Small Custodians, Big Business After the Schwab-TD Merger, Rival Rms Are Reaching for New Business Opportunities

INVESTED IN ADVISORS | APRIL 2021

Small custodians, big business After the Schwab-TD merger, rival rms are reaching for new business opportunities. Is David sprinting past Goliath?

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28 On SPACs, 22 GameStop Small cusodians, and crypto: big business Q&A with After the Schwab-TD merger, rival firms Apex’s are reaching for new business opportunities. Is David sprinting past Goliath? Tricia BY JESSICA MATHEWS Rothschild After going public, the clearing firm plans to to grow and nudge further into the traditional advisory space, says its president. BY JESSICA MATHEWS

Columns 7 5 lessons learned in 2020 The game changed, and there’s a lot we have learned that can potentially skyrocket our success through 2021. BY CHIP MUNN 8 Advisors’ worst career errors Arrogance, naiveté and procrastination can all undermine best-laid advancement plans. BY MARK ELZWEIG

Industry News 10 The retail investor wave: An inside look More than one-third of U.S. brokerage clients opened their first accounts in 2020, according to new research. BY TOBIAS SALINGER 12 Alternative investment fintechs soar New entrants are gaining traction while established players continue to grow. BY RYAN W. NEAL

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001_FP0421 1 3/15/2021 4:03:16 PM Contents

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14 32 EDITOR-IN-CHIEF Chana R. Schoenberger

14 33 MANAGING EDITOR Grandma wins case against How to avoid legal trouble when Andrew Welsch J.P. Morgan and grandsons switching firms Beverley Schottenstein accused the bank and It’s complicated, but possible, for financial ASSOCIATE MANAGING EDITOR brokers of unauthorized trading, among other advisors to limit risk and liability while Andrew Shilling alleged misconduct. moving their practices. TECHNOLOGY EDITOR BY LYNNLEY BROWNING BY MARK KOWALSKY Ryan W. Neal

16 SENIOR EDITOR Big firms likely to benefit from SEC ad Client Tobias Salinger rule update Those with the resources to sort through 35 REPORTER compliance thickets may be better positioned A second look at the 4% rule Lynnley Browning for the long-awaited changes. Based on their stage, each client has different long-term needs. ASSOCIATE EDITOR BY KENNETH CORBIN Jessica Mathews BY VIJAY KHETARPAL 18 COLUMNISTS Morgan Stanley, RBC tangle over Lazetta Braxton, Allan Boomer, Kimberly Foss $600M of client assets Portfolio The dispute highlights the complex nature 36 CONTRIBUTING WRITERS of non-solicitation carve-outs when advisors Chinese firms — delisted Kenneth Corbin, Alan J. Foxman, Jeffrey Levine, switch firms. U.S. exchanges may end trading in shares of Michael Kitces, Donald Jay Korn, Allan S. Roth, BY ANDREW WELSCH certain China-based companies. Here’s what Chip Munn this may mean for your clients. 20 COPY EDITORS Betterment buys Canadian robo’s U.S. BY EARL CARR Dina Hampton, Rebecca Stropoli book of business 38 The first deal under CEO Sarah Levy will net It’s time to revisit the IRA trust. Here’s EXECUTIVE DIRECTOR, BRAND STUDIO the firm 17,000 accounts and $190 million in why Michael Chu client assets. All trusts named as beneficiaries before the DESIGNER BY RYAN W. NEAL Secure Act may need to be updated, says Meen Choi one analyst. Practice BY DONALD JAY KORN SALES MANAGER Kris Kadel (212) 803-8472 30 Social Security tips for women Upfront & more NATIONAL SALES MANAGER, CONFERENCES AND EVENTS Planning needs and strategies should focus Stacy Gellman (212) 803-8841 on longevity and creating lifetime income Retirement Advisor SENIOR MARKETING MANAGER streams after a spouse has died. 5 Confidence Index Jamie Billington (212) 803-6099 BY SOPHIA DUFFY 40 CE Quiz 32 How the pandemic has changed us Career mobility and heightened client dependence are two unexpected byproducts of extreme uncertainty. CHIEF EXECUTIVE OFFICER ��Gemma Postlethwaite BY JODI L. PERRY CHIEF FINANCIAL OFFICER ��Debra Mason

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DATA BASED INSIGHT FROM FINANCIAL PLANNING AND ARIZENT RESEARCH

Retirement Advisor Confidence Index Retirement confidence slides ... slightly Clients are happy to have the political season behind them and are optimistic about COVID vaccines — but risk tolerance is a sore spot.

By Kenneth Corbin

Even as clients’ confidence in their retirement planning dipped AMOUNT OF CLIENT ASSETS USED TO PURCHASE slightly in January, advisors say that 2021 began generally EQUITY-BASED SECURITIES 70.0 strong, with key metrics of retirement confidence posting higher 65.0 65.0 61.5 62.3 62.8 63.3 marks than over much of the past year. 60.0 62.7 56.6 57.7 Many advisors polled in the Retirement Advisor Confidence 55.0 50.0 50.8 Index, Financial Planning’s monthly barometer of business 45.0 46.2 45.0 42.2 conditions for wealth managers, see hopeful signs in the 40.0

35.0 encouraging news about the COVID-19 pandemic and the end 35.3 30.0 of a tumultuous political season. Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Jan. 2020 2020 2021 “Clients feel more comfortable now that [the] vaccine is Source: Arizent Research underway,” one advisor says. “They feel more comfortable with the market.” In January, advisors overall rated their clients’ confidence in RISK TOLERANCE their retirement situation at 55.2, off 1.1 points from the previous 65.0 60.8 60.0 57.0 month, but higher than at any other point in 2020. Notably, 55.3 57.0 55.0 excepting December 2020, clients’ retirement confidence in 52.0 50.0 52.4 47.0 January was higher than at any point since January 2018. 45.0 44.4 40.0 RACI scores above 50 indicate an increase in investor 38.1 37.8 35.0 confidence. Scores below that level signify a drop in confidence. 35.6 34.7 30.0 Other indicators fared similarly, with advisors reporting high 29.6 25.0 confidence in investments in equities and overall retirement Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Jan. 2020 2020 2021

contributions. The component of RACI that tracks investments Source: Arizent Research in equities posted a score of 62.7, off 2.3 points from December, but up nearly two points from the average score throughout 2020, and 6.1 points higher than the same period a year ago. that they are moving money into international investments. “There seems to be an optimism in the market for higher “Risk tolerance in January was lower than in December due returns,” one retirement advisor says. “People feel better about to political change and the perception of the market being investing based on last year’s market performance and the fact elevated,” one advisor says. that vaccines seem to be coming.” The RACI element that tracks clients’ risk tolerance tumbled But that confidence comes with a caveat. Many advisors 8.4 points to a mark of 52.4, still well ahead of many months in report that clients have been spooked by volatility in U.S. 2020 and 5.4 points over the year-earlier period. January also markets and are growing more risk-averse, with several saying saw an increase in clients opening new retirement accounts.

The Retirement Advisor Confidence Index, published in partnership with ADP®, is created by the editors of Financial Planning and is based on a monthly survey of about 300 advisors. Visit financial-planning.com for more results. ADP and the ADP logo are registered trademarks of ADP, Inc. ADP does not provide tax, financial, investment or legal advice, or recommendations for any particular situation or type of retirement plan.

Financial-Planning.com April 2021 Financial Planning 5

005_FP0421 5 3/15/2021 12:31:11 PM Benchmark

“A number of clients have left their jobs — voluntarily or other point in 2020. Some of that strength can be traced to involuntarily — and established IRAs,” the advisor says. employers expanding their own menu of retirement options to The RACI component that tracks total products sold posted make participation more attractive. a score of 59.6, up 3.6 points from the previous month and the “As employers start to offer Roth option[s], we are seeing highest mark since December 2019. more participants take advantage of it,” according to one Overall plan contributions were down slightly from Decem- retirement advisor. “The company match has a direct effect on ber, but with a score of 63.9 remained stronger than at any participant enrollment.” FP

TOTAL NUMBER OF RETIREMENT PRODUCTS RETIREMENT ADVISOR CONFIDENCE INDEX SOLD TO CLIENTS 58.0 56.3 65.0 56.0 53.6 55.2 59.6 54.0 60.0 52.2 52.9 52.2 51.9 53.6 56.1 56.0 52.0 55.3 54.0 55.0 50.0 52.6 51.3 51.0 50.5 52.0 50.0 48.0 46.1 47.5 46.0 45.0 45.2 44.0 40.6 40.0 43.5 39.9 42.0 42.5 37.4 35.0 40.0 Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Jan. Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Jan. 2020 2020 2021 2020 2020 2021

