvantages of a Sole Proprietorship: • Unlimited liability and legally responsible for all debts against the business.

• Business and personal assets are at risk.

• May be at a disadvantage in raising funds, and are often limited to using funds from personal savings or consumer loans.

• May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.

• Some employee benefits, such as owner’s medical insurance premiums, are not directly deductible from business income (only partially deductible as an adjustment to income).

Partnerships

• Limited Liability Company (LLCs) Worth noting is that we believe neither sole proprietorships nor partnerships offer the kind of liability protection suitable for your company, but we’ll cover them nonetheless so that all options are on the table for you to review.

Sole Proprietorships The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility www.transitions-mag.com

for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are “ one and the same” with the business.

In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that outlines how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. Yes, its hard to think about a “break-up” when the business is just getting started, but many partner-

February 2010

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Setting Up Your Business

ships split up at crisis times and unless there is a defined process, there will be even greater problems. Here are the three types of partnerships you might consider: 1. General Partnership — Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement.

Equal shares are assumed unless there is a written agreement that states differently.

2. Limited Partnership and Partnership with limited liability — “Limited” means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects, or for investing in capital assets. This form of ownership is not often used for operating a service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.

3. Joint Venture — Acts like a general partnership, but is clearly for a limited period of time or a single project.

If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.

Advantages of a Partnership: • Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.

• With more than one owner, the ability to raise funds may be increased.

• The profits from the business flow directly through to the partners’ personal tax returns.

• Prospective employees may be attracted to the business if given the incentive to become a partner.

• Profits must be shared with others.

• Since decisions are shared, disagreements can occur.

• Some employee benefits are not deductible from business income on tax returns.

• The partnership may have a limited life; it may end upon the withdrawal or death of a partner(s).

Corporations A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. The following are the most desirable for a small business: 1. S Corporation — A more beneficial way to go for your company’s legal structure is the S Corporation, which operates like a C Corporation, but places better tax advantages in your corner. It enjoys the same rights and limited liability protection of a C Corporation without suffering the C Corporation’s plight of double taxation.

2. Limited Liability Company — A Limited Liability Company (LLC) couples the tax advantages of a partnership with the liability protection of a corporation.

LLCs are owned by members instead of shareholders in an S Corporation. This entity can operate with a single member or can have multiple members. uuu

Next issue: Office Space and Banking Relationships

• The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership: • Partners are jointly and individually liable for the actions of the other partners.

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Resources:Keiter, Stephens, Hurst, Gary & Shreaves; www.kshgs.com; Small Business Administration (SBA) www. sba.gov

February 2010

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Transitions Magazine

TOP 10 TIPS For Lowering Your Workload

By Stephen Wershing, CFP®

I

3.

Document Processes

6.

Outsource Something

1.

Limit looking at email to twice a day – Email may be the biggest time-suck in history. Turn off your email alerts. Set Outlook to default to your calendar when you start it. Set specific times to check your email. And not first thing in the morning!

2.

Set aside time to clear out your inboxes – Following up on the first tip, schedule time to triage what has arrived that day. A lot of this advice is from David Allen and his disciples (like me). (David is a best-selling author and world’s leading authority on personal and organizational productivity.) During this scheduled time, evaluate each item in your email box, mail pile and “in” tray. If you can complete whatever it requires of you in two minutes or less, do it then. If not, place it on your “to do” list, delegate it, or throw it out (and be ruthless).

3. Document your processes – Anything that you do regularly can benefit by being systematized and analyzed. In our context, let’s start with client review meetings. Do you have a documented process? Writing down and reviewing a client process is key to quality control, and a necessary step if you want to improve it.

4. Delegate – Your biggest value to your business is your expertise, and that generally translates into working with clients. Every minute you are involved in something else is value taken away from your business. Some time on other activities is necessary – the key is to minimize. Ask yourself: “Is this something only I can do?” Can it be done by another person, another company, or a machine?

My favorite example is setting appointments. Why on earth would you invest time calling a client simply to arrange a time to meet when your assistant can do it? www.transitions-mag.com

February 2010

Personal Management

1.

Limit e-Mail Checking

t’s that time of year when we reflect on the past twelve months and contemplate the next. After feeling the gratitude of simply surviving this last year, you may be considering what you can do to make next year better.

In that spirit, I offer a few of the best tips I have heard for being more productive:

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Personal Management

5. Schedule phone calls – Along with scheduling my meetings, my assistant also schedules my phone calls. If I need to speak to someone by phone for more than a couple minutes, my assistant calls the other person to put it on both our calendars.

6. Outsource something – Examine the activities performed in your practice, and find something that can be hired out. A lot has been written about third party asset management. If you consider it important to retain that responsibility, preparation of investment reports can be outsourced. My firm and others provide a wide range of support services, including virtual assistants and financial plan loading. Your firm’s accounting can be outsourced. Maybe the most comprehensive single listing of service partners is the Virtual Solutions Consortium. Is there something your firm does that can be more efficiently or effectively done by others?

7. Dictate –A host of internet-based services will translate your spoken words into written words, like Jott and Copytalk, and it sounds as though speech recognition software, like Naturally Speaking, is becoming more practical.

8. Be efficient in your work reading – Using trade magazines as the example, you can open an issue, scan the contents and go directly to those articles of interest to you. Or, you can tear out those articles and have a “reading folder” at the ready when an opportunity arises. Bob Veres, as a service to his Inside Information subscribers, reads a collection of industry publications and distributes summaries of the stories with relevancy ratings. If you are a committed geek like me, you can email those summaries to your Kindle, ready to take advantage of the time waiting for your daughter to get out of dance class.

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9. Prepare tomorrow’s priorities today – And I’m being literal. This is not an exercise in developing a vision of the future. I mean at the end of each workday, make a list of the most important tasks for the next day before you go home. Priorities will likely be in the front of your mind so you will save time waiting for the coffee to kick in and pondering “What should I do first?” And if you begin each day by immediately starting in on a high priority task, the whole day will be more productive, I promise.

10. Say no – We all have a “to do” list of one sort or another. Productivity writers like Tim Ferris and Leo Babauta of Zen Habits have described the idea of a “not-to-do” list. Whether it is unproductive habits you will stop, or functions you will cease or projects/boards/volunteer activities you will respectfully decline, “no” can be one of your most powerful productivity tools.

Good luck with lowering your workload in 2010! uuu

Stephen Wershing is President of Ensemble Financial Services, Inc., the leading outsourcing company for independent advisors. His firm provides broker-dealer, investment advisor, technological, compliance, and virtual staffing services. Ensemble Financial was named one of the Top 50 Independent Broker/Dealers of 2008

by Investment News. www.ensemblefs.com

February 2010

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Transitions Magazine

M&A Outlook for 2010

W

What’s on the Horizon?

By Daniel B. Seivert

ith the markets on an upswing after taking a torrid roller coaster ride over the past two years, the merger and acquisition (M&A) landscape for wealth managers has been infused with a healthy level of optimism. Higher cash flows, recovering valuation multiples, and continued demand to buy wealth management firms, among other things, have laid the groundwork for much greater deal activity than was apparent during the recession-afflicted years of 2008 and 2009. In fact, we believe that M&A activity should pick up meaningfully in 2010, as more wealth managers pursue succession plans, advisors move away from challenged larger firms, and mergers become an attractive way to facilitate growth and create value.

