Fee Advisors Network News

FINRA to get tough on Reg D Offerings

Finra expects to bring cases against brokerage firms involved in selling private-placement offerings next year. Reg D refers to the securities regulations that govern the sale of private-placement investments, which are generally exempt from having to be registered with regulators. The self-regulatory organization has been receiving an increasing number of complaints from investors in recent months concerning sales of private placements. Finra is looking at misrepresentations made by brokers in connection with the sale of the products, as well as whether sales made to customers were suitable.

Dodd bill would make reps fiduciaries

Consumer groups on board, but SIFMA prefers House approach that could redefine ‘fiduciary’. The senate draft unveiled last week eliminates the “broker-dealer exemption” from the adviser registration provisions under the Investment Advisers Act of 1940, effectively requiring brokers providing advice to register as advisers and be subject to a fiduciary standard. That standard would be the same applied to advisers and would require them to put the client’s interests first. The House bill would require all brokers providing advice to abide by fiduciary standards, but would give the Securities and Exchange Commission the discretion to write regulations defining those standards. The SEC revision of fiduciary standards could result in rules closer to those which brokers work, which require only that products be suitable to the investor. The Obama administration’s plan would require brokers to come under a fiduciary standard.

There are numerous articles and discussions currently taking place with reference to retirement planning. This, of course, is due to the fact that our age wave is rolling into the late 50’s and early 60’s where retirement is becoming more of a reality than that of a distant future objective. The impact of this reality brings with it a major element of reconstructing a fee-venue practice, new product design, and planning methodology of properly liquidating assets (or an estate), as opposed to the experience we have all been accustomed to - creating the estate/net worth.

The following strategy can be very beneficial for an older client who: (1) has a need for stabilized or increased guaranteed cash flow, (2) has a desire to transfer wealth, (3) has charitable inclinations.

Capital Leverage

(1)
Client is in their 70’s and has been taking a 5% conservative annual income stream ($65,000) from their account that had been worth $1.3 million. This account has fluctuated downward and is now worth $1 million. This creates the dilemma of receiving a reduced cash flow of $50,000 or increasing the annual distributions to a 6.5% factor, which will also invade capital.

Despite all the violent rollercoaster bouncing around in the equity markets today, the most volatile and temperamental investment vehicle in the fi nancial services world is still the variable life insurance policy. Not only are these contracts linked to the stock market according to the wishes of the client or advisor (the subaccounts are basically mutual funds inside the policy wrapper), but all market volatility is greatly magnifi ed by the fact that every up and down also determines the cost of insurance within the policy. If the market turns bearish, the amount at risk--the difference between the face amount and the value of the accounts; in other words, the amount the insurance company would have to pay out of pocket if the policyholder died--goes up, meaning the cost of covering that extra amount goes up too. Imagine that you have a term policy whose face amount goes up whenever the market goes down, and you have to liquidate your stock positions at a loss to pay the increased premium.

Our Life Analyzer is the hottest buzz with faculty and students at the Financial Planning department of Texas Tech University (TTU), which is considered to have the premier CFP Board Certified Financial Planning curriculum in the country. Over the past few weeks, we have held one demo for the faculty and one demo for advanced students (PhD and Masters program) and the excitement has been overwhelming. Our joint educational venture with TTU is opening a new paradigm of risk management/life insurance realities and thinking. The class projects being creates will analyze existing policies held by the university’s foundation.

Debate over new fiduciary language from the CFP Board and the FPA has focused on the risk management aspects of life insurance, though some of the conclusions have gone unchallenged, and others reflect industry biases.

Does a Variable Universal Life illustration compromise our fiduciary responsibilities?

Consider:

1. The VUL is sold as a concept, supported by an illustration.
2. The Illustration is a “Point-of-Sales” tool.
3. The client has to sign-off on the illustration and all of the (often brushed aside) caveats.
4. We have also actively used these illustrations for comparison purposes or to quasi-analyze different policies.

Time is a strange commodity. It is both relevant and irrelevant. It represents seasons and mechanical function. Einstein referred to it as a Fourth dimension. We track time by seconds, minutes, hours, etc. as a way to keep every one on the same page. Without time, we would never be “on time”. And yet, we experience the swiftness (a busy schedule) as well as the agonizing slowness (a one hour boring conference seems to last forever) of time. We mark the age of a person in years, yet that statistic has no bearing on the health, attitude, and whether that person is vibrant or not. Because of this, statistical averages are elusive.

Many advisors think of risk management as representing a client’s exposure to market volatility or the Beta factor of a portfolio. However, risk comes in many other forms, too. As a fiduciary advisor, it is your duty, both ethically and legally, to advise your clients about many forms of risk and risk management.