Merrill Lynch’s Comp Plan Contains a Curious Digital Incentive

December 10, 2018

With its 2019 compensation plan, Bank of America-owned Merrill Lynch Wealth Management will prod its advisors to get clients digitally engaged: specifically, the wirehouse will link advisor compensation to how often clients log into apps and online portals.

The 2019 compensation plan, unveiled at the beginning of November, requires that advisors’ clients log in at least once every 90 days to mobile or online portals in order for the advisors to earn client-engagement credits – worth 14 basis points (or one hundredth of one percent) on advisors’ production credits from clients’ checking and savings accounts.

A Merrill Lynch spokesperson noted that only 40% of an advisor’s client base must be digitally engaged and that more than half of the firms' clients already meet the logging in criteria.

“There are advisors that are mad about this,” says Danny Sarch, a recruiter and president of Leitner Sarch Consultants in White Plains, N.Y. “Anytime you link the Bank of America with the success or purpose of Merrill Lynch, it complicates the relationship. It’s really astonishing in today’s world, when broker-dealers are supposed to be moving in the fiduciary direction. It really surprised me,” he adds.

But Merrill Lynch moving in the direction of trying to bolster client usage of digital tools is not surprising, given the wirehouse’s recent test of a new iteration of a digital advice program that pairs robo and live advisors, according to a story published by FA-IQ’s sister publication Ignites, based on the wirehouse’s recent regulatory disclosure.

According to a Nov. 14 ADV form filed by Merrill Lynch and the Ignites story, the new program, known as Merrill Guided Investing With Advisor, is undergoing a pilot phase with a small group of internal employees.

Investors in the program will pay 40 basis points more than for digital-only services. Scott Smith, a director for Cerulli Associates, who recently authored a report predicting digital tools will continue to grow as a complement for traditional human advisors, has no trouble with Merrill Lynch – or other firms – prodding advisors to make their clients embrace the online world.

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“I haven’t seen any compensation plans that have set unobtainable benchmarks,” Smith says. Merrill is simply “rewarding advisors to encourage client behavior,” he says, “These are gradual implementations. It’s not going to kill anybody.”

Wells Fargo’s 2019 Comp Plan to Be Mostly Unchanged

December 10, 2018

Wirehouse Wells Fargo, in a bid to hold on to its private client group advisor force, wants them to know that their compensation is — mostly —staying the same, according to news reports.

Advisors in the firm’s private client group, which has around 9,450 brokers, will not have to hit new monthly production targets to maintain their payouts, AdvisorHub writes, citing several internal sources.

Under the firm’s current two-tier plan, advisors will get to keep 22% on the first $11,500 to $13,250 in monthly production, and a flat 50% on anything above that, according to the industry website.

Wells Fargo hasn’t raised the target in several years, although it has in the past, AdvisorHub writes.

“With all the other changes that are happening, we wanted people to have consistency,” a Wells Fargo official who asked to remain anonymous tells the website.

However, brokers generating less than $250,000 in annual revenue who don’t participate in the two-tier system will see their payouts reduced from the 2018 levels, one of the sources tells AdvisorHub. The website does not specify the size of the cut. Meanwhile, brokers who produce at least $500,000 will continue receiving a “segmenting” bonus of 50% if 75% of their client accounts have $250,000 or more on a household basis, according to AdvisorHub.

Wells Fargo will continue encouraging its brokers to move clients with less than $250,000 to “financial relationship advisors,” who are salaried brokers, the website writes.

Wells Fargo has lost more than 1,000 financial advisors across all its wealth management units since the 2016 revelations that employees in the firm’s retail banking unit opened millions of accounts without client authorization.

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And during 2018, the wealth management division has been under investigation by the SEC and the Justice Department, which are looking into the unit’s sales practices.

Wells Fargo has made several changes to the division to stanch the exodus of advisors, including most recently announcing that it will get into the RIA space.