In the report we recently published on the subject, entitled M&A Trends and Opportunities for Wealth Managers in 2010, we assess in depth the M&A landscape in 2010. But, for the sake of brevity, we will provide a few of the salient points of the report in this article, in an effort to facilitate your decision-making for the upcoming year, as your firm contemplates the direction that it’s headed.

Number of Companies for Sale/Advisors in Motion Primed for Increase We measure the supply of two key types of “sellers”: wealth managers (also referred to as RIAs, financial planners, HNW boutiques, family offices, etc.) and advisors in motion (which are advisors moving out of or between wirehouses, independent broker dealer, financial planning firms, etc.) who are looking to start their own firms or affiliate with other firms in hopes of improving their business freedom, compensation, equity, and/or lifestyles.

In general, we believe that the supply of these sellers in 2010 will depend on the performance of the markets.

If financial markets are strong in 2010 (up 10% or more), the supply of wealth management sellers will increase significantly over 2009 levels, but will likely remain below the peak levels of the 2004 to 2007 time period.

Industry Update

Though 2010 will represent a significant step up in activity from the past two years, it should be noted that it will have some clear distinctions from the freewheeling period of 2004 to 2007, when seemingly everyone wanted to buy a wealth management firm and there were no shortage of options to pursue whether you were looking to acquire or looking to sell. Instead, the opportunities will be more subtle and selective, though they could afford wealth managers some substantial payoffs if they are willing to roll up their sleeves a bit.

The supply of advisors in motion will likely increase to new highs as advisors: a) feel more comfortable moving their investor clients now that their asset levels have recuperated a bit; b) move to business modwww.transitions-mag.com

February 2010

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Industry Update

els where they can realize the full equity value of their books of business upon a sale (whether that coincides with retirement or not); c) gain more flexibility with regard to the way in which they run their operations and/ or phase out of the business, and d) look to find relief by getting away from organizations, people, structures, rules, and demands that they believe to be a poor fit with themselves and their clients.

If markets are flat to down in 2010, the supply of wealth management sellers and advisors in motion will be moderately higher than what was experienced in 2009, but deal activity will be slower and more cautious.

Opportunities for Sellers: Valuations Down, Mergers Up, and Buyers Solid With valuations still low, now is a great time to sell equity to employees, partners, family members or investors in cases where you are looking to get equity in their hands at attractive prices or give them equity and minimize the associated gift taxes. Many advisors fear that higher capital gains rates are around the corner. If you are in this camp, then you may also want to sell shares now to the parties above in hopes of avoiding higher tax tariffs for yourself in the future.

2010 will also be a great time for advisors in motion (or breakaways) to merge with other existing RIA firms, becoming an IAR or partner of that firm.

At no time in history have there been so many professionals looking to facilitate these deals, including custodians, consultants, attorneys, investment bankers, and recruiting firms. The tools and support to go independent or join other firms are at all time highs.

Also, sellers in 2010 will actually have the opportunity to conduct deals with a higher quality and more genuine set of buyers than in years past. The 2003 to 2007 time period was flush with buyers and it seemed as though 18

everyone wanted to own or purchase a wealth manager.

As it turned out, many of these firms were actually dangerous to consummate a deal with, since they did not have the business model required to withstand changes in the market and/or to justify the prices they were offering.

Some of those firms no longer exist, while many others have decimated valuations and are far from industry leadership. By contrast, in 2010, wealth managers will have the opportunity to conduct deals with more rational buyers that have a better chance of sustaining and preserving the important client and employee relations that most selling entrepreneurs want to protect.

Demand by Firms Looking to Buy, Merge, and Recruit: Still Strong but REAL Demand to Remain Well Below Peak The desire to buy wealth management firms never really ebbed much in the economic downturn, but authentic buyer demand certainly did.

As many other aspects of the financial services business cratered, wealth management retained and - in certain respects - improved its relative attractiveness.

In the 2003 to 2007 time period, just about every type of financial services firm wanted to get into the wealth management business, often opting to do this through acquisitions. This group of firms included banks (global, national, regional, community, trusts, thrifts, and credit unions), insurance companies, investment managers, financial technology firms, pension consultants, investment banks, advisory platforms, hedge funds, private equity firms, broker dealers, family offices, and custodians.

What’s different in 2010? Most of these firms still want to get into the business and in a bigger way. However, they just have too many internal problems/distractions to deal with, they don’t have the financial resources to conduct transactions, and many sellers now don’t trust most of these types of buyers.

February 2010

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Transitions Magazine

Industry Update

While buyer demand in 2010 will remain high, real demand will be off significantly.

Therefore, there will be far fewer firms involved in making real bids for sellers. Sellers should also expect a much higher percent of the bids received will be in the form of suggested mergers or structures where the deal is essentially consummated by nothing more than the cash flows of the company. Any firm can consummate a deal using such structure, but in the past few of these deals ever won competitive processes. Given that more sellers may want to hold equity longer, these deals may actually come into vogue, and will simultaneously cause sellers to place much more importance on the qualitative attractiveness of the buyer/succession partner than was previously the case.

Opportunities for Buyers: A Mixed Bag The past two years have not been the best time for buyers looking to buy other RIA practices.Even though valuations had fallen significantly during this time, few firms were willing to sell at those low levels and therefore never put their businesses on the market. However, in terms of buying, recruiting, or merging with advisors in motion, the last two years were the best the industry has ever seen. 2010 will continue to be an unprecedented opportunity for wealth managers to hire, purchase, merge with or partner with advisors that have opted to explore the opportunities beyond the status quo at wirehouses and many other types of broker dealers or investment product distributors.

Many private equity holders are looking to simplify their holdings and move into lower risk and more diversified investments. Now is a great time for entrepreneurs to create a win-win situation by purchasing their own equity from these parties.

2010 also presents an excellent opportunity for entrepreneurs to buy back their firms all together. Whether you sold your firm to a bank, insurance company, large financial institution, rollup firm, etc., many of these players are looking to focus on their core competencies and unload non-core business or ones that are meeting internal “hurdle rates”, a classification that may fit your firm. History is filled with firms that have sold themselves at high valuations to larger companies only to buy themselves back at a fraction of the price. 2010 may be a great time for you to look into a management buyout, management buyback, or restructuring of the deal you have with your equity partners. uuu

Daniel B. Seivert is CEO and Managing Partner of Echelon Partners. Prior to founding the firm, Mr. Seivert was one of the initial Principals of Lovell Minnick Partners (previously Putnam Lovell Capital Partners) in 1999, following a career at The Capital Group, where he held executive and operating positions. Mr. Seivert is one of the leading financial and strategic advisers to CEOs, other senior executives, and boards of directors in the investment management and wealth management industries. www.echelon-group.com

As with the past two years, 2010 will continue to be a great time to buy back stock from employees, investors, friends, and/or family that want out or need the cash given these difficult times. www.transitions-mag.com

February 2010

NOTE To obtain a copy of the full report, please contact Aaron Jackman at: ajackman@echelon-group.com

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February 2010

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Transitions Magazine

The Exit Planning Process

By David Leitner, Esq. 7 STEP PROCESS FOR EXIT PLANNING

I

Step 1

Your Destination

Step 2

Valuing Your Busines

Step 3

Enhancing Your Value

Step 4

Sell to Outsiders

Step 5

Sell to Insiders

Step 6

Business Continuity

Step 7

Estate Planning

n last month’s article we discussed the importance of properly valuing your business. Now we proceed to step 3 of the 7-Step Exit Planning process, which is enhancing the value of your business.