Source: Arizent Research Source: Arizent Research

Kenneth Corbin is a Financial Planning contributing writer in Boston and Washington. Follow him on Twitter at @kecorb. Purpose-driven leadership in 2021

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006_FP0421 6 3/15/2021 12:31:13 PM IN PRACTICE Munn

retirement in March of last year, and quickly learned the important role we advisors have in leveraging media opportunities to educate and motivate clients and prospects. We all have the power to share our unique point of view that attracts the people who need to hear our message. We can create our own radio shows (podcasts) or television networks (YouTube) from our own homes. In 2020, we learned how this 5 lessons learned in 2020 was significant to our business by rolling up our The game changed, and there’s a lot we have learned that can sleeves and just doing it. potentially skyrocket our success through 2021. Be resilient By Chip Munn In 2020, I learned how resilient our families, clients, teams and the industry as a Last year was a test for many of us. The we communicate and collaborate to serve whole can be. The philoso- immense challenges and obstacles stretched our clients. Many companies were forced to pher Epictetus said, “Circum- the fabric of our lives. Consider these five close physical locations and figure out how stances don’t make the man; things learned in 2020 that I will continue to to be productive at home. What we found they reveal him.” carry with me to be a better advisor. out is that there are a multitude of ways (and I’m amazed at what last times) that people can be productive outside year’s experiences revealed, Be a strong leader of the typical 9-to-5 schedule. the sheer grit that surrounds During my conversations with clients over us. Whether it was medical the course of 2020, what they wanted most Use technology to provide options professionals on the front line was someone to help give them confidence, Online events, webinars, virtual office hours or kids, teachers and parents and perhaps more important, help them and advisory board meetings. You name it: adapting to virtual school, reframe their thinking and refocus on a path 2020 brought us other forms of engagement people just got it done. It forward. Sometimes our most valued advice to make sure face-time with clients was still wasn’t always pretty or easy, to clients is that which offers encouragement possible. And you know what? These innova- but we made it to the end of and direction, especially in uncertain times. tive solutions strengthened our connection 2020 and beyond. with clients. It’s easier than ever to provide Now our duty as financial Disrupt the workplace communication options using technology. advisors is to continue Last year was an overdue showcase for serving our clients, so they innovation and adaptation in the workplace. Become a broadcaster accumulate the wealth they A transformative change took place in how I launched my first client-facing book on deserve. FP

Chip Munn is the CEO and senior wealth advisor of Signature Wealth Group.

Financial-Planning.com April 2021 Financial Planning 7

007_FP0421 7 3/15/2021 12:38:36 PM IN PRACTICE Elzweig submitted the transfer paperwork in a timely fashion. By the time he got around to focusing on the transfer process, he’d lost many more assets than he had ever expected to.

The Stonewaller One long-tenured advisor at a major wirehouse was terminated by his firm. He’d already been interviewing with a prospective firm that was well-suited to his niche. When asked by this firm’s compliance department for a detailed explanation of his termination, he took the bad Advisors’ worst career errors advice of a celebrity attorney and stonewalled Arrogance, naiveté and procrastination can all undermine best- them. The firm passed on laid advancement plans. him.

By Mark Elzweig The Hamlets A commission-based advisor got a nice offer from a firm. In my 35 years as an executive recruiter, I’ve manager to join a high-producing team. He He delayed and delayed. seen many advisors make solid career was enticed by a small boost to his payout When he was finally ready to decisions that set them up for future success. and some extra dollars for T&E. His new accept, the firm had decided But then there were the advisors who made partners lost no time in trying to get to know it was no longer hiring some astounding mistakes. Here are a few his transactional clients to convert them to a heavily transactional that stand out. fee-based format. They even designated brokers. another team member to acquire his book. Other advisors got offers The Boaster The advisor needed to have a frank discus- in strong stock markets, when Once, the head of a team boasted to the sion and a written agreement with his clients are typically happy. branch manager at a prospective firm that prospective partners on a time frame for Some of these advisors he got his previous branch manager fired. maintaining his business model and his plans dillydallied and found From then on, the branch manager at the for retirement. He didn’t do this. themselves jumping ship in hiring firm feigned interest while covertly whipsawing or down markets. sabotaging the deal. There’s a difference Mr. Overconfident Their clients were then not between healthy self confidence and One advisor had changed independent nearly as loyal, hurting the grandiosity. broker-dealers and yet was strangely value of their deals. complacent about ensuring the success of The moral: If you’ve Didn’t sweat the details his move. He often expressed great confi- decided to move on, don’t An older advisor who’d always practiced solo dence that his client relationships were rock alienate your prospective was cajoled by his wirehouse branch solid, but couldn’t be bothered to ensure they manager — Just do it! FP

Mark Elzweig is president of Mark Elzweig Co., a New York-based recruiting firm placing financial advisors at wirehouses, regional firms and IBDs.

8 Financial Planning April 2021

008_FP0421 8 3/15/2021 12:42:59 PM It’s time to hear their voices Access Denied is a revolutionary podcast featuring more than two dozen professionals providing a comprehensive examination of institutional barriers and outright racism across many sectors of ﬁ nancial services.

FP0421.indd 9 3/16/2021 3:07:04 PM House ad_Access denied.indd 1 1/12/21 3:52 PM Industry News ALSO IN INDUSTRY NEWS: ALTERNATIVE INVESTMENT FINTECHS SOAR, P. 12 very high. Still, the group only answered an average of 1.4 out of five investment Race and ethnicity of retail brokerage investors in account owners. knowledge questions correctly, accord- While the researchers ing to the study. 2020 designed a representative By contrast, the holdover owners got White Black Latino Asian sample, the study doesn’t 1.8 out of five correct, on average, while 70% 70% 68% estimate the total number of the experienced entrants got 2.25. 60% 58% new investors. The experienced entrants — which 50% had the largest representation of For wealth Latinos — emerged as the most “savvy 40% managers, investors” of the three, based on their 30% brokerage scores and the fact that they tapped 20% account the benefits of creating a new account 17% 17% 15% 10% 13% owners remain alongside existing ones, says Angela 9% 9% 10% 7% 7% Fontes, director of NORC’s Behavioral 0% an untapped opportunity. and Economic Analysis and Decision- Holdover account owners Experienced entrants New investors making program. Source: FINRA Foundation and NORC, February 2021; 1,291 U.S. adults surveyed between Oct. 26 and Nov. 13 More than 10 million new Latinos also comprised a higher accounts opened in 2020 percentage of new investors than through six major discount holdover account owners. The retail investor wave: brokerages including The same was true of Black investors, Robinhood, Charles Schwab, who made up 17% of new investors An inside look Fidelity Investments and compared to 7% of experienced E-Trade, according to a entrants and holdover owners. different study in December At least 62% of new investors were More than one-third of U.S. brokerage clients opened their first by analyst Devin Ryan of 18 to 44 years old, while only 29% of accounts in 2020, according to new research. JMP Securities. holdover owners and 48% of experi- For wealth managers, the enced entrants were 44 or younger. By Tobias Salinger brokerage account owners “The No. 1 source for information is remain something of an friends and family for these new investors, untapped opportunity. In the wake of the GameStop short is low, but their confidence is not in many Only 48% of the holdover squeeze, a new study is shedding light on cases,” says Olivia Valdes, a researcher with account owners made their Investor type by age an influx of millions of new investors who the FINRA Foundation and one of the investment decisions after

could eventually turn into full wealth authors of the report. “So there’s a discon- speaking with financial New Investors 22% 40% 23% 16% management clients. nect in what they know and what they think professionals, with tapering Investors who opened brokerage accounts they know.” levels among the other two Experienced in 2020 are younger and more racially and NORC and the FINRA Foundation polled groups including just 23% of 20% 28% 25% 28% Entrants ethnically diverse than existing account 1,291 U.S. taxable account owners between the new investors, according holders, according to a study released Feb. 2 Oct. 26 and Nov. 13 and divided them into to the study by NORC and the Holdover by the FINRA Investor Education Foundation three groups: FINRA Foundation. And it’s Account 6% 23% 26% 45% Owners and a research institution called NORC at the 1. Investors who didn’t open any new the untried market entrants University of Chicago. brokerage accounts in 2020, who may most need the 0% 20% 40% 60% 80% 100%

But researchers are concerned that this 2. Existing investors who did open new guidance. 18-29 30-44 45-59 60+ burgeoning group of novice investors could ones, and, Of the new investors, 50% Source: FINRA Foundation and NORC, February 2021; 1,291 U.S. adults surveyed between Oct. 26 and make poor decisions and lose out on 3. Entirely new entrants. described their investment Nov. 13: long-term gains to their portfolios. The new investors comprised 38% of the knowledge as average, with “We see that their investment knowledge sample, with 43% of it coming from holdover 12% saying it was high or Tobias Salinger is a senior editor of Financial Planning. Follow him on Twitter at @TobySalFP.