Finra Reveals Broker-Dealer Suitability Fails

December 10, 2018

Self-regulator Finra’s newly-released 2018 examinations report highlights what the organization often discovers when it places brokers under a suitability microscope.

The highlights in the 15-page report potentially offer some guidance on how Finra would enforce the SEC’s pending Regulation Best Interest. In May, Finra CEO Robert Cook said the self-regulator will have exam oversight over the best interest rule.

In October, Cook said Finra will evaluate if it’s necessary to keep its own suitability rule when Reg BI is adopted.

Finra’s Suitability Rule 2111 establishes a “fundamental responsibility” for firms and associated persons to deal with customers fairly and is composed of three main obligations: reasonable-basis suitability; customer-specific suitability; and quantitative suitability.

Finra’s exam report points out the following common suitability failures of registered representatives of broker-dealer firms:

They did not adequately consider the customer’s financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity and other investment profile factors when making recommendations.
They failed to take into account cumulative fees, sales charges or commissions.
They made unsuitable recommendations involving complex products, such as leveraged and inverse exchange-traded products, including ETFs and exchange-traded notes.
They were overconcentrated in illiquid securities and variable annuities, switched between share classes, and had sophisticated or risky investment strategies.
They recommended unsuitable mutual fund share classes and Unit Investment Trusts.
They had inadequate product due diligence across product classes, including failure to understand the specific features and terms of products recommended to customers.

Finra also observed some broker-dealer firms facing quantitative suitability challenges with their supervisory systems and other operational issues.

When a broker-dealer or associated person has “actual or de facto control” over a customer’s account, there must be a reasonable basis that a series of recommended securities transactions are not excessive and unsuitable in relation to the customer’s investment profile, according to Finra.

Finra says setting parameters for trading volume and cost, and restrictions on frequency or patterns of clustered or single product exchanges have helped broker-dealer firms deal with quantitative suitability issues. In some cases, customers whose accounts breached the firm’s thresholds received telephone calls from principals or detailed activity letters setting forth the frequency and cost of trading over specific periods, according to Finra.

On the flip side, Finra said broker-dealer firms with “sound supervisory practices for suitability” generally identified risks, developed policies, and implemented controls tailored to the specific features of the products they offered and their customer base.

Such controls included restricting or prohibiting recommendations of products for certain investors, and establishing systems-based controls – or “hard blocks” – for recommendations of certain products to retail investors to prevent registered representatives from going rogue.

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Some firms also implemented methods to verify the source of funds for variable annuity transactions. Some required registered representatives – including principals with supervisory responsibilities – to receive training on specific complex or high-risk products before the representatives recommended them.

Other exam findings highlighted in the recent report are related to fixed income markup disclosure, reasonable diligence for private placements and abuse of authority.

The latest report is a follow-up to Finra’s first-ever Examinations Findings Report released in December 2017. The key topics in last year’s report were best execution, product suitability, outside business activities and private securities transactions, cybersecurity, anti-money laundering and market access controls. Finra plans to release an exam findings report annually.

Amid Trade and Political Worries, Barings Says Diversify

December 10, 2018

Worries about trade relations with China, the Eurozone’s future, and U.S. fiscal policy have increased market volatility and investor concern, Christopher Smart, head of global macroeconomic and geopolitical research for Barings, says.

And he’s not alone. Citing recent tariff worries between the U.S. and other large economies, Steve Kaplan, head of portfolio insights for JPMorgan Asset Management told FA-IQ market participants have long been vexed by political turmoil.

But Smart claims FAs may not need to focus on these issues. Speaking with FA-IQ, he outlines why advisors should keep an eye on asset class correlation and how diversification may prove valuable.