In Step 2 you were able to determine whether you have an actual business with independent value capable of being transferred or if you were merely self-employed. In Step 3 we discussed transforming your firm into an independent business with independent value for transfer or, if you are already there, how to enhance the value of that business to maximize your return on investment.

But, if you expand and enlarge your operation, by increasing assets under management, or hiring some additional employees to help in that process, you are taking the first step toward transforming your selfemployment situation into a business with its own independent value. Further, the development of internal management systems and incentives that keep your key employees loyal to the company, even after you transition to new ownership, and, where appropriate and in the best interest of the clients, transferring the assets under management into products that will provide greater trail commissions, will greatly enhance the value of your practice.

Value Drivers Think of Step 3 as working on, and not in, your business. To increase your business value you have to target the same elements that professional buyout experts consider that give a business value and for which they are willing to pay top dollar. These elements are referred to as value drivers.

Common value drivers include a stable and motivated management team, operating systems that improve sustainability of cash flow, operating profit margins, a good diversified customer base, good financial controls and a realistic growth strategy. www.transitions-mag.com

February 2010

Exit Planning

First, we shall discuss some of the unique aspects of the financial advisor business space. Most financial advisors are small operations with few, in any employees. If that is your situation, and you want to maintain it, you will likely only be able to sell your business for some percentage of assets.

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Exit Planning

Perhaps the most important value driver is the quality of the management team. That is a team composed of those persons responsible for setting company objectives, monitoring performance, controlling business activities and motivating workers. In a small company this team may consist of one person, usually the owner. To build a top notch organization, however, a management team should include people with a variety of skills. Surrounding the owner with quality people with different skills than the owner has is a necessary prologue for a successful sale.

system. Reward key employees as the company’s’ performance improves. Part of this should be paid currently and part deferred to become a subject of vesting.

This sort of golden handcuff provision will encourage the management team to stay in place until the incentive benefits are fully vested, which should be at least as long as the transaction period and the envisage in the sale. Exactly what these incentives are will depend very much on the nature of the business and the time horizon for the sale. A qualified exit planner will counsel the owner and help develop a strategy for the identification of key employees and an appropriate incentive plan to keep them around even after the sale.

Almost as important as talent, the management team needs to have staying power. One of the first questions that a prospective buyer will ask is who runs the The next significant value driver is the development company and are they willing to and implementation of business sysThe more diversistay. If the answer is that the owntems that generally return revenue and er is in charge and wants to leave fied your established an established and growing customer as soon as the sale is closed, the customer base is the base. If the owner leaves immediately value of the company will take a more your company after the sale of business, what does nosedive. The reason management he leave behind? If the answer is a cawill be worth. teams are so valuable is because pable management and highly efficient a good team is hard to assemble business system, the business will sell and even harder to keep together. for a premium price. Business systems Buyers know that if a good management team is in include computerized and manual procedures used to place, prospects of continued success is good. generate revenue and control expenses as well as what Generally, negotiations revolve around building the methods are used to track how customers are identibuyer’s perception that future cash flow will match or fied, products and services are delivered. Policies and exceed historical results. In evaluating this risk, buyers procedures would normally include such things as focus on whether or not the existing management team personnel policies, inventory and fixed asset control, is able to grow the business. The stronger the manage- customer and vendor communications and the like. A ment team, the higher the price the purchaser will be qualified exit planner will assist the owner in establishwilling to pay. A solid management team will lead the ing business systems than add value to the company. buyer to assume that customer relations can be maintained and will remain intact and the result is a higher sale price. The question then becomes how do you keep your management team in place when you are wanting to sell the business.

One way is to implement an incentive compensation 22

The more diversified your established customer base is the more your company will be worth. Ideally, you would want no more that one customer to be responsible for more than ten percent of total revenues. A diversified customer base insolates the company from loss of any single customer. Even loyal customers occasionally shift to other vendors. If too much of the company’s rev-

February 2010

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Transitions Magazine

Exit Planning enue is concentrated in too few customers, even a small shift can have major negative consequences.

The company’s growth strategy should be realistic and well enough developed that it can be communicated to a potential buyer in such a way that a buyer will see how cash flow will continue to grow. Growth strategy based on such things as industry dynamics, population growth in the customer area, new product lines, market plans, growth or acquisition or territorial expansion should be part of written plan. An exit planner can help develop a written plan that will be useful in the sale of the company.

Once again, a qualified exit planner can help identify the specific value drivers appropriate to a particular business and advise the owner how to develop them enhance a company’s marketability and help the owner obtain a premium price.

David Leitner has helped numerous business owners achieve their goal of exiting from their business in style and with financial security. He is a 1976 graduate of Stony Brook University and a 1979 graduate of the University of Iowa College of Law. He has been licensed to practice law in Iowa since 1979, before the United States Supreme Court since 1994 and in Nebraska since 2000. In addition to his law practice, concentrating in civil litigation and estate planning, he has published or contributed to 14 books and many law journal articles on subjects ranging from insurance coverage litigation to employment discrimination and from managed care to software. David has been recognized by the American Bar Association, Who’s Who in Emerging Leaders, Who’s Who in American Law, Who’s Who in the Midwest, Who’s Who in the World and others. He can be contacted at 515 252 0777 or dleitnerlaw@ gmail.com

uuu

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CASSIE DESIGNS www.darktwin-marketing.com www.transitions-mag.com

February 2010

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Transitions Magazine

Beyond Reproach Breaking the Track Record Addiction to Build a Practice that is "Beyond Reproach"

A

To think about this objectively, let’s examine the distribution of random outcomes of six flips of a fair (balanced) coin. In the case of coin flips, we know that there is no skill involved and the outcomes are merely the result of mathematical laws that must be true. There are 64 unique potential outcomes for six coin flips. In Table 1 we show the number of observations and the probability distribution of the counts of flipping heads in six coin flips.

Table 1 — Distribution of Six Coin Flips Number of Heads Flipped

6

5

4

3

2

1

0

TOTAL

Number of Observations

1

6

15

20

15

6

1

64

Probability

1.6%

9.4%

23.4% 31.3%

1.6%

100%

23.4% 9.4%

Now presume for a moment that flipping heads equated to one year of outperformance on a risk adjusted basis. Morningstar assigns five stars to the top 10% risk adjusted returns in a peer group. This approximates the probability of flipping five or more heads out of six flips (an 11% chance, 1.6% plus 9.4%). Morningstar assigns four star ratings to the next 22.5% which we can think of as outperforming on a risk adjusted basis in four of the last six years, which approximates the 23.4% chance of flipping heads four out of six flips. Only 32.5% of a universe earns four or more stars, yet if it were just random coin flips 34.4% would flip four or more heads.

sEthics,

ristotle is often credited as the originator of the law of causality. Essentially, he was distinguishing the difference between being able to prove the cause of an observation versus merely observing an outcome from different perspectives.

One example of why understanding this difference impacts ethics and integrity (or the lack thereof) in our industry can be seen in the tendency of advisors to falsely identify the cause of investment results. Many advisors automatically assign “skill” to above average track records and completely ignore the portion of the observations that would have definitely occurred randomly in the complete absence of skill.

