mhaven.net Licensing Requirements by Monica Haven, E.A., J.D., L.L.M.
Not that kind of license! Must be male and female, at least 18 years of age mhaven.net Not nearer of kin than second cousins Not having another living husband or wife Divorces must be final in the state where granted Must have at least one witness at ceremony Both parties must appear at License Bureau No waiting period; no blood tests License fee is $60
Why offer financial services? The client… mhaven.net • Is dissatisfied with current results • Is overwhelmed by too much info • Prefers one-stop shopping convenience • Enjoys an established rapport with the tax practitioner • Has already given tax practitioner access to requisite information • Appreciates that tax practitioner can address tax implications The practitioner… • Can redefine shrinking tax practice and follow industry trend • Can maintain a competitive edge • Can capitalize on existing synergies • Can generate year-round revenues • Can have FUN!
The Bureau of Labor Statistics estimates… mhaven.net • Employment of personal financial advisors is expected to grow 41% in the next decade (much faster than the average for all occupations). • This occupation is projected to be among the 10 fastest-growing.
Personal Financial Planning mhaven.net • Developing, coordinating, and implementing • A flexible plan • Using client’s available resources • To achieve client’s financial goals
The Planning Process Establish scope of the engagement mhaven.net Gather data [see Document Checklist, p.19] Identify client’s financial (& other) goals Establish a baseline Perform needs, portfolio, & tax analyses Adjust client’s goals, if necessary Formulate the financial plan Implement and coordinate plan Always monitor and update plan
Needs Analysis • Health mhaven.net • Education • Retirement • Vacation • Large purchase • Other
Portfolio Analysis mhaven.net • Allocation • Risk/reward trade-off • Diversification and risk minimization
Working with client expectations mhaven.net • Change assumptions about inflation & growth rates • Reduce the dollar amounts involved • Increase the time frame • Increase income (portfolio allocations and/or client’s employment) • Decrease expenditures & establish a budget • Educate the client & modify the level of acceptable risk
Investment Pyramid mhaven.net
Spectrum of Services mhaven.net
What’s best? Service Type Pros Cons Financial Planner No conflict of interest Full-time attention required mhaven.net FP Representative Not responsible for Perceived as lacking investment performance competence Client pays extra for advice AND implementation Fee-Only Advisor Easy adjunct to practice Eventually full-time No FINRA license required No B/D affiliation required Commission-Based $/hour higher FINRA license & oversight Agent of B/D Unable to gain full overview Perceived as biased Cannot charge fees 2 nd Opinion Offers peace of mind No LT relationship Discretionary Minimal client involvement Advisor assumes liability Authority Time purchases and sales May be accused unsuitable trades Additional record-keeping
Who’s who? Registered Investment Advisor mhaven.net • ENTITY governed by Investment Advisor’s Act of 1940 & registered with SEC or state unless exempt (< 15 clients/12-month period) • Advisory Affiliate refers business to RIA but excluded if attorney, accountant, engineer, or teacher & advice is incidental • IA Representative is INDIVIDUAL who works for Affiliate, has passed exam, & is state-licensed Registered Representative • Agent of Broker/Dealer, loyal to his employer Insurance Agent • Must be state-licensed (& also FINRA-licensed if selling variable products)
Fiduciary Standard • IA owes undivided Duty of Loyalty & Duty of Care to client mhaven.net • IA may not issue or recommend unregistered securities • IA must disclose all available fee discounts • IA cannot contractually limit his liability • IA can lend to or borrow money from clients • RR previously exempt from Fiduciary Standard under Merrill Lynch Rule but must adhere to Suitability Standard • After March 2007, RR providing fee-based advice is held to Fiduciary Standard (but is till an agent of the B/D)