10 Financial Planning April 2021 Financial-Planning.com

010_FP0421 10 3/15/2021 1:06:06 PM Industry News Industry News ALSO IN INDUSTRY NEWS: ALTERNATIVE INVESTMENT FINTECHS SOAR, P. 12 very high. and they’re about twice as likely as folks At the same time, more than a third Still, the group only answered an who are not new investors to use social of the entrants said their goal in average of 1.4 out of five investment media,” Fontes says. opening their brokerage account was to account owners. knowledge questions correctly, accord- learn about investing, notes Christine While the researchers ing to the study. Learning by doing? Lazaro, director of the Securities designed a representative By contrast, the holdover owners got One key finding of the study jibes Arbitration Clinic at the St. John’s sample, the study doesn’t 1.8 out of five correct, on average, while with wealth managers’ oft-stated University School of Law. estimate the total number of the experienced entrants got 2.25. aim to serve new generations of “The literacy level suggests that they new investors. The experienced entrants — which investors and to bring aboard more may not fully understand what they’re had the largest representation of clients in general. doing,” Lazaro says. “There’s a lot of For wealth Latinos — emerged as the most “savvy discussion right now about democratiz- managers, investors” of the three, based on their “The literacy level ing markets. The investor literacy angle brokerage scores and the fact that they tapped suggests that they may is the really important piece of this that account the benefits of creating a new account not fully understand doesn’t get discussed.” owners remain alongside existing ones, says Angela what they’re doing.” Since the most popular goal across an untapped Fontes, director of NORC’s Behavioral — Christine Lazaro, , the 1,300 investors for their taxable, opportunity. and Economic Analysis and Decision- director of the Securities non-retirement brokerage accounts making program. Arbitration Clinic at St. was retirement savings, FINRA More than 10 million new Latinos also comprised a higher John’s University School Foundation’s Director of Research Gary accounts opened in 2020 percentage of new investors than of Law Mottola says members of all three through six major discount holdover account owners. groups may not understand the tax brokerages including The same was true of Black investors, Black and Latino investors most often benefits of IRAs. Wealth managers Robinhood, Charles Schwab, who made up 17% of new investors cited being able to open accounts with a could make inroads with each group. Fidelity Investments and compared to 7% of experienced small amount of money as their reason “Getting reliable, credible informa- E-Trade, according to a entrants and holdover owners. for opening an account in 2020; indeed tion in front of these new investors different study in December At least 62% of new investors were it was the only one appearing in each of could go a long way towards ensuring by analyst Devin Ryan of 18 to 44 years old, while only 29% of the top 5 reasons among white, Black, that they’re not just investing now, but JMP Securities. holdover owners and 48% of experi- Latino and Asian-American investors. that they’re investing five and 25 years For wealth managers, the enced entrants were 44 or younger. Lower or nonexistent account from now,” Mottola says. brokerage account owners “The No. 1 source for information is minimums could be having their The study also showed that remain something of an friends and family for these new investors, intended effect of expanding the base. two-thirds of new entrants invested untapped opportunity. $2,000 or less, which means that they Only 48% of the holdover may not be at risk of falling into account owners made their Investor type by age financial straits if they lose it all, investment decisions after according to Mottola and Mark Lush, speaking with financial New Investors 22% 40% 23% 16% a behavioral scientist at NORC. professionals, with tapering In order to understand why they’re levels among the other two not working with wealth managers in Experienced groups including just 23% of 20% 28% 25% 28% large numbers, Lush suggests looking at Entrants the new investors, according their information sources. to the study by NORC and the “The friends and family are saying, Holdover FINRA Foundation. And it’s Account 6% 23% 26% 45% ‘Hey, you should begin investing,’ but Owners the untried market entrants they didn’t say, ‘Hey you should go talk who may most need the 0% 20% 40% 60% 80% 100% to a financial advisor about investing,’” guidance. 18-29 30-44 45-59 60+ Lush says. “Friends and family hold Of the new investors, 50% sway, but it’s what they’re recommend- Source: FINRA Foundation and NORC, February 2021; 1,291 U.S. adults surveyed between Oct. 26 and described their investment Nov. 13: ing that’s the big disconnect.” FP knowledge as average, with 12% saying it was high or Tobias Salinger is a senior editor of Financial Planning. Follow him on Twitter at @TobySalFP.

Financial-Planning.com April 2021 Financial Planning 11

011_FP0421 11 3/15/2021 1:30:00 PM Industry News

are struggling to find the attracted more than a dozen broker- same opportunities, and dealers, Schaeffer says: “The quest for there are high acquisition access to this asset class is insatiable.” costs to find, access, vet and Alto IRA, which provides a network approve an alternative of alt providers for investors to put investment for a client, self-directed retirement account Noll says. assets into anything from real estate Automation that eases that and private equity to cryptocurren- process is drawing interest cies, has raised $16.8 million since across the wealth industry. In 2017. The company is currently February, JPMorgan Chase building relationships with large RIAs invested an undisclosed and expects to cross $500 million in amount into Zanbato, a assets under custody in the third fintech startup that lets quarter, according to Alto IRA founder investors trade shares of and CEO Eric Satz. pre-IPO companies. InvestX, a Advisors in particular have interest in Zanbato competitor with a access to crypto, private equity and focus on broker-dealers, has venture capital, and a platform like Alto Alternative investment raised $2.1 million in funding IRA helps them perform due diligence since launching 5 years ago, for clients on investment opportunities, fintechs soar according to Crunchbase. Satz says “Robo advisors have pretty signifi- New entrants are gaining traction while established players “There is real cantly put the writing on the wall for strong interest in the financial advisor community that if continue to grow. helping advisors you don’t figure out how to differentiate your service offering over the next By Ryan W. Neal allocate more assets to decade, you’re going to die,” he says. alternatives.” “Can you help them with due diligence Advisor demand for investments they can’t fintech as advisors struggle to help clients — AIX CEO Joe on this particular alternative investment find on public stock exchanges is creating invest in assets that aren’t correlated to Ujobai opportunity?” new opportunities for fintech companies. rising stock markets. It remains to be seen if these firms Alternative Investment Exchange (AIX), a “There is real strong interest in helping Venture capital is can get significant traction with digital marketplace for alternative invest- advisors allocate more assets to allowing firms to remain advisors. Two companies, iCapital ment transactions, kicked off March by alternatives, but there is a reputation that it’s private for far longer than Network and CAIS, have already grown announcing a partnership with independent not an easy thing to do,” Ujobai says. “Advisors they traditionally would, quite large by offering RIAs and broker-dealer Kalos Financial. AIX will don’t expect the market to be [going up] and venture-backed firms independent broker-dealers access to provide Kalos’ advisors with a paperless, forever. They’re working to get more education were valued at more than alternative investments. Turbotax-like “point and click” experience on how alts fit into client portfolios.” $2 trillion last year, accord- iCapital raised $162 million in 2020 that reduces the time it takes to invest in The coronavirus has also proven to be a ing to CNBC. Advisors who from firms like Goldman Sachs, alternatives from weeks down to minutes, catalyst for the growth of digital alts cannot provide access to BlackRock, UBS, BNY Mellon and Wells says Brad West, COO of AIX. platforms. Prior to the pandemic, the pre-IPO trading are going Fargo. This year, the company acquired Kalos declined to comment, but the deal alternative investing industry was reliant to start losing assets from AI Insight, a digital education and is a win for AIX, which went public in 2019 on in-person meetings, says Eric Noll, CEO their biggest clients, says compliance platform, and launched after building the technology for years in a of Context Capital Partners, a holding Brian Schaeffer, managing AltsEdge to help educate advisors on fintech incubation program. The company company that launched a technology director of business how alts can fit into client portfolios. has a similar partnership with Independent platform, Context 365, to aid in the development at InvestX. Meanwhile, CAIS, which has its own Financial Partners, says CEO Joe Ujobai. research and discovery process for alterna- Since the Canadian AI-powered learning system called CAIS The deal also speaks to the current tive investments. company moved into the

BLOOMBERG NEWS BLOOMBERG momentum behind alternative investing Without live events, independent advisors U.S. a few months ago, it’s Ryan W. Neal is technology editor at Financial Planning. Follow him on Twitter at @RyanWNeal.