Integrity and Trust s

by David B. Loeper, CIMA®, CIMC®

I do not find it the least bit ironic that the four-star rated Growth Fund of America outperformed four www.transitions-mag.com

February 2010

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Transitions Magazine

Ethics, Integrity and Trust

of the last six years relative both to the S&P500 and the category average. If a million monkeys randomly picked stocks from the newspaper, 23.4% would have accomplished this achievement. But, for the monkeys that achieved this accolade, we blame it on random luck which we know exists. Yet, how many of us represent to our clients a presumption of skill for selecting the fund we are recommending (without knowing the factual cause) even though a slightly higher percentage of monkeys would randomly produce this result?

Nor do I find it ironic that the five-star rated American Funds Fundamental Investor Fund outperformed both the S&P500 and the category average five of the last six years, an achievement reserved for only the top 11% of monkeys.

Now step back and think about this for a moment. We know for a fact that random luck exists. We know the cause of outcomes for random coin flips is provable math. We also know that skill might exist. We cannot definitively say that a superior result was caused by skill. In fact, if our attempt to prove skill relies on a track record that could have been created with random coin flips, one must acknowledge that any track record could be the result of EITHER skill OR luck.

Our industry tends to ignore these facts. It makes for good marketing and persuasive sales presentations.

But, in a practice that is beyond reproach, the emphasis would not be on an ASSUMPTION of skill or a PRESUMPTION of the record being replicated in the future.

Instead, it would be fully disclosed and acknowledged as uncertainty for the underlying cause of the observation, and thus unpredictability of the future. Check yourself on this in each presentation you make. Regardless of the disclosures you make, do you IMPLY the record is repeatable in the future, extraordinary or due to skill? If so, is that consistent with the notion of integrity? Do you REALLY know the cause was not luck?

I’ve heard pitches from many salespeople peddling various products based on such records. When I hear this 26

I ask them a simple question, “Are you saying this is definitely an indication of future results?”

They all know they would get into trouble from a regulatory perspective if they said it was. But, their usual retort is something like, “if you don’t go on track records, what else do you have to go on?”

And my answer is, “if track records are uncertain, unknowable for future results and replicable by random monkeys, why should I care about it?”

Acknowledging this reality and clearly communicating it exemplifies a practice that is beyond reproach. uuu

David B. Loeper is the CEO of Financeware, Inc. which does business as Wealthcare Capital Management. An SEC Registered Investment Adviser with nearly 25 years experience, Loeper has appeared on CNBC and has been a featured contributor on Bloomberg TV and CNN. Loeper joined Wheat First Securities as vice president of investment consulting in 1988, where he served for 10 years. He was promoted to managing director of investment consulting, and then eventually to managing director of strategic planning for the retail brokerage division. He left his position at Wheat First Securities in 1999 to found Financeware.

Loeper has been a member of the Investment Management Consultants Association (IMCA) for over 20 years, serving on the advisory council for more than 5 years, most recently as chairman. Loeper was also appointed by the governor of Virginia to serve on the Investment Advisory Committee of the nearly $30 billion Virginia Retirement System. He received his CIMA® designation in 1990 by completing a program offered through Wharton Business School, in conjunction with IMCA. Loeper has authored numerous whitepapers and books including the top selling book, Stop the 401k Rip-off! as well as The Four Pillars of Retirement Plans, Stop the Retirement Rip-off and Stop the Investing Rip-off

February 2010

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Transitions Magazine

"HIGH FIVE"

NEXT Financial Inc.

N

The NEXT Challenge: Do You Have an Entrepreneurial Spirit?

EXT Financial has created a comprehensive training, coaching and mentoring program that provides registered representatives and OSJ Managers with the skills and knowledge to take their practice to the NEXT level. The NEXT Challenge offers three levels of customized coaching: Platinum, Gold and Silver. Each level was created to help advisors get the most from their coaching experience.

Is This Program for You? • Do you have an entrepreneurial spirit?

• Would you like to build a plan that helps you reach your vision?

• Are you interested in hearing from industry leaders to discover best business practices and marketing strategies?

• Would you like to better manage your time while maintaining and increasing your business production and value?

If you answered yes to these questions, then it may be well worth your time to check out The NEXT Challenge. Following is a sample of this year's programs: SESSION ONE: Strategic visionary planning, utilizing your connection chain, advanced marketing principles, branding, targeted business planning, developing your annual client and prospect touch calendar, and client audit feedback.

SESSION TWO: Increasing sales, enhancing office efficiencies, leadership development, maximizing the web, developing and implementing a referral system SESSION THREE: Indentifying your target market and niche, converting to and maximizing profitablity in a fee-based practice, and advanced sales techniques for high net worth clients.

Founded by a group of passionately independent investment professionals, NEXT is entirely owned and managed by its representatives and employees. With ownership available to each representative and employee, everyone at NEXT has a voice and input into how the company is run, and no shareholder can own more than 10%. It’s a philosophy that has resulted in extraordinary company growth and history-making industry accolades such as “Broker/Dealer of the Year.1” In addition, Next Financial assists with: • Practice Valuation: Change your business so it becomes more valuable over time. Or, use this information to buy or sell a practice.

• Growth through Acquisition: Grow your practice by acquiring other practices.

• Business Succession: Create a retirement plan in case you unexpectedly die or become disabled.

High Five! s

More About NEXT Financial, Inc.

• Business Transition: Transitioning your business to your successor or when you are ready to sell to another advisor.

For more information about NEXT Financial, Inc. go to www.NEXTfinancial.com.

Based on a poll of registered representatives conducted by Investment Advisor magazine. Broker/Dealers rated highest by their representatives are awarded “Broker/Dealer (B/D) of the Year.”

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Book Review

AN INSIDER'S VIEW OF THE LEHMAN BROS' COLLAPSE — What the Heck Happened? —

Title: A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers Author: Lawrence G. McDonald

Cover Price:$27.00 (368 pages, hard copy)

To order, click here: http://www.lawrencegmcdonald.com/lehman-book/ They stand alone – the zillion-dollar questions of the financial crisis : What the hell happened at Lehman Brothers? And why was it allowed to fail, with aftershocks that rocked the global economy? In this news-making, often astonishing book, a former Vice-President of Lehman gives us the straight answers – right from-the-belly-of-thebeast. Larry McDonald is the first senior Wall Street trader ever to write such an exposé – revealing at last the culture and unspoken rules of the game like no book has ever achieved before.

A Colossal Failure of Common Sense is a human story of McDonald’s rise from a Massachusetts project, to the New York headquarters of Lehman Brothers, home to one of the toughest trading floors in the world. He posed as a pizza delivery man to get past receptionists, to score interviews at brokerage firms. He peddled frozen pork chops, door to door, to hone his sales skills, desperate to realize his dream of working on Wall Street.

We get a close-up view of the other participants in the Lehman collapse, those who saw it coming with a helpless, angry certainty. We meet the Brahmins at the top, whose reckless, pedal-to-the-floor addiction to growth finally demolished the nation’s oldest investment bank. The Wall Street we encounter is a ruthless place, where brilliance, arrogance, ambition, greed, and all the human traits, combine in a potent mix that sometimes fuels prosperity, but sometimes destroys it.