How Advisors Identify and Diversify Away from Hidden Contagion Risks

October 22, 2018

The global financial crisis wreaked havoc on investors’ portfolios, including those of wealth management clients who thought their financial advisors had them properly diversified. In truth, when the S&P 500 plummeted 54.89% between October 2007 and March 2009, those investors learned the various asset classes across their portfolios were far more correlated than was otherwise thought. As a result, hidden contagion made the clients of seemingly savvy financial advisors far more vulnerable than they expected.

Advisors who successfully weathered the storm say identifying and diversifying away from contagion risks in the future is possible – at least for those who know where to look. Spotting correlations among sectors, asset classes or countries is a good first step. Tracking major outflows and consistent flights to safe haven assets is another useful measure. But the real key is being able to identify potential triggers by making connections between seemingly distinct markets.

“Looking at the 2008 correlation and contagion, the lesson for advisors is to not conflate diversification and risk management,” says Greg Luken, a former financial advisor who runs Luken Investment Analytics, a Nashville, Tenn.-based quantitative outsourced CIO firm serving advisors. “Know the maximum acceptable loss in the portfolio, and in each respective investment in the portfolio, as well as conditions when you will exit the position.”

“Cash as an asset class — for liquidity, safety and opportunistic purposes — was a lesson many advisors learned during the crash.”
Adam Taback
Wells Fargo Investment Institute

He warns that waiting until you’re in the midst of a crisis or potential crisis is the wrong time to start. Instead, Luken suggests, advisors should begin with the end in mind. Earlier this year, wary of how rising interest rates are affecting bonds, his firm started proactively de-risking portfolios for advisors by increasing positions in short-term and floating-rate fixed income.

Luken also notes that while no signs of global contagion are imminent, he does point to potential debt restructuring problems in Greece and Italy as having the potential to spark a contagion event in the Eurozone that could one day affect U.S. advisory portfolios.

Adam Taback, a one-time financial advisor and head of global alternative investments for the Wells Fargo Investment Institute, says although diversification should be achieved through uncorrelated asset classes, he encourages advisors to consider their clients’ liquidity needs when trying to diversify away contagion risks.

“Cash as an asset class — for liquidity, safety and opportunistic purposes — was a lesson many advisors learned during the crash,” he says, recalling how in 2008 cash was one of the only asset classes to avoid losses and that advisors who had already given client portfolios enough exposure to it were able to reallocate at significant bargains.

On the other hand, Taback says, advisors discovered that a lack of liquidity from alternatives such as hedge funds benefited certain clients. “By keeping investors from redeeming quickly out of fear, managers could keep the capital and gain returns, since the next calendar year, markets saw a big snap back up in 2009.”

If a new contagion on the magnitude of the 2008 crisis does strike, advisors should think twice about running to treasuries, according to Michael Poppo, a New York-based financial advisor who manages over $1.3 billion at UBS.

During the financial crisis, the MSCI EAFE fell more than 50% before rebounding by more than 70% in the following year. The massive outflow from foreign markets, coupled with the massive inflows into U.S. Treasuries, left the U.S. government benchmark Treasury with an effective yield of 0%.

“Selling out after a historically significant correction is rarely a good idea and, in this analysis, would have resulted in leaving the MSCI EAFE — yielding 5% — to purchase an overvalued, effectively non-yielding investment,” Poppo says.

Portfolio Trends

"Many clients are concerned about interest rates rising and the impact of that on their portfolio. As advisors seek to reduce duration risk, they are often introducing more credit risk than they recognize. The issue with this is that credit risk is more correlated to equities, and this means portfolios aren’t as diversified as they should be. Utilizing high quality fixed income and uncorrelated alternatives could help."

- Steve Kaplan, Head of Portfolio Insights for J.P. Morgan Asset Management

More to explore:

The Advisor's Approach to Active Management for Headline Events

J.P. Morgan Asset Management's Portfolio Insights Tool

Shedding Sentimentality and Knowing When to Reallocate

J.P. Morgan Asset Management and Financial Advisor IQ are not affiliated. All trademarks appearing herein are owned by their respective organizations. JPMorgan Distribution Services, Inc. is a member of FINRA.