12 Financial Planning April 2021 Financial-Planning.com

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are struggling to find the attracted more than a dozen broker- IQ, added a $50 million equity invest- same opportunities, and dealers, Schaeffer says: “The quest for ment from holding company Eldridge in there are high acquisition access to this asset class is insatiable.” 2020. The company brought in more costs to find, access, vet and Alto IRA, which provides a network than $300 billion in network assets by approve an alternative of alt providers for investors to put getting advisors to select CAIS as their investment for a client, self-directed retirement account alternative investment platform of Noll says. assets into anything from real estate choice, including mandates from Automation that eases that and private equity to cryptocurren- Northwestern Mutual, Truist and process is drawing interest cies, has raised $16.8 million since National Securities, according to Matt across the wealth industry. In 2017. The company is currently Brown, founder and CEO of CAIS. February, JPMorgan Chase building relationships with large RIAs Executives from both companies say invested an undisclosed and expects to cross $500 million in 2020 was a record year for growth as amount into Zanbato, a assets under custody in the third market volatility drove advisors to seek fintech startup that lets quarter, according to Alto IRA founder diversification away from equity It’s only natural for more players to enter the space, says iCapital CEO Lawrence Calcano. investors trade shares of and CEO Eric Satz. markets. pre-IPO companies. InvestX, a Advisors in particular have interest in that have just a transaction engine will Zanbato competitor with a access to crypto, private equity and “The issues in struggle. The key to success is a focus on broker-dealers, has venture capital, and a platform like Alto experience and friction marketplace approach and trusted raised $2.1 million in funding IRA helps them perform due diligence have never really been relationships with advisors, asset since launching 5 years ago, for clients on investment opportunities, addressed,” — AIX managers and a broad spectrum of according to Crunchbase. Satz says COO Brad West custodians, Brown says. “Robo advisors have pretty signifi- AIX has built connections with 10 “There is real cantly put the writing on the wall for Given the opportunity in helping different custodians as well as four strong interest in the financial advisor community that if independent advisors more easily transfer agencies for alternative helping advisors you don’t figure out how to differentiate access alts, it’s only natural for more assets that are non-custodied, West allocate more your service offering over the next players to enter the space, says iCapital says. The company sees plenty of assets to decade, you’re going to die,” he says. CEO Lawrence Calcano. And with room to grow by working with RIAs alternatives.” “Can you help them with due diligence fintechs taking different approaches to who serve a more mass affluent client — AIX CEO Joe on this particular alternative investment the market, there is room for larger base and by letting broker-dealer Ujobai opportunity?” firms like iCapital to partner with a clients like Kalos determine which It remains to be seen if these firms startup rather than compete directly, products advisors can access, as Venture capital is can get significant traction with Calcano adds. opposed to iCapital’s and CAIS’s allowing firms to remain advisors. Two companies, iCapital Of course, there could also be approach of curating a list of ap- private for far longer than Network and CAIS, have already grown acquisition opportunities. In May, iCapital proved investments. they traditionally would, quite large by offering RIAs and acquired Artivest, one of its biggest rivals, The company is also confident its and venture-backed firms independent broker-dealers access to for an undisclosed amount. technology can offer advisors a better were valued at more than alternative investments. “What are they trying to build? There digital experience than competitors. $2 trillion last year, accord- iCapital raised $162 million in 2020 are real differences between what [new “When you get past the marketing ing to CNBC. Advisors who from firms like Goldman Sachs, entrants] are trying to offer,” Calcano and press releases, the issues in experi- cannot provide access to BlackRock, UBS, BNY Mellon and Wells says. “iCapital has spent our time ence and friction have never really been pre-IPO trading are going Fargo. This year, the company acquired building a robust technology platform addressed,” West says. “The industry to to start losing assets from AI Insight, a digital education and [that’s] configured differently in terms date has been focusing on wealth and their biggest clients, says compliance platform, and launched of assets and value and service that we asset managers, but there’s a lack of Brian Schaeffer, managing AltsEdge to help educate advisors on provide to our customers.” understanding and investment in director of business how alts can fit into client portfolios. Brown is encouraged by new connecting to transfer agents or development at InvestX. Meanwhile, CAIS, which has its own technology innovation in the alterna- custodians. We’re building that whole Since the Canadian AI-powered learning system called CAIS tives space, but says wealthtech firms connectivity across all parties.” FP company moved into the U.S. a few months ago, it’s Ryan W. Neal is technology editor at Financial Planning. Follow him on Twitter at @RyanWNeal.

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Schottenstein and Avi ties, he worked at Morgan Stanley and Schottenstein. Citigroup. He isn’t currently registered Jonathan Brennan, a with FINRA. lawyer for the two grandsons Evan’s brother Avi Schottenstein at Maynard Cooper & Gale in worked as a J.P. Morgan Securities broker New York, says in a statement from 2014 to July 23, 2019, according to that his clients “are deeply BrokerCheck. Avi, also no longer disappointed by the result and FINRA-registered, previously worked for believe it is not justified by the Morgan Stanley. Both grandsons worked facts or the law.” His state- out of J.P. Morgan Securities’ headquar- ment adds that the award “is ters on Park Ave. in New York. inconsistent with the substan- In all, the grandsons allegedly made tial evidence presented at the more than 360 unauthorized trades, hearing which showed that generating hefty commissions for over the entire time Evan themselves. As part of trading invest- Schottenstein served as his ments without their grandmother’s Beverley Schottenstein, right, and her granddaughter Cathy Schottenstein Pattap in Bal Harbour, Florida. grandmother’s financial permission, the grandsons also off-load- advisor, Mrs. Schottenstein’s ed a “legacy position” that Schottenstein accounts profited by more held in Big Lots, a Schottenstein empire Grandma wins case against than $30 million.” investment, worth around $52 million, The statement also says says Scott Ilgenfritz, a lawyer for the J.P. Morgan and grandsons that “given the extensive matriarch at Johnson Pope Bokor contact between Mrs. Ruppel & Burns in Tampa, Florida. Schottensein and her Beverley Schottenstein, 94, resides in Beverley Schottenstein accused the bank and brokers of grandson (over 2,400 calls the wealthy enclave of Bal Harbour, unauthorized trading, among other alleged misconduct. while at J.P. Morgan), the Florida. She inherited her late hus- evidence overwhelmingly band’s 25% stake in the family empire By Lynnley Browning suggests that Mrs. Schotten- but later sold it to one of his brothers, stein’s account was invested in Ilgenfritz says. Evan first persuaded his full accordance with her grandmother to become his client in A wealthy grandmother won a $19 million Outfitters, American Signature Furniture, wishes.” It concludes by saying 2006, when he was at Citigroup, arbitration award against J.P. Morgan more than four dozen shopping centers, that the grandsons’ lawyers according to her attorney. Securities and two former brokers — her several shoe and furniture factories and are “considering a motion to Ilgenfritz claims the two brothers had grandsons — over alleged unauthorized grocery chain Albertson’s Companies, vacate” the FINRA ruling. created and used a fictitious email trading in her accounts. among other holdings, according to A spokesperson for J.P. account for their grandmother to The ruling came 18 months and 43 business data company Dun & Bradstreet. Morgan Securities did not “receive” documents disclosing the hearing sessions after retail matriarch Schottenstein alleged that while working respond to requests for trades in her J.P. Morgan Securities Beverley Schottenstein filed claims against as financial advisors at J.P. Morgan immediate comment. account. Only the matriarch “never got the firm and her grandsons for alleged Securities, her two grandsons engaged in Evan Schottenstein worked the documents, because she’s not on abuse of fiduciary duty, fraudulent misrep- unauthorized trading of “multiple auto- at J.P. Morgan Securities as a the computer,” the attorney says. Her resentations and omissions and other callable structured notes and various other broker from 2014 to June 27, account was a non-discretionary misconduct. A panel of three FINRA securities” for which J.P. Morgan Securities 2019, when he was dis- account, meaning that a broker has to arbitrators ruled in her favor Feb. 5, accord- was a market maker, “including Apple charged over “concerns get an investor’s permission before ing to the arbitration award. stock, as well as initial public offerings relating to trading activity for making trades. Schottenstein’s late husband and his (IPOs) and follow-on offerings (FPOs),” the account of a family He says his client first suspected the brothers developed a retail empire that according to the arbitration award. The member,” according to a note alleged misconduct around August became Schottenstein Stores Corp. and alleged unauthorized trading in her the bank entered into his 2018, when she realized she hadn’t been later grew to include stakes in shoe retailer account purportedly generated hefty FINRA BrokerCheck record.