Book Review s

McDonald’s gripping story of the firm’s death spiral is a modern-day thriller, studded with incredible, insider revelations no one else knows, or would dare reveal.

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The collapse of Lehman Brothers was no surprise and didn’t have to happen. In fact, CEO Richard Fuld and President Joe Gregory were confronted with warnings on three occasions — starting as far back as 2005 — that the property market, on which they were betting the ranch, was teetering toward collapse. Fuld and Gregory turned their backs each time.

McDonald paints a vivid picture of life inside Lehman, where the isolated and reclusive chief executive ‘reigned’ in his sumptuous 31st floor office, accessible only by private elevator. From this Ivory Tower so much of the firm’s brightest talent was driven out of the door. The full significance of the Lehman bankruptcy remains to be measured. But this much is certain: it was a devastating blow to both America and the world beyond. And it need not have happened. This is the story of why it did. uuu About the Author: From July 2004 through September 2008, Lawrence G. McDonald was a Vice President of Distressed Debt and Convertible Securities Trading at Lehman Brothers. He ran an extremely successful joint venture between the firm’s fixed income and equity divisions. He was the most profitable trader on the convertible securities desk 2006 and 2007. Lawrence G. McDonald was Co-Founder of Convertbond.com, a website coined by Forbes Magazine as “Best of the Web” from 2000-2003, and was noted as the world wide web’s premier source for convertible securities information, valuation and news.

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Transitions Magazine

Independence made Easy • Be your own boss.

• Control your own destiny.

• Captain your own ship.

T

hese lofty platitudes to the glories of independence make for wonderful motivational poster material.

Who wouldn’t want to experience that sense of power and self-reliance, after all? It’s a good question, but then there’s this: if independence is all it’s cracked up to be, why are so many investment reps still toiling away for the big firms? The answer to this even more reasonable question might be a matter of simple human nature – we all fear change. Change is difficult. It’s inconvenient. It’s messy.

Fantasy or Reality?

Like many institutions, the financial industry has a tendency to lull investment professionals into a sense of rote comfort. After years or even decades of working within the narrow codes and practices of the big firms, many reps may view independence as little more than a working man’s fantasy – a wistful afternoon daydream too fraught with complications and hassles to ever realistically consider. But the notions of calling one’s own shots and carving out one’s own niche shouldn’t be dragged down by the minutiae of the transition process or the perceived difficulty of setting up Magazine a safe, reliable management system for clients. Maybe that’s why more reps are looking for guidance along the journey to independence from brokersXpress, a company with the structure and resources in place to help reps make that change and get the most out of their hard work. brokersXpress: Technology, Product, Transition Team and More brokersXpress has a team of dedicated professionals ready to assist newly independent reps in every aspect of their transition, as well as ongoing specialized assistance in important areas like marketing and compliance. The goal is to help ease the burden of any aspect of the process that would take reps away from best serving their clients. But beyond simply eliminating many of the obstacles, brokersXpress provides the technology and product selection to allow reps to actually provide an even higher level of service to those investors.

The secure web-based brokersXpress platform features straightforward trade screens, an easy-to-use client-rep interface that allows for more efficient communication and account management, and a full suite of innovative trading tools designed to help both client and rep find and understand new trading opportunities. The brokersXpress system is also capable of supporting a wide array of investment choices, meaning reps can help clients explore the possibilities of adding options and ETFs to their portfolios just as easily as they can basic stocks and mutual funds.

The automation of the platform also means that both reps and clients enjoy the advantages of speedy, reliable execution and the convenience of self-clearing. Of course, no business built on great technology would be worth much without a trustworthy human element backing it up, which is why brokersXpress also has highly trained support personnel available to provide instant information or help quickly resolve problems for busy reps.

So perhaps there’s more to the notion of independence than just catchy slogans and pie-inthe-sky sentiment. Discover the methods brokersXpress uses to help make those messages a reality at www.brokersxpress.com.

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F.Y.I.

brokersXpress

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Sound Off!

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Outstanding Wealth Management Teams to feature in the 4th Edition of The Wealth Factor: A Team Approach This customized, hard-cover book provides an objective, third-party endorsement for you and your team. It's authored by veteran journalist Sydney LeBlanc, and published by Financial Forum Publishing.

Books can be distributed to clients, prospects, members of your network, editors and writers at targeted publications. Call today for details and to see if you and your team meet the criteria for inclusion.

CONTACT: Stephanie at 435.750.0062 x3, or email stephanie@ffpublish.com *Fee includes 300 copies of the book and a complete marketing and PR package.

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February 2010

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Transitions Magazine

Risky Business: The Three Primary Elements of Risk Understanding the three primary elements of risk can help you build better relationships with clients and secure your practice

I

By Geoff Davey

t’s a jungle out there and, while sometimes beautiful and even exhilarating, jungles are also risky. We talk to our clients all the time about risk, and compliance departments dedicate an enormous percentage of their time ensuring that the investors understand the inherent risks in the financial markets. But even with all the ostensible focus on educating clients about risk, many advisors are not providing enough – or the right kind of – education about the nuances of risk. It may be because they themselves are not clear.

First, let’s take a look at the elements of risk. Risk has three primary characteristics: • Risk tolerance – a personality characteristic • Risk capacity – a financial consideration • Perceived risk – risk involved in the alternatives being considered Risk tolerance is a psychological element. It’s a measure of how an individual feels emotionally about taking risk. Where does the person strike the balance between getting a favorable outcome versus an unfavorable outcome?

Here’s an example that helps to explain risk tolerance: Have you ever been a passenger in a car when the driver seems to be going very fast - or very slowly? The speed obviously feels right to the driver, but you’re feeling uncomfortable. Either you’re anxious that there will be an accident, or you’re antsy, wondering why he or she is just creeping along. (Now if the creeping driver is your sixteen-year-old son, all of a sudden the speed seems just fine … but that’s another story altogether.) Of course there are a lot of factors involved in a person’s driving behavior, but a key element is the person’s tolerance for risk. Obviously the fast driver has a higher risk tolerance than you, the worried passenger - and the slow driver’s risk tolerance is lower than yours.

Risk Capacity Risk capacity has to do with whether the individual’s financial situation can withstand the impact of a negative outcome. For instance, if someone were borrowing assets to invest – either borrowing against their other assets or borrowing on margin – in the case of a bad outcome (like the current marketing environment) this person could be wiped out because they were exceeding their financial risk capacity. Others who invested in the same scenario but without borrowing, may have not have been wiped out, although they might find it more difficult to achieve their goals.

Risk Management s

• Risk tolerance

Here’s another way to understand risk capacity. Imagine that your mother decides she’d really like to www.transitions-mag.com

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Risk Management

learn to ride a skateboard, so she goes out and buys one.

You try to talk her out of it, because while she may have the appropriate risk tolerance for it – after all, she was the one who decided to try it – she doesn’t have the appropriate risk capacity because she could easily break a hip or something equally incapacitating. So you give the skateboard to your 8 year-old son and suggest that he use it. He doesn’t want to try it because he knows that his friends have had accidents and he doesn’t want to get hurt. This is just the opposite situation. He has the risk capacity – he’s not likely to break anything and even if he does, he’ll recover quite easily. But he obviously doesn’t have the tolerance, the psychological inclination, for this type of risk.

Advisors are readily able to evaluate risk capacity by analyzing the client’s financial circumstances; however, the measure of risk tolerance is more nuanced.