RBC Wealth Management Helps Fight Financial Abuse

December 10, 2018

RBC Wealth Management - U.S. has launched a new unit that will assist the company’s employees in preventing and reporting suspected financial abuse, the company says.

In addition, RBC is working with Sifma on its initiative to protect elderly investors from financial exploitation, according to the company.

RBC’s new Client Risk Prevention Division aims to address the estimated $3 billion lost by Americans annually as a result of financial exploitation, according to Sifma, RBC says in a press release.

The actual scale of financial abuse, however, may in fact be much higher, as only one in 44 such cases gets reported, according to the press release.

One of the goals of RBC’s recent initiatives is to “open that dialogue” about financial fraud that many people don’t want to engage in, Michael Armstrong, CEO of RBC Wealth Management - U.S., says in the press release.

RBC also claims that its new initiative goes “well beyond” the requirements recently enacted by Finra to protect investors from financial abuse.

The company will train its staff to recognize and fight such abuse and incorporate these topics into their annual reviews with their clients, according to the press release. Part of the initiative also includes working within the communities of which RBC’s advisors are a part, including partnering with community groups and law enforcement, the company says.

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"We believe it is our responsibility to do everything in our power to preserve and protect the dignity and financial wellbeing of our clients," Jen McGarry, head of the Client Risk Prevention Division at RBC Wealth Management- U.S., says in the press release."Our financial advisors – and all the employees that support them – are in a unique position to help mitigate the risk of financial exploitation. By establishing this dedicated division and supporting SIFMA in its Senior Investor Protection Initiative, we’re taking proactive steps to address a very real and growing concern."

Indie FAs Sue Former RIA Alleging Their Business Was Held for “Ransom”

December 10, 2018

A pair of independent advisors are suing the RIA they left earlier this year claiming the firm held them “hostage” and tried to “strong-arm” them to stay so it could continue collecting part of their revenue, according to news reports.

Sisters Beth Westburg and Laurie Lipman are suing Good Life Advisors for fraud and breach of contract and further allege the RIA “fraudulently misrepresented” that they would own their clients, ThinkAdvisor writes.

George Miller, a partner in Shustak Reynolds & Partners representing the advisors, tells the publication about $500,000 is in dispute. But Good Life says the sisters’ claims are “baseless” and “legally deficient” and intends to contest them “vigorously,” Bryan Ward, a lawyer with Holcomb + Ward representing Good Life, tells ThinkAdvisor.

Westburg and Lipman had joined Waddell & Reed in 1999. In 2003, when their father Sam Lipman retired, they took over his advisory business, according to the publication. The sisters then joined Good Life Advisors as hybrid advisors in 2014, ThinkAdvisor writes. At the time, the sisters managed around $30 million for about 230 clients, according to the publication.

They began receiving some profit-sharing distribution as soon as they joined the firm, but two years later the sisters signed an operating agreement that was meant to formalize the distributions, Miller tells ThinkAdvisor. That agreement included a non-compete clause entitling Good Life to damages if Westburg and Lipman left the firm without giving 120 days notice, according to the publication.

Miller tells ThinkAdvisor Good Life told the sisters they needed to sign the operating agreement if they wanted to continue getting the profit-sharing distribution, which they did. The advisors then left the firm in early February this year — but about 40 days early, as per the operating agreement, Ward tells the publication.

“There were rules for the shareholders to follow, and Ms. Westburg and Ms. Lipman didn’t,” he tells ThinkAdvisor.

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But Miller tells the publication that when the advisors had told Good Life of their intention to leave, the company said that whatever RIA they moved to would have to pay over $75,000 to acquire their practice. The sisters registered with Commonwealth Financial as independent advisors in La Mesa, Calif., at the start of 2018, according to ThinkAdvisor.