BLOOMBERG NEWS BLOOMBERG DSW, clothing chain American Eagle commissions for the two grandsons, Evan Prior to J.P. Morgan Securi- Lynnley Browning is a Reporter for Financial Planning. Follow her on Twitter at @BrowningLynnley.

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Schottenstein and Avi ties, he worked at Morgan Stanley and receiving paper statements. “She Morgan Securities put a temporary Schottenstein. Citigroup. He isn’t currently registered started to get suspicious,” he says. freeze on her account. The bank lifted Jonathan Brennan, a with FINRA. In December 2018, a granddaugh- the freeze after about two weeks lawyer for the two grandsons Evan’s brother Avi Schottenstein ter who was visiting used Schotten- passed, and the transfer was completed at Maynard Cooper & Gale in worked as a J.P. Morgan Securities broker stein’s J.P. Morgan Securities credit around the end of that month, accord- New York, says in a statement from 2014 to July 23, 2019, according to card to log in to the matriarch’s ing to Ilgenfritz. that his clients “are deeply BrokerCheck. Avi, also no longer account. The granddaughter saw Schottenstein’s claim, filed on July disappointed by the result and FINRA-registered, previously worked for “very alarming” trades, including for a 24, 2019, was handled remotely via believe it is not justified by the Morgan Stanley. Both grandsons worked $150 million position in derivatives Zoom by a FINRA panel in Boca Raton, facts or the law.” His state- out of J.P. Morgan Securities’ headquar- known as auto-callable structured Florida. Fees for the 43 hearing sessions ment adds that the award “is ters on Park Ave. in New York. notes, and told her grandmother, for the claim totaled $64,500; the panel inconsistent with the substan- In all, the grandsons allegedly made according to Ilgenfritz. ordered the bank and Evan Schotten- tial evidence presented at the more than 360 unauthorized trades, The matriarch had been revising her stein to pay the fees. hearing which showed that generating hefty commissions for estate planning documents in prior The $19 million arbitration award is over the entire time Evan themselves. As part of trading invest- months, and, after seeing the suspicious FINRA’s largest since October 2018, a Schottenstein served as his ments without their grandmother’s trades, she wrote a five-page amend- spokesperson for the regulator said. grandmother’s financial permission, the grandsons also off-load- ment to her will and trust that accused Schottenstein had initially requested at advisor, Mrs. Schottenstein’s ed a “legacy position” that Schottenstein her grandsons of “taking over her least $10 million in compensatory accounts profited by more held in Big Lots, a Schottenstein empire financial affairs and keeping her in the damages, punitive damages of three than $30 million.” investment, worth around $52 million, dark,” Ilgenfritz says. He declined to times that amount, disgorgement by J.P. The statement also says says Scott Ilgenfritz, a lawyer for the comment when asked if she had cut Morgan Securities of all trading revenues that “given the extensive matriarch at Johnson Pope Bokor them out of her will. and commissions and reimbursement of contact between Mrs. Ruppel & Burns in Tampa, Florida. “Evan was by far the predominant various legal fees. She later upped her Schottensein and her Beverley Schottenstein, 94, resides in person in trading activity,” Ilgenfritz request for compensatory damages to grandson (over 2,400 calls the wealthy enclave of Bal Harbour, says, although “Avi got a share of the more than $69 million. while at J.P. Morgan), the Florida. She inherited her late hus- revenue” from allegedly unauthorized As part of the award, the arbitration evidence overwhelmingly band’s 25% stake in the family empire trades through a partnership he panel ordered J.P. Morgan Securities to suggests that Mrs. Schotten- but later sold it to one of his brothers, formed with his brother in May 2016. rescind the grandsons’ investment of stein’s account was invested in Ilgenfritz says. Evan first persuaded his Through the partnership, which their grandmother’s money in a private full accordance with her grandmother to become his client in handled the matriarch’s account and equity fund run by Coatue Manage- wishes.” It concludes by saying 2006, when he was at Citigroup, which J.P. Morgan Securities would ment. It also ordered the bank and that the grandsons’ lawyers according to her attorney. have known of and approved, Evan Schottenstein to each pay one are “considering a motion to Ilgenfritz claims the two brothers had according to Ilgenfritz, Evan got 80% half of the grandmother’s legal fees in vacate” the FINRA ruling. created and used a fictitious email of the revenues, while Avi got 20%. the case. And the panel denied Avi A spokesperson for J.P. account for their grandmother to Overall, Schottenstein’s account Schottenstein’s request to have his Morgan Securities did not “receive” documents disclosing the generated gross revenues of FINRA records expunged. respond to requests for trades in her J.P. Morgan Securities $3,885,430, through commissions, The Schottenstein family was once immediate comment. account. Only the matriarch “never got selling concessions and IPO-related on the Forbes 400 wealthiest Ameri- Evan Schottenstein worked the documents, because she’s not on and other fees. cans list, with a net worth of $2.7 at J.P. Morgan Securities as a the computer,” the attorney says. Her Around February 2019, the grand- billion in mid-2015, but has since broker from 2014 to June 27, account was a non-discretionary daughter mailed to the bank the dropped off. Family members involved 2019, when he was dis- account, meaning that a broker has to handwritten amendment accusing the in the private company, run by charged over “concerns get an investor’s permission before two brokers of wrongdoing, according third-generation family member Jay relating to trading activity for making trades. to Ilgenfritz. That month, Schottenstein Schottenstein and based in Columbus, the account of a family He says his client first suspected the attempted to transfer the bulk of her J. Ohio, have allegedly been feuding over member,” according to a note alleged misconduct around August P. Morgan Securities assets to an money and assets for years, the the bank entered into his 2018, when she realized she hadn’t been account at Goldman Sachs, but J. P. magazine wrote. FP FINRA BrokerCheck record. Prior to J.P. Morgan Securi- Lynnley Browning is a Reporter for Financial Planning. Follow her on Twitter at @BrowningLynnley.

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chief compliance officer at compliance retraining. tru Independence, a service provider for independent All or nothing RIAs. The extent to which firms embrace “The most exciting thing social media or any of the other about these new rules is that changes included in the long-awaited we will be able to promote update of the advertising rule remains the testimonials, but more to be seen. importantly our performance Even if the impact of the new numbers,” Sizemore says. marketing rule will be profound, it will also be gradual. “The most The regulation will take effect 60 exciting thing days from the date it appears in the about these new Federal Register. rules is that we (The SEC did not immediately will be able to respond to a question on when the rule promote the might appear in the Federal Register.) Big firms likely to benefit testimonials.” — Then, advisors will have 18 months Stacy Sizemore, before they are required to comply chief compliance with the new regulation, though they from SEC ad rule update are permitted to update their advertis- officer at tru ing programs before that date, which Independence Those with the resources to sort through compliance thickets some firms likely will do once the SEC may be better positioned for the long-awaited changes. Included in the rule is comes out with new materials to help some welcome guidance By Kenneth Corbin around social media, affirming that advisors will generally not be held The SEC’s update to its decades-old expand their online footprint are not going accountable for how their advertising rule could profoundly change to take advantage,” he says. posts are shared or liked the way advisors promote their firms and “I think being able to go out there and — so long as the firms connect with prospective clients — particu- actively reach prospective clients in the themselves aren’t tipping the larly when it comes to direct advertising. ultrahigh-net-worth space on a direct basis scale by selectively altering But in the process, the rule could further online is going to be a game changer for or deleting content. advantage bigger firms at the expense of us,” Rolph continues. “I think you’re going to The SEC also recom- smaller ones. see a lot more money flow into direct mends that firms revisit their “What this does now is I think for these marketing, especially online direct market- policies around social media, larger firms is it kind of opens up the ing. I think the biggest change is going to including enacting a firewall floodgates for direct marketing to become a be on social media.” between employees’ primary part of the client acquisition The commission also opened the door to personal accounts and the process,” says Duncan Rolph, managing firms including client testimonials and paid firm’s marketing activities. partner at Miracle Mile Advisors, a $2 endorsements in their marketing materials, Sizemore’s firm is already billion-AUM RIA in Los Angeles. as well as an objective presentation of exploring how it can Rolph anticipates a gradual shift away performance data. incorporate the new from the nearly complete reliance many firms provisions in the SEC’s rule to place on referrals to bring in new clients. No dings for ‘likes’ help advisors enhance their

“I think there’s going to be some real Including previously off-limits testimonials in marketing efforts, an WILSON JARED “It does open up additional opportunities,” says Inspired Financial President Evelyn Zohlen. winners and losers because the firms that advisors’ marketing activities will be a “huge initiative she acknowledges

BLOOMBERG NEWS BLOOMBERG don’t have the resources or the acumen to step forward,” according to Stacy Sizemore, will require considerable Kenneth Corbin is a Financial Planning contributing writer in Boston and Washington. Follow him on Twitter at @kecorb.