Perceived Risk Let’s take a look at an example of perceived risk. A few of my peer group have bought motor scooters just to get around, for short trips. They don’t see this as carrying a risk, yet statistics show that people over 50 who ride a motor scooter are likely to have an accident. But most of the people who buy them are not aware of the statistics, so their perception is of a much lower risk.

Some of the people who bought sub-prime investments – the ones that had AAA ratings – didn’t realize they were taking a risk. We now know that the ratings of those investments may have been problematic, but the investors saw the AAA rating, bought the investment and didn’t perceive the risk as being as high as it was.

These three elements of risk – tolerance, capacity and perception – all come into play when advisors sit down with clients to do financial planning and all are important. What is absolutely essential, however, is that advisors (1) recognize how they are distinct and (2) ensure that there is no confusion when it comes to making investment decisions.

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Risk Profiling Questionnaires Most advisors today use some form of risk tolerance questionnaire. It may be one provided in their planning software, by a product supplier or as a required element from a compliance department. Typically, the client completes it quickly, often with the advisor’s “assistance.” Then one of two things occur; either the adviser moves on to the “real” portfolio design process or, even worse, the risk tolerance questionnaire itself is used to select an investment portfolio directly. This type of profiling is known as a portfolio picker: Questions are asked about goals, experience, risk capacity, etc., to select one of five or six investor “styles”, each of which has its own model portfolio.

Portfolio pickers have been shown to be a flawed methodology in several research studies. Their shortcomings, together with an introduction to the principles of good measurement, can be found in “Insights on Measuring Risk Tolerance from Psychology and Psychometrics,” a paper co-written by me and two US academics (Michael Roszkowski, Ph.D. and John E. Grable, Ph.D, CFP).1 The other option is a psychometric profile. Questions for this type of profile have been selected after a rigorous process of usability and norming trials. Questions are tested for understandability (how easy the question is to understand) and answerability (how easy the question is to answer.) These trials ensure that the questions are in plain English and can be understood by the client without explanation by the advisor. Questions with high usability are then subjected to norming trials, which test the statistical qualities of each question and of the scoring algorithm.

A psychometric test will provide an accurate score with a small known margin of error, on a known scale, and a meaningful verbal report. There should also be a technical manual, which provides details of the trials and the results. It sounds complicated because it is. But the complexity resides with the development of the questionnaire, 1 Journal of Financial Planning, April 2005, (http://www. fpanet.org/journal/articles/2005_Issues/jfp0405-art8.cfm)

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Risk Management not with its use with clients; that’s the beauty of it.

The fact is, portfolio pickers ask too few “good” questions and too many “bad” questions. Whether a particular question is good or bad can be determined only by the type of complete analysis described above; however, it is possible to use a simple sight check to do an initial culling of questions that are off the topic or will require explanation by an advisor.

Questions about time horizons, cash flow requirements, investment experience and the like, while all of interest to the advisor, should not be included with risk tolerance questions as the they will only distort the result to the point where there is no valid or reliable outcome.

Unfortunate Trade-Offs A simple example illustrates a typical financial planning trade-off situation: In deciding on what portfolio best suits his needs and to which he can make a properly informed commitment Bob, with his advisor’s assistance, needs to take into account and resolve conflicts between the three competing risk-related parameters: his risk required, his risk capacity and his risk tolerance.

Bob’s advisor shows him that he needs a very aggressive portfolio to achieve his life ambitions. However, by questioning and analysis she discovers that Bob could afford to lose no more than 10% of his investment assets without having his life ambitions markedly changed, which means a conservative portfolio. By assessment, the advisor discovers that Bob has a “lowest” risk tolerance which, all else being equal, would lead him to a moderate portfolio. Clearly there are three different asset allocations leading to three distinctly different lifestyle outcomes competing here, but: • Is any one of them right for Bob? • Which allocation causes Bob the greatest and the least anxiety?

• Are there alternatives? www.transitions-mag.com

• What is the right way to proceed, recognizing the substantial differences in long-term outcomes?

• How should Bob make those decisions?

In the end, Bob must make the decision because he is ultimately the one who has to live with the consequences.

He must give his properly informed commitment to the asset allocation that will be implemented. Exploring the trade-offs is usually a powerful educational experience about risk and return. The advisor’s role in this process is to suggest alternatives, to illustrate outcomes, to recommend – but not to decide.

This process is commonly called a Gap Analysis and is usually resolved by clients through a combination of: • Increasing the resources being applied through earning more and/or spending less • Converting personal use assets to investment assets • Easing the goals through delaying, reducing and/or discarding • Taking somewhat more risk than would be their preference (but not to the stage that in a downturn they might panic and sell) This process, as outlined for Bob above, is at odds with much of standard industry practice where portfolio pickers automatically make trade-offs opaquely (based on the value system of the portfolio picker’s creator rather than on Bob’s). This “pragmatic” short cut runs a high risk that there will be a poor match between the needs of the investor and the portfolio recommended. At the very least, this is just plain wrong; at worst, it results in: • Heightened risk of client unhappiness • Increased levels of product churn • Greater likelihood of both informal and formal dissatisfaction and complaints It’s not surprising then to find that most advisors place little stock in today’s risk tolerance questionnaires. Some are

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skeptical about whether the questionnaire is capable of measuring much. Others seem to doubt whether risk tolerance is something that even can be measured in the first place, while still others believe that risk tolerance is so unstable that there is no point in trying to measure it. Of course, many advisors have witnessed cyclic client behavior patterns – clients are seek risk in bull markets and avoid risk in bear markets.

For some practitioners, it’s all too easy to use this as an excuse to inquire no further. What’s really necessary is to explore in greater depth exactly what risk tolerance is, how to measure it and how it fits into the financial planning process. A variety of free tools and reports is available at www.riskprofiling.com.

In “The Economics of Loyalty,” a study sponsored by Vanguard, Julie Littlechild, president of AdvisorImpact, shows that engaged clients remain with their planners longer and generally offer qualified referrals (download the white paper at http://advisorimpact.com/ussite/ economics_of_loyalty.html). An easy and effective method of engaging clients and building trust is by a thorough understanding of their unique financial risk tolerance.

A comprehensive financial risk tolerance test gives reliable, in-depth insight into your clients’ financial attitudes, values, motivations, preferences and experiences.

By making risk tolerance explicit and understandable, clients are more confident of the advice and committed to the planning process. uuu

Geoff Davey, co-founder of FinaMetrica has an international reputation for expertise in risk tolerance and its role in the financial planning process. A pioneer of financial planning in his native Australia, Davey has been a part of the financial services industry for 37 years.

He can be reached via FinaMetrica’s information portal, www.riskprofiling.com.

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Transitions Magazine

Legislation: Preparation and Knowledge is Key

By Daniel J. Young, CLU, ChFC

A host of new and proposed legislation relating to RIAs and IAs has been rearing its head. The basic changes will require registration for more types of advisors. This will require hedge funds, private equity funds and others to seek compliance guidance.