Common adviser problems Type of controversy 2005 complaints Percentage of total Breach of fiduciary duty 3,514 23.10% mhaven.net Negligence 2,225 14.60% Breach of Contract 1,987 13.10% Unsuitability 1,926 12.70% Failure to supervise 1,828 12.00% Misrepresentation 1,826 12.00% Omission of facts 1,123 7.40% Unauthorized trading 395 2.60% Churning 315 2.10% Margin calls 78 0.50% Online trading 7 0.00% Source: National Association of Securities Dealers
IA Registration Federal mhaven.net • If > $25 million under management • File Form ADV - Part I: Applicant’s info - Part II: Business practices • Effective 45 days after filing • Subject to Brochure Rule 204-3 - Must deliver to client at least 48 hours in advance - Must give 5 day right-of-rescission - Proposal: In plain English State • If < $25 million or if > 5 clients in state and IA is domiciled • Most states require FINRA licensing exams • Exemptions for accredited financial planners demonstrating competency & expertise
FINRA Exams Series Exam Title Questions Time mhaven.net 6 Investment Company & Variable 100 2 ¼ Contracts Limited Rep 7 General Securities Rep 250 6 24 General Securities Principal 150 3 ½ 63 Uniform Securities Agent State Law 60 1 65 Uniform Investment Advisor Law 130 3 66 Combined State Law 100 2 ½
Governing Regulations Investment Advisors Act of 1940 mhaven.net • Amended (1960) & interpreted (1981 & 1987) • Covers IA responsibilities, reporting, fees, anti-fraud, and penalties Investment Advisor Release 1092 of 1987 • Defines IA - Gives advice about securities - On a regular basis - For a fee • Exemptions include accountants whose advice is only incidental
Regulations (cont’d.) Uniform Prudent Investors Act of 1994 mhaven.net • Adopted by most states • Portfolio Theory • Must consider risk/reward trade-off • No specific prohibitions but must be diversified Securities Act of 1933 • Full & fair disclosure • Registration of new issues Securities and Exchange Act of 1934 • Established SEC • Regulates securities markets, conduct, margin & insider trading National Securities Markets Improvement Act of 1996 • Coordination Act delineates responsibilities of federal and state regulators
Ethical Standards Rule 405 mhaven.net • Recommendations must be reasonable & suitable CFP Board of Standards • Define the scope of the engagement • Determine client’s needs, priorities, personal & financial goals • Obtain quantitative information • Analyze client’s information • Evaluate financial planning alternatives • Develop financial planning recommendations • Present the financial planning recommendations
Sample Questions: Series 6 mhaven.net Open-end must redeem shares at NAV within investment companies a. 3 business days using Regular Way settlement rules of the NASD b. 7 days under the Act of 1940 Investment Company c. 5 business days under Regulation T of the Securities Act of 1934 d. whatever date is declared by the Board of Directors of the investment company
Sample Questions: Series 6 mhaven.net The XYZ Fund is quoted at $13 Bid and $14 Ask. The prospectus states that there is a 1% redemption fee. A customer redeeming 2,000 shares would receive net proceeds of a. $25,740 b. $26,000 c. $27,720 d. $28,000 (2000 shares X $13/share) – 1% = $26,000 – 260 = $25,740
Sample Questions: Series 6 An investor studying an annual report of the DEF Investment Company sees mhaven.net that the net asset value is up from $12.16 to $12.97/share and that the selling price is down. What type of fund is it? a. balanced fund b. open-end fund c. closed-end fund d. any mutual fund which has operated in a declining market NAV SP But where SP is based on NAV (plus Sales Load) in open-end fund, SP must rise when NAV rises. Here, it does not and so this must be a closed-end fund.
Sample Questions: Series 63 mhaven.net A security may be registered in a state by a. coordination b. notification c. qualification depending d. any method, on the state An agent or broker/dealer may be subject to a. revocation or suspension b. criminal liability c. civil liability d. all of the above
Sample Questions: Series 63 mhaven.net Under the Uniform Securities Act, the burden of proof for exemption an from securities registration is upon the a. agent selling the security b. broker/dealer selling the security c. investment banker underwriting the security d. issuer claiming the exemption
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