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chief compliance officer at compliance retraining. firms digest the marketing rules. compliance teams working overtime to tru Independence, a service “No one’s doing anything until the sort through the 430 pages of the provider for independent All or nothing rule takes effect,” Rolph says. “We’re updated rule, another factor that could RIAs. The extent to which firms embrace all assuming there’s going to be put smaller firms at a disadvantage “The most exciting thing social media or any of the other additional guidance that comes along with their larger rivals. about these new rules is that changes included in the long-awaited with this.” “It does open up additional we will be able to promote update of the advertising rule remains opportunities, but the vigilance of the testimonials, but more to be seen. “No one’s doing making sure you’re complying has not importantly our performance Even if the impact of the new anything until the been reduced,” says Evelyn Zohlen, numbers,” Sizemore says. marketing rule will be profound, it will rule takes effect.” president of Inspired Financial, an RIA also be gradual. — Duncan Rolph, based in Huntington Beach, Califor- “The most The regulation will take effect 60 managing partner, nia. “As the chief compliance officer exciting thing days from the date it appears in the Miracle Mile Advisors for my firm, I still need to be very about these new Federal Register. vigilant about this.” rules is that we (The SEC did not immediately The SEC has also stipulated that will be able to respond to a question on when the rule firms cannot pick and choose which ‘Friends, family and dog’ promote the might appear in the Federal Register.) parts of the rule they want to adopt; if Many of the provisions of the new rule, testimonials.” — Then, advisors will have 18 months a firm takes advantage of one provi- such as those inviting advisors to Stacy Sizemore, before they are required to comply sion in the rule, it must implement the promote their practices with client chief compliance with the new regulation, though they whole package. testimonials and paid endorsements, are permitted to update their advertis- That means that firms looking to carry significant disclosure requirements. officer at tru ing programs before that date, which expand their social media presence or So, too, do the provisions around Independence some firms likely will do once the SEC embrace new permissions on endorse- third-party ratings. Included in the rule is comes out with new materials to help ments and testimonials will have their Compliance experts caution that some welcome guidance the SEC will expect advisors to around social media, conduct their own due diligence and affirming that advisors will ensure that they are presenting generally not be held meaningful rankings and not engaging accountable for how their in the type of behavior that has posts are shared or liked challenged consumer-generated — so long as the firms ratings systems since they first themselves aren’t tipping the appeared on the internet. scale by selectively altering Christine Gaze, managing partner at or deleting content. the Purpose Consulting Group, envi- The SEC also recom- sions a scenario where unscrupulous mends that firms revisit their advisors are “having their friends, family policies around social media, and dog” post favorable reviews in an including enacting a firewall effort to game the ratings sites. between employees’ “I think it’s going to open the door personal accounts and the for — unfortunately — salacious, firm’s marketing activities. terrible things on the one hand,” Gaze Sizemore’s firm is already says. “But the idea that there would be exploring how it can some objective rating system, that there incorporate the new would be a way to compare and provisions in the SEC’s rule to contrast financial advisors that’s done help advisors enhance their in a way that’s [fair] — that’s just long

marketing efforts, an WILSON JARED “It does open up additional opportunities,” says Inspired Financial President Evelyn Zohlen. needed.” FP initiative she acknowledges will require considerable Kenneth Corbin is a Financial Planning contributing writer in Boston and Washington. Follow him on Twitter at @kecorb.

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Martin, his son Wade, his of employment for any reason, employ- grandson Zachary, and Brett ee may solicit and attempt to solicit, Scharf — joined Morgan directly or indirectly, those customers Stanley from UBS in 2010. whom he/she serviced prior to employ- Arthur Martin, who had been ment with” Morgan Stanley. The with UBS and predecessor employment agreement was filed in firm PaineWebber since 1976, federal court as part of the litigation says he was reluctant to between the two sides. change firms, but was Attorneys not affiliated with the case convinced to do so after praised the Martin team’s foresight in Morgan Stanley promised securing the carve-out in the first place. that his existing client “These guys had good [legal] relationships would belong counsel, whoever did this for them,” to him. says Ross Intelisano, founding partner “We were told by Morgan of law firm Rich, Intelisano & Katz. Stanley that we ‘owned’ the client relationships. Further, Carve-outs becoming common with the support of Morgan At the time the Martin team moved to Morgan Stanley, RBC tangle Stanley senior legal counsel, Morgan Stanley, the firm was still a we were told that no other member of the Broker Protocol, an over $600M of client assets Morgan Stanley advisors industrywide pact that permits advisors would solicit, contact, or to take basic client contact information The dispute highlights the complex nature of non-solicitation service our clients if we ever with them when switching employers. carve-outs when advisors switch firms. left the firm in the future and Morgan Stanley and UBS left the that we ‘owned our book of protocol in 2017. Morgan Stanley has By Andrew Welsch business and relationships,’” since sued some departing advisors, Arthur Martin says in a legal alleging they violated non-solicitation filing. agreements. A one-paragraph amendment to an employ- light on the importance of exceptions that The Martin team got that Though carve-out clauses have ment contract signed a decade ago may allow advisors to hold onto clients they promise in writing. existed for years, they are becoming help a former $600 million Morgan Stanley brought to a firm if they later leave. A The Morgan Stanley more common today, industry insiders team retain their clients after they left to carve-out for pre-existing client relationships financial advisor employ- say. work for RBC. may be becoming a more common request ment agreement the team “These are more standard in the The amendment’s wording is playing a in recruiting deals, lawyers say. And it could signed Aug. 19, 2010 states business for non-protocol firms to make key role in ongoing litigation between the play a role in preventing legal disputes from that for a period of one year the advisors comfortable that, so long wirehouse and the advisors, who parted arising or, in this case, resolving them in following termination of as they pay their [promissory] note off, ways with Morgan Stanley in October. advisors’ favor. employment, advisors may they can take the clients that they Morgan Stanley claims in legal filings that “If I was representing a group that was not solicit any Morgan brought in. It gives them agency,” the team has violated non-solicitation getting ready to leave a large firm, I would Stanley customers “who were Intelisano says. agreements. The advisors contend that tell them that unless your next employer will serviced by you, or whose Carve-outs are even being sought by they’ve only contacted clients covered by a agree to a carve out, I’m not going to names became known to teams moving to protocol firms so-called “carve-out” clause to their employ- recommend you go there,” says Bill Singer, you, while in the employ of” because, as insiders note, who knows ment agreement, which permits them to an attorney not affiliated with this case. the firm. what the future holds. Firms merge, solicit clients that they brought to Morgan Morgan Stanley and the advisors’ The amendment, or office cultures change, branch manag- Stanley from a prior employer. attorney, Tom Lewis of law firm Stevens & carve-out, secured by the ers get replaced, and brokerages can “The customers rightfully belong to the Lee, declined to comment. Martin team overrides that leave the protocol with short notice. Martin Team,” the advisors’ legal filing states. standard language. The Mar- Advisors and teams with bigger AUM The dispute, which has moved from ‘If we ever left the firm’ tin team added wording that

BLOOMBERG NEWS BLOOMBERG federal court to FINRA arbitration, shines a The Martin team — composed of Arthur states that “upon termination Andrew Welsch is managing editor of Financial Planning. Follow him on Twitter at @AndrewWelsch.