Here is an overview: Registration The new rule would largely eliminate existing exemption from SEC registration for investment advisers with fewer than 15 clients and subject investment advisers to new regulatory regime, by requiring registration for many currently unregistered advisers to private funds. Only limited exemptions would be available under H.R. 3818, including: • Private funds with AUM under $150 million which are exempt under Section 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 • Small Business Investment Companies (SBICs) • Investment advisers that are Commodity Trading Advisers (CTAs) Those firms that are required to register will need to comply with new recordkeeping, SEC reporting and disclosure requirements, and they would be subject to SEC examination. Even if an investment adviser qualifies for exemption, it will still be subject to records and reporting requirements which are yet to be defined by SEC. Those who are required to register will have to hire a CCO in order to do an annual CCO report, increase disclosure and comply with Books and Records requirements. The proposed rule allows for a one-year transition period following passage of law.

Standard of Conduct

Legislative Update s

• Venture capital funds

The SEC proposes to adopt rules under the Exchange Act and Advisers Act to provide that when RIAs and B/Ds render investment advice about securities to retail customers that they are required to act solely in the interest of customer or clients without regard to the financial interest of the RIA or B/D providing the advice. The rule states that the new standards will be “at least as high” as the fiduciary duty that RIAs alwww.transitions-mag.com

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Legislative Update

ready meet under Advisers Act. This expands the “best interests” standard to all investment advice, regardless of whether it concerns exchange-traded securities. It also applies to all customers, even those with high net worth and sophistication.

Custody On May 20, 2009, the SEC proposed amendments to Rule 206-4(2) under Investment Advisers Act of 1940 in the wake of a series of high-profile enforcement actions alleging fraudulent conduct, including misappropriation or other misuse of investor assets. These proposed amendments would enact additional safeguards relating to an RIA that has custody of clients’ funds and securities. Among other things, the proposed rule would require an annual surprise examination by an independent public accountant implement CPA oversight.

These proposals have generated a storm of comments and reaction by the industry. It is not clear in what form the final rules will pass, but it is fairly clear that some form of change is coming.

ject to regulatory scrutiny. We also know that the public demands, with good reason, safeguards against some of the abuses of the past few years. While we do not know all of the details, the best practice for hedge funds and private equity funds is to hire a CCO, even if it is a part-time or “virtual” CCO to start thinking about these issues. In the regulatory world, prevention and preparation are key.

For more information, you may look to the SEC www. sec.gov and FINRA www.finra.org websites, or contact a regulatory attorney. uuu

Daniel J. Young teaches regulatory law at the University of Texas Law School and practices law in Austin, Texas. Dan can be reached at Dan@DanYoungLaw.com or (tel) 512535-4500.

Firms that are required to register for the first time will need compliance help in many areas, including the following: • Registration Process • SEC Audit • Conduct Mock Audits • Prepare for Regulators • Work with Regulators During Audit • Books and Records • Custodial Issues • E-mail/Document retention

®

• Best Execution So we know that change is coming. We know that many who before did not have to register will now be sub36

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Transitions Magazine

A Conversation with ..,

John Peluso

President, Wells Fargo Advisors Financial Network

By Sydney LeBlanc

Recently, I had the pleasure of discussing important issues of going independent with John Peluso, including how to choose an independent broker dealer, what are the challenges, what are the benefits and many other things. I believe his perspective and insight will be helpful to you.

Peluso: The most important factor an advisor should consider when contemplating going independent is selecting the correct “Partner”.

Due diligence should include evaluation of platform, product depth, technology, transition support, pricing, start up and transition capital, coaching, and marketing expertise. Additionally, get to know the John Peluso people. Don’t underestimate the passion and vision of the leadership team. When it comes to running a business, get the order right; (1) Build a strong foundation, (2) know your financial levers that drive cash flow and equity (3) grow and expand.

LeBlanc: The three positive elements of running a business are: ownership, control, independence. Why don’t all advisors want to do this?

Peluso: There are many reasons why an advisor would consider going independent, but it is not for everyone. Advisors must be willing, able and capable of running a business. Once educated, advisors realize it is not hard to run a business. However, many just don’t want the commitment associated with it.

LeBlanc: Would you say this is a good time to make a change or a bad time? Why? Peluso: I think this is one of the best times to make a change and go independent. With the recent client loss of faith in many financial institutions it is important for advisors to look at all the options and understand the different business models available. Independence give you more control and more options. It is a perfect time to seize the opportunity and differentiate yourself.

In the Spotlight s

LeBlanc: Going independent and running a “business” is not the same as running a “practice.” What main point of advice would you give a wirehouse advisor who is interested in going independent?

Main point about running a business?

LeBlanc: How can an advisor or broker go about evaluating which firm to choose? What is the best process? What research is available?

Peluso: Research websites. Ask about marketing capabilities and what the firm’s brand stands for. Speak www.transitions-mag.com

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In the Spotlight

with other financial advisors who made the transition.

Take time to understand the numbers. Your due diligence should always include a visit to the firm’s headquarters so you can meet the people who will be supporting you.

LeBlanc: What is the biggest challenge or obstacle to going independent?

Peluso: Going independent presents the same challenges advisors face when changing firms: will my clients follow me? Before you move you need to think about what it will take to replicate your business and how strong your relationships are with your clients. Also ask yourself if your clients will recognize the new firm/brand you are partnering with. If you are part of a firm that follows the broker protocol, you need to clearly understand what that entails. A good “Partner” firm will clearly explain and provide detailed plans and support not only for your transition, but also for helping move your clients as well.

LeBlanc: Now, what is the biggest challenge or obstacle to running a business?

Peluso: The biggest challenge in running a business is the mind shift in thinking like an owner. The choices you make will impact your bottom-line. As a business owner you now are able to do all those things that you once said, “if it were me, I would……” As a business owner you have the opportunity to do those very things. The challenge is to ensure you protect, run and grow your business.

LeBlanc: Do indy firms help advisors run and operate their business? Consult with them? Are there any other unique services offered?

Peluso: Some Indy firms have robust programs to assist FA’s in operating and running their practices. You can choose to go it alone or seek to collaborate with a partner. At Wells Fargo Advisors Financial Network, we have an experienced regional branch development team that works with advisors to help them achieve their dreams and goals. We leverage all the resources of Wells Fargo, 38

including an experienced transition team, professional development and training, best practices and we supplement with external strategic partners for added support.

LeBlanc: What do advisors fear the most when making a transition?

Peluso: Aside from having their clients join them at their new practice, FA’s fear that running the business will be an administrative burden. They tend to think they will spend more time doing day-to-day tasks associated with owning a business as opposed to advising their clients. This misnomer cannot be further from the truth. By and large, most Financial Advisors will do about 90% of what they are doing today. With the right partner, it’s far simpler than most people realize.

LeBlanc: Thank you, John, for spending time with me today and for sharing your words of wisdom with our readers. uuu

For more information visit www.whywaitfinet.com.

John Peluso is a Senior Managing Director, a member of the Wells Fargo Advisors Management Committee, and president of Wells Fargo Advisors Financial Network based in St. Louis, MO. He is responsible for setting strategic direction for the management, satisfaction, retention and organic growth of the firm’s independent business channel.

Previously, he was a Managing Director in the Private Client Group for Wells Fargo Advisors where he led the business development efforts, and was the National Director of Profit Formula, a semi-independent compensation model designed for $1 million and up financial advisors. Earlier in his career, John was the Western Region Sales Director for new broker-dealer business development for First Clearing Corp. He joined Wheat, First Securities in Richmond, VA in 1988 and after three years in the operations group, John moved into the correspondent clearing business unit to head up marketing, product development and administration. John is a graduate of the Securities Industry Institute at The Wharton School. He is past Chairman of the SIFMA Independent Firms Committee, a former Board member of the Wealth Advisory Institute and a current Executive Member of the Athletic Educational Foundation of the College of William & Mary.