Good Life recently filed a motion to dismiss the advisors’ claims, citing lack of jurisdiction and failure to state a claim, the publication writes. Miller, however, filed an opposition motion last week, according to ThinkAdvisor. The case has yet to enter the discovery phase, the publication writes.

Advisor Moves: Wells Fargo Loses $100M Team to Raymond James

December 10, 2018

Wirehouse Wells Fargo continues losing representatives to rivals, most recently to Raymond James, which has been particularly aggressive about luring advisors from the scandal-plagued wirehouse.

Elizabeth Hulley, Sean Reynolds and Benjamin Nicholson have joined Raymond James & Associates, the firm’s traditional employee broker-dealer, as the Hulley Reynolds Nicholson Group of Raymond James, according to a press release from Raymond James.

The Buffalo, N.Y.-based team previously oversaw $100 million at Wells Fargo Advisors, Raymond James says. Hulley is a 35-year veteran of the financial services industry, while Reynolds has been in the industry for 16 years and Nicholson for 14 years, according to the press release.

“We were drawn to Raymond James primarily because of the firm’s culture,” Nicholson says in the press release. “The people we met have the best interests of us and, more importantly, our clients at heart, and this has been exemplified throughout our transition.”

Wells Fargo has lost more than 1,000 financial advisors to rivals since revelations emerged in 2016 that its retail bank employees had opened millions of client accounts without authorization.

Raymond James has become a new home for many departing Wells Fargo representatives. Earlier this month, a team managing $222 million left Wells Fargo for RJA in Richmond, Va. But in recent weeks Wells Fargo has also lost advisors to Stifel Financial, Ameriprise and LPL Financial.

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LPL Poaches $220M Team from Raymond James

Yet Raymond James isn’t immune to shedding a few advisors itself, most recently to LPL Financial.

Last week, LPL announced that Retirement & Investment Group joined LPL’s broker-dealer and corporate RIA platforms, according to a press release from LPL.

The Catonsville, Md.-based firm includes President Tom Quirk, who’s a certified financial planner, and a three-person support team, LPL says.

Quirk oversaw around $200 million at Raymond James, according to the press release. And like many advisors who have recently joined LPL, Quirk touted its technology as one of the main reasons he came on board.

“I believe LPL’s capabilities will allow me to keep operating costs down while also being able to maximize productivity and access resources that will make a difference in the support we provide,” Quirk says in the press release. “I’m particularly excited about the integration features in ClientWorks. I can automate investment analysis and produce reports, which makes it easier on my end and provides a quality experience for my clients. Those types of opportunities have the potential to add a lot of value to our practice.”

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PNC Loses $225M Team to LPL

LPL Financial has had a good start to the last month of the year, it seems. In addition to the $200 million team it nabbed from Raymond James, the company also picked up a $225 million team from PNC Investments.

Steve Pollock, Jane Rocks, Robert Litwin, Tom Becker and Michael Schneider have aligned with Gladstone Advisors and LPL’s broker-dealer and corporate RIA platforms, according to a press release from LPL.

Pollock, Rocks and Litwin share an office in Marlton, N.J., while Becker is based in Cape May, N.J., and Schneider joins Gladstone’s headquarters in Bedminster, N.J., LPL says.

“By joining LPL we are taking our business to the next level,” Pollock says in the press release. “I am eager to have tools and resources within an integrated platform that’s user friendly. And LPL provides access to a wide range of products and services that I believe will help us have more control of our business and give our clients more choice as well.”

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Wentworth to Buy Indie B-D World Equity Group

Broker-dealer aggregator Wentworth Management Services is acquiring a large independent broker-dealer in Illinois, the company says.

The acquisition of Arlington Heights, Ill.-based World Equity Group, which is still subject to Finra approval, would add 180 financial advisors producing close to $40 million annually to Wentworth, according to a press release from the firm.