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Martin, his son Wade, his of employment for any reason, employ- and production are more likely to which are not named in legal docu- grandson Zachary, and Brett ee may solicit and attempt to solicit, secure a carve-out as part of the ments, have told Morgan Stanley that Scharf — joined Morgan directly or indirectly, those customers recruiting process, experts say. they have been contacted by the Stanley from UBS in 2010. whom he/she serviced prior to employ- “They’re like prenuptials. Most people advisors. The firm also contends that Arthur Martin, who had been ment with” Morgan Stanley. The who get married don’t have a prenup. one of the advisors, who joined the with UBS and predecessor employment agreement was filed in Who does? Wealthy people,” Singer team after it moved to Morgan Stanley, firm PaineWebber since 1976, federal court as part of the litigation says. has solicited clients and is not protect- says he was reluctant to between the two sides. ed by the carve-out clause. change firms, but was Attorneys not affiliated with the case ‘A good reputation’ Morgan Stanley further claims that convinced to do so after praised the Martin team’s foresight in Of course, having a carve-out provision one of the advisors emailed a client Morgan Stanley promised securing the carve-out in the first place. doesn’t protect an advisor from facing presentation to himself, and that the that his existing client “These guys had good [legal] legal action. The Martins’ carve out, firm has demanded this be returned to relationships would belong counsel, whoever did this for them,” and others like it, require repayment of Morgan Stanley if the advisor still has it. to him. says Ross Intelisano, founding partner outstanding promissory notes. Attor- For their part, the advisors deny the “We were told by Morgan of law firm Rich, Intelisano & Katz. neys also note it’s not a get-out-of-jail allegations, asserting in their legal Stanley that we ‘owned’ the free card; advisors can’t take confiden- filings that they have not solicited any client relationships. Further, Carve-outs becoming common tial company documents with them clients that they are not permitted to with the support of Morgan At the time the Martin team moved to when they walk out the door, for solicit. Stanley senior legal counsel, Morgan Stanley, the firm was still a instance. Clients covered by the agreement we were told that no other member of the Broker Protocol, an Morgan Stanley filed its legal comprise approximately 80% of their Morgan Stanley advisors industrywide pact that permits advisors complaint against the Martin team in book of business, according to the would solicit, contact, or to take basic client contact information January, about three months after the team. They also say Morgan Stanley service our clients if we ever with them when switching employers. team had left Oct. 2 to join RBC in has been telling clients that Arthur left the firm in the future and Morgan Stanley and UBS left the Princeton, New Jersey. Martin retired from the business. that we ‘owned our book of protocol in 2017. Morgan Stanley has When the team worked at Morgan “I have worked very hard to establish business and relationships,’” since sued some departing advisors, Stanley, they managed about $600 an excellent reputation in the commu- Arthur Martin says in a legal alleging they violated non-solicitation million in client assets and generated nity and my profession. ... A good filing. agreements. $6 million in annual revenue, according reputation is critical to a financial The Martin team got that Though carve-out clauses have to Morgan Stanley’s lawsuit filed in advisor’s livelihood, and thus critical to promise in writing. existed for years, they are becoming federal court in New Jersey. my family, my team and me,” Arthur The Morgan Stanley more common today, industry insiders About $200 million of client assets Martin says in a court filing. financial advisor employ- say. had transferred to RBC by early After a judge granted Morgan ment agreement the team “These are more standard in the January, according to Morgan Stanley. Stanley a temporary restraining order signed Aug. 19, 2010 states business for non-protocol firms to make Among other claims, the wirehouse Jan. 22, the dispute moved to FINRA that for a period of one year the advisors comfortable that, so long says that the day after the Martin team arbitration where a panel of three following termination of as they pay their [promissory] note off, resigned, Saturday, Oct. 3, “many and arbitrators will hear both sides’ claims employment, advisors may they can take the clients that they perhaps most of the over 300 client and evidence. In the meantime, other not solicit any Morgan brought in. It gives them agency,” relationships” served by the advisors advisors may contemplate the value of Stanley customers “who were Intelisano says. received mailings from the group. That a carve-out clause for their existing serviced by you, or whose Carve-outs are even being sought by same day attorneys representing client relationships. names became known to teams moving to protocol firms Morgan Stanley sent a letter to the “If you’re an advisor thinking of you, while in the employ of” because, as insiders note, who knows Martin team’s legal counsel demanding moving, a carve-out clause for your the firm. what the future holds. Firms merge, that the Martin team not violate their current clients is something you should The amendment, or office cultures change, branch manag- non-solicitation agreements. pursue very hard. It’s an important tool carve-out, secured by the ers get replaced, and brokerages can Morgan Stanley claims this and to give you the agency to leave, pay off Martin team overrides that leave the protocol with short notice. other letters went unanswered. The your note and still be able to keep your standard language. The Mar- Advisors and teams with bigger AUM wirehouse claims that a few clients, book,” Intelisano says. FP tin team added wording that states that “upon termination Andrew Welsch is managing editor of Financial Planning. Follow him on Twitter at @AndrewWelsch.

Financial-Planning.com April 2021 Financial Planning 19

019_FP0421 19 3/15/2021 1:06:28 PM Industry News Betterment buys Canadian robo’s U.S. book of business The first deal under CEO Sarah Levy will net the firm 17,000 accounts and $190 million in client assets.

By Ryan W. Neal

Canadian robo advisor Wealthsimple manages about $8 billion ($10 billion is calling it quits in the U.S. in Canadian dollars) for Canadian The company, which raised $87 clients. million in October to accelerate Despite significant growth in growth toward an initial public Canada — Katchen boasts that during offering, has sold its U.S. advisory busi- the first half of 2020, 18% of new ness to rival robo Betterment. brokerage accounts in Canada were Wealthsimple manages roughly opened at Wealthsimple — the firm $190 million across 17,000 accounts in has struggled to gain a foothold in the the U.S., says Betterment vice presi- more competitive U.S. robo advice dent of communications Joe Ziemer. market, says David Goldstone, Betterment manages $18 billion manager of research and analytics at across 660,000 accounts, according to Backend Benchmarking. its SEC filing. “This stark difference in adoption Terms of the deal were not dis- between the two markets helps explain closed. Wealthsimple did not respond why Wealthsimple sold its U.S. assets to requests for comment. and is focusing on the Canadian It is the first time Betterment has market,” Goldstone says in an email. acquired another firm’s book of Betterment will not acquire any of business, and marks the first deal Sarah Levy.took over as CEO of Betterment after Wealthsimple’s technology, employees under new CEO Sarah Levy, who took founder Jon Stein stepped down in December. or operations. over when founder Jon Stein stepped secure a better financial future,” Levy Wealthsimple will continue to down in December. said in a statement. “This was an operate its Brooklyn office and “We first took a look while Jon was excellent opportunity for us to grow reassign the majority of U.S. staff to still at the helm and Sarah was our customer base, and we’ll continue the Canadian business, Business advising the company, but this was to be aggressive in opportunities that Insider reports. something that Sarah signed off on in accelerate our business goals.” Wealthsimple’s latest round of her first few weeks as CEO,” Ziemer Wealthsimple accounts will be funding valued the company at $1 says in an email. transitioned to Betterment by June. billion, according to Bloomberg. Like Wealthsimple, Levy has plans The company alerted its users Thurs- The investment will help the firm for a Betterment IPO, according to day morning. build out cash, checking, insurance previous statements, and the acquisi- Wealthsimple co-founder and CEO and mortgage products to turn tion is an efficient growth driver, Michael Katchen considered several Wealthsimple into customers’ primary Ziemer adds. potential buyers for the business, financial institution, Katchen said at “We are excited to bring these according to Business Insider. the time. customers on board and help them The Toronto-based company still Just not for U.S. customers. FP

Ryan W. Neal is technology editor at Financial Planning. Follow him on Twitter at @RyanWNeal.

20 Financial Planning April 2021

020_FP0421 20 3/15/2021 1:06:32 PM More than a resource — your ally for advancement

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FP0421.indd 21 3/16/2021 3:07:04 PM House Ads 2021-Subscription_011221.indd 5 2/16/21 10:00 AM Small custodians, big business

After the Schwab-TD merger, rival firms are reaching for new business opportunities. Is David sprinting past Goliath?

By Jessica Mathews

dvisor Sheila Padden never had unprecedented volume and net new assets, a complaint with Charles smaller custodial competitors see an opportunity Schwab, her custodian of five to attract financial advisors joining the RIA years. That is, until last year. channel, or, in some cases, unhappy firms looking Padden doesn’t have her own to move their books of business. client service team and relies on There are more than a dozen small players in Aone of Schwab’s call centers. It has historically the RIA custody marketplace. They range from been responsive; the company “tends to run a self-clearing firms to trust companies to front-end pretty tight ship,” she says. Around November, custodians sitting on top of third-party clearing that started to change. platforms. While these players may be “I had to just be prepared to be on hold for 45 overshadowed by Schwab’s sheer size — the minutes,” Padden says. “If I didn’t have the time, company serves 13,000 RIAs — these small then I just shouldn’t make the call.” custodial firms are re-thinking the settlement As Schwab, the largest player in the market, process, testing new pricing models, and focuses on its merger with TD and handles improving advisor efficiency and service.

