mhaven.net Licensing Requirements by Monica Haven, E.A., J.D., - PowerPoint PPT Presentation

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