It would also expand Wentworth’s presence in the Midwest, the company says. World Equity’s management team, meanwhile, “will largely remain intact,” according to the press release. And Rich Babjak, co-founder and president of World Equity, will remain at the firm as a senior member of its management team and will also get a stake in Wentworth, the company says.

"As co-founderBob Yaroszwas looking to retire, we wanted a partner that provided the opportunity to retain and grow the team and business," Babjak says in the press release. "I think our future is more than bright. A lot of the bigger firms don't have the flexibility to do some of the things we are still going to be able to do. Maintaining that boutique feel and an entrepreneurial culture all while having a deeper pocket behind us will be very unique to the industry. We have the opportunity to become a destination for advisors seeking to grow their own business."

Wentworth is a holding company focused on small to middle-market independent broker-dealers and RIAs looking to scale up and plan for succession, the company says. The aggregator plans to announce more planned roll-ups in 2019, according to the press release.

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Folio Financial Launches Robo for Advisors

December 10, 2018

Folio Financial has rolled out a digital wealth management platform aimed at financial advisors and institutions, with built-in flexibility allowing advisors various ways to deploy it, the company says.

The new platform aims to offer goal-based financial planning with custom portfolios, the brokerage, custody and fintech firm says in a press release.

Folio’s platform offers several options, including working with a standalone robo advisor, an “advisor workstation,” hybrid advisor options and an option that allows for financial planning with a human advisor only but through what Folio calls “one highly configurable solution.”

The goal is to help financial advisors and institutions offer their clients personalized or even “bespoke, if desired” investment advice, the company says.

The new offering, dubbed “Digital Wealth Platform,” will also let advisors completely own their client relationships, Folio claims, as it eliminates the need to have a third party provide automated advice.

Folio’s new platform is also supposed to help advisors deliver consistent advice across various channels while managing complex investment strategies all from one place, and streamline various operations, including onboarding and portfolio management, Folio says in the press release.

“The wealth management industry is experiencing a dramatic transformation. A new generation of investors, and in fact an older generation too, are prioritizing digital engagement, convenience, and greater control over their investments. They’re also looking for something better than what they’ve had, and all this is forcing firms to reevaluate their service models,” Steven Wallman, CEO and founder of Folio Financial, says in the press release.

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“With the introduction of our DWP, financial institutions and advisors can now deliver to all types of clients an automated, end-to-end digital experience that replicates the type of personalized, professional advice that traditionally has only been available to private institutions and ultra-high-net-worth individuals — all from one platform and at a lower cost.”

Are FAs Seeking Clients All Wrong?

December 10, 2018

Financial advisors may need to change tack on how they approach looking for clients. While most Americans want to have a financial plan, many never get one — and advisors may be partly at fault for not engaging with potential clients early on in their wealth-accumulation phase, according to a recent survey.

Around 75% of American adults say they need a “firm financial plan,” according to a recent survey by Citizens Bank Wealth Management and Mintel cited by WealthManagement.com. But only 55% actually end up having one, the survey found, according to the web publication. And aside from the obvious benefits of having such a plan, such as helping savers meet their financial goals, financial planning helps with an overall sense of security and reduces stress and anxiety, WealthManagement.com writes.

So the financial advice industry needs to examine why someone would want to have a plan but wouldn’t get one, Jay Friday, the head of financial planning for Citizens Bank Wealth Management, tells the web publication.

Part of the problem, according to Friday, is that advisors look for clients who already have some minimum of investable assets — but many consumers want to have a plan before they save $250,000 or more, he tells WealthManagement.com. Robo-advisors such as Betterment and Wealthfront filled in where traditional wealth managers didn’t engage, but Friday tells the web publication that they don’t “go far enough.”

Friday says traditional financial advisors could offer “modular options” of pricing in the meantime, according to WealthManagement.com.

College graduates, for example, could be charged a fraction of a fee just to focus on how much they should be saving, he tells the web publication. And this approach would help advisors build trust with clients, Friday tells WealthManagement.com.