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Transitions Magazine

RIA Central: A Community of Like-Minded Peers

A

By Sydney LeBlanc

ccording to industry research reports, adults are using social and business networking sites in big numbers. Some of the report’s findings:

• A third of adults post at least once a week to social sites such as Facebook and Twitter.

• A quarter of adults publish a blog and upload video/audio they created.

• 60% maintain a profile on a social or business networking site.

• 70% read blogs, tweets and watch “user generated content” (UGC) like YouTube videos and such.1 We also know that, increasingly, independent advisors and RIAs are using sites such as LinkedIn and LinkedFA as ways to network with colleagues, gain business, and communicate with prospects and clients.

LinkedFA is one such site that is also FINRA-compliant.

With their popularity and bold numbers of users, one might question whether all of the activity and regular use of these sites is actually profitable for the end user—or are they just a colossal waste of time? The jury may still be out on that question, but one might argue that if the site is focused and dedicated to targeted groups who have common interests, it could be highly profitable and meaningful as well.

LeBlanc: Dan, I’ve been hearing a lot of buzz lately about your RIA community. Can you tell our readers more about it, and what is your mission and vision for RIA Central?

Kurt: RIA Central is an online community of registered investment advisors, aspiring RIAs and industryrecognized thought leaders. You can think of us as a LinkedIn specifically for the RIA industry. Our mission is to provide a free and open exchange of ideas and resources for the betterment of the industry. In partnership with over 30 thought leaders, we publish articles, podcasts, videos and webinars focusing on topics ranging from compliance to practice development to client management. In just a short period of time, hundreds of RIAs and aspiring RIAs have joined RIA Central.

LeBlanc: Who is behind RIA Central? Who was the mastermind? Tell us more about yourself, Dan, and how you are involved in the community.

Kurt: Our parent company, Fugent, founded RIA Central in December, 2008. Fugent has served the financial services industry for more than 10 years, offering advanced communication tools to many of the top financial services firms. The founders of Fugent had been eying the growth of the RIA industry for a long time and recognized that RIAs lacked an easy and efficient way to conenct with one another. Most RIAs do not have the same infrastructure support system that wirehouse firms provide. RIA Central was built to be that support infrastructure. I was brought on at the founding to refine the concept, execute and turn our vision into reality.

RIA Central s

Such is the case with a new community for RIAs called RIA Central (www.riacentral.com ) I had the distinct pleasure of speaking with Dan Kurt, Director of Business Development for RIA Central. Here is what he had to say:

1 Forrester Research, www.forrester.com www.transitions-mag.com

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LeBlanc: How, specifically, can RIA Central help the more successful RIA? Why would he or she need more help anyway?

Kurt: RIA Central focuses on providing actionable information and resources. We recognize that RIAs are time-constrained and suffer from information overload.

All the content we publish in conjunction with our thought leaders is short and to the point. Further, our members benefit from being able to tap into a network of their peers for help answering the tough questions keeping them up at night.

LeBlanc: Can aspiring RIAs learn more about becoming an RIA and is there a way for them to connect to other RIAs and IARs? Kurt: Absolutely. Many of our members are aspiring RIAs thinking about forming their own RIA or joining an existing practice as an IAR. We place a lot of emphasis on producing content relevant for advisors thinking about making the transition. Our “Confessions of an RIA” podcast series, in fact, features candid discussions with top RIAs about how they made the transition and grew their practice.

LeBlanc: What do you offer in addition to content and podcasts?

Kurt: We offer members the ability to directly interact with peers through discussion forums and blogs. RIA Central is really all about facilitating meaningful interaction and dialog among peers. This is a community of professionals interested in helping one another and advancing the industry as a whole.

LeBlanc: Can you tell our readers how RIA Central distinguishes itself from other business/social networking sites and communities? There seem to be too many these days.

Kurt: We are very careful about who we admit into the community. Members must have a valid securities license or a professional financial designation. We do not allow self-promotion and work diligently to filter out noise. The result is a professional environment of peers free to learn and to teach without distraction.

who they are, and what they provide the community.

Kurt: RIA Central would not be what it is without our more than 30 industry recognized throught leaders. Folks like Ron Surz, Scott MacKillop, Ed Slott, Steve Saenz, Steve Barger and Marie Swift help guide RIA Central by sharing their wisdom and experience of working with top RIAs. The passion and dedication that our thought leaders bring to RIA Central is nothing short of amazing.

Behind their participation is a fundamental belief in fiduciary duty and the superior client service fee-only financial advisors provide.

LeBlanc: In addition to what RIA Central offers currently, are you planning any new features or services this year?

We are putting the finishing touches on a marketplace of money managers, commodity trading advisors, alternative investment companies and other types of financial services firms. Our members will have access to detailed profiles meant to facilitate the due diligence process. The marketplace is designed to provide the minute details and substance RIAs require to truly evaluate a firm and its offerings. In addition to financial services firms, our members will have access to detailed profiles on technology vendors and service providers. In keeping with our desire to facilitate meaningful interaction and dialog, our members will be able to tap into their peer group as part of the due diligence process.

LeBlanc: Any closing thoughts?

Kurt: When we set out to build RIA Central, our vision was to create the true home of the registered investment advisor. In just a few short months, hundreds of RIAs and aspiring RIAs have joined our community. Together with our thought leaders, we have built something very special. I'm humbled day in and day out by the fervor our members and thought leaders bring to their profession.

RIA Central is nothing more than a conduit.

LeBlanc: Thank you, Dan, for sharing your thoughts about RIA Central. We’ll suggest that our readers check out the community at www.riacentral.com

LeBlanc: Tell us more about your Thought Leaders and 40

February 2010

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Transitions Magazine

Grin and Bear It!

Meet You Half Way Jock found himself in dire trouble. His business had gone bust and he was in serious financial problems. He was so desperate that he decided to ask God for help.

"God, please help me. Ah've lost ma wee store and if ah dinna get some money, ah'm going to lose my hoose too. Please let me win the lottery!"

Lottery night came but someone else won.

Jock prayed again.

"God, please let me win the lottery! Ah've lost my wee store, ma hoose and ah'm going to lose ma car as weel!"

Lottery night came again! Still no luck. Jock

A Touch of Humor s

prayed again.

"Ah've lost ma business, ma hoose and ma car.

Ma bairns are starving. Ah dinna often ask Ye for help and ah have always been a good servant to Ye. PLEASE just let me win the lottery this one time so ah can get back on ma feet!"

Suddenly there was a blinding flash as the heavens open and the voice of God Himself thundered, "Jock, at least meet me half way and buy a ticket!"

Something got your funny bone? Submit your jokes and cartoons to info@transitions-mag.com. Entries selected for "Grin & Bear It!" will receive a $10 gift card. www.transitions-mag.com

February 2010

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Transitions Magazine

Resource Directory Click on ads for more information and to visit websites.

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info@ffpublish.com tel: 435.750.0062 x1

Financial Forum Marketing Solutions Professional Telemarketing for Financial Firms • Recruiting • List Cleansing • Event Registration • Product Promotion • Client Appointments For more information, call 435.787.2900

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