22 Financial Planning April 2021 Financial-Planning.com April 2021 Financial Planning 23 Small custodians, big business Small custodians, big business

From 2009 to 2019, RIA assets grew from $2 they had not experienced any service issues in trillion to $5.7 trillion, according to data from recent months. Cerulli Associates. And for decades a handful “We haven’t noticed any difference over of firms have shaped the custody business: the last two months,” says Jim Gladney, CEO Charles Schwab, Fidelity Investments, TD of $1.6 billion wealth management firm Ameritrade and BNY Mellon Pershing. Portfolio Solutions and $175 million RIA “They were the leaders in innovation from a Liberty Wealth Advisors. technology perspective to get to the scale that A Schwab spokesman said the company is they are at today,” says Noel Stave, COO of working to address specific issues and resolve RBC Clearing & Custody, referring to Schwab, them. “Our service times have not been where TD and Fidelity. they should be in recent weeks,” the Because moving a book of business from spokesman said in an emailed statement in one custodian to another requires a lot of February. However, he said that the service work, advisors tend not to do it frequently. gaps are not related to the Schwab-TD That hurdle heightens competition between integration, but connected to advisors’ rapid custodians for business from new entrants to growth recently. the RIA channel — as well as to entice “We have been actively and rapidly adding advisors to place their clients’ assets at additional resources to assist as quickly as multiple custodians. possible to address the unprecedented volumes But the market has been changing. In the we are seeing,” he said in an email, noting that last two years, two smaller players were “our hold times have improved/stabilized even scooped up, as Morgan Stanley and Goldman against continued volume” since December. Sachs bought E-Trade Financial and Folio Is there an opportunity for small custodians Financial, respectively. The biggest change to entice away many RIAs from Schwab? came when Schwab purchased TD Ameritrade, Maybe not. Several advisors served by service the third largest custodian in the industry, centers who spoke with Financial Planning had creating a $3.1 trillion behemoth. no plans to take their business elsewhere, Crisis absolutely “That quiet, old custodial business… has saying they have been generally happy at seen quite a lot of change over the last two Schwab and TD Ameritrade. accelerates change years. And that’s going to continue,” says Dan Custody assets tend to be fairly sticky. Skiles, president of custodian Shareholder Re-papering client accounts and learning new — Jason Wenk, founder and CEO of Altruist Services Group, which clears through BNY Mellon Pershing and services more than 1,700 financial advisors. This moment is their opportunity to shine, Why advisors choose their custodian they say. Service problems “Crisis absolutely accelerates change,” says Padden and other advisors have expressed 43% Jason Wenk, founder and CEO of Altruist, a some frustration with service at Schwab in custodian that launched in 2020 and now recent months. serves more than 600 RIAs, clearing trades “What used to take one to two days now via Apex Clearing. takes three to four days,” says Tyler Smith, COO of Garrett Investment Advisors, an RIA Industry in flux with more than $270 million in assets at TD Steady growth, the dominance of a few firms Ameritrade. and the challenges of winning new business Service problems seem to be confined to Customer have historically characterized the custody RIAs who use call centers. Three RIAs that service market as firms fought for RIAs’ burgeoning have designated service teams at TD Source: Arizent business. Ameritrade or Schwab told Financial Planning

24 Financial Planning April 2021 Financial-Planning.com

024_FP0421 24 3/15/2021 2:08:39 PM Small custodians, big business Small custodians, big business

From 2009 to 2019, RIA assets grew from $2 they had not experienced any service issues in technology and platforms can be a big lift for trillion to $5.7 trillion, according to data from recent months. financial advisors, according to Brian Lauzon, Cerulli Associates. And for decades a handful “We haven’t noticed any difference over managing director of InCap Group, an RIA of firms have shaped the custody business: the last two months,” says Jim Gladney, CEO M&A investment bank. Charles Schwab, Fidelity Investments, TD of $1.6 billion wealth management firm “The last thing any RIA wants to do is change RELATED STORY Ameritrade and BNY Mellon Pershing. Portfolio Solutions and $175 million RIA custodians,” he says. “It’s a herculean process.” Q&A with Apex Clearing’s “They were the leaders in innovation from a Liberty Wealth Advisors. For these reasons, small custodians say they Tricia Rothschild technology perspective to get to the scale that A Schwab spokesman said the company is aren’t anticipating a mass exodus from After going public, the they are at today,” says Noel Stave, COO of working to address specific issues and resolve Schwab and TD Ameritrade. clearing firm plans to to grow and nudge further RBC Clearing & Custody, referring to Schwab, them. “Our service times have not been where “I don’t think that many advisors are going into the traditional TD and Fidelity. they should be in recent weeks,” the to leave,” Altruist’s Wenk says. advisory space, says its Because moving a book of business from spokesman said in an emailed statement in However, there is an opportunity to stand out president. one custodian to another requires a lot of February. However, he said that the service to new business: financial advisors getting Read more on page 28 work, advisors tend not to do it frequently. gaps are not related to the Schwab-TD started in the RIA channel or looking to add That hurdle heightens competition between integration, but connected to advisors’ rapid another partner to their multi-custodial custodians for business from new entrants to growth recently. businesses. There’s also an opportunity to help the RIA channel — as well as to entice “We have been actively and rapidly adding financial advisors new to the business altogether. advisors to place their clients’ assets at additional resources to assist as quickly as “We’ve gotten way more visibility around multiple custodians. possible to address the unprecedented volumes SSG in the last year than ever before, and we But the market has been changing. In the we are seeing,” he said in an email, noting that actually decreased our marketing budget last two years, two smaller players were “our hold times have improved/stabilized even dramatically,” Skiles says, noting that SSG is scooped up, as Morgan Stanley and Goldman against continued volume” since December. onboarding approximately two advisors a week. Sachs bought E-Trade Financial and Folio Is there an opportunity for small custodians RBC Clearing & Custody signed on 50 new Financial, respectively. The biggest change to entice away many RIAs from Schwab? RIAs — 58% growth in clients — between came when Schwab purchased TD Ameritrade, Maybe not. Several advisors served by service August and December 2020, according to the the third largest custodian in the industry, centers who spoke with Financial Planning had company. By the second week of February, RBC creating a $3.1 trillion behemoth. no plans to take their business elsewhere, had added about 20 more, according to Stave. “That quiet, old custodial business… has saying they have been generally happy at “We just continue to grow,” he says. seen quite a lot of change over the last two Schwab and TD Ameritrade. Paul Ferry, an advisor who had held $25 years. And that’s going to continue,” says Dan Custody assets tend to be fairly sticky. million in client assets at TD Ameritrade and Skiles, president of custodian Shareholder Re-papering client accounts and learning new Schwab, moved his book of business to RBC Services Group, which clears through BNY Mellon Pershing and services more than 1,700 financial advisors.

Service problems Why advisors choose their custodian Padden and other advisors have expressed 43% 42% some frustration with service at Schwab in 40% 39% 38% recent months. “What used to take one to two days now takes three to four days,” says Tyler Smith, 17% COO of Garrett Investment Advisors, an RIA with more than $270 million in assets at TD 6% Ameritrade. Service problems seem to be confined to Customer Brand name Favorable Technology Firm Recommen- Other RIAs who use call centers. Three RIAs that service pricing mandated dation have designated service teams at TD Source: Arizent Ameritrade or Schwab told Financial Planning

Financial-Planning.com April 2021 Financial Planning 25

025_FP0421 25 3/15/2021 2:13:06 PM Small custodians, big business Small custodians, big business

Clearing & Custody approximately six months Apex is also reducing the time it takes to ago, largely because of the hands-on attention open accounts, which she says it can perform he says he receives there. in fewer than 10 minutes. “As a small RIA, you need to be able to talk Custodians that use a third-party clearing to somebody,” Ferry says. “They really hold my firm to settle trades, including Altruist, hand in terms of coming over and building my TradePMR, and Shareholder Services Group, business with them.” are making improvements to advisor support, user experience and daily workflow. Key innovations Altruist is simplifying and streamlining Hybrid Fee-based Innovative new technologies and better service account opening, funding, trading, reporting models being pursued by small custodians will and billing processes for advisors, according help advisors on their platforms excel, to Wenk. They were the leaders in executives say. “What we’re trying to do is take these typical innovation from a technology Firms are also focusing attention on the points of friction that an RIA would have and infrastructure of custody itself, on capabilities really listen to our users,” Wenk says. Altruist is perspective to get to the scale like direct indexing, and on speeding up trade building digital check deposit capabilities as settlement. well as a single unified billing system that that they are at today Custodians that clear their own trades are addresses multiple types of charging. — Noel Stave, COO of RBC Clearing & Custody responsible for fronting deposits with When advisors choose a vendor, they have clearinghouses, the organizations operating to look at both the front-end partner as well as under the SEC whose role is to protect the the clearing firm operating on the back-end. marketplace, which requires capital. They’re “If you look at competitors like us, it’s an At Altruist, Wenk has tried to take a also responsible for the inner workings and important question: Who do you clear with? software-as-a-service strategy to its support recordkeeping of the trades and protecting And how long have you been with them?” for financial advisors. Most of their service the assets. Skiles says. requests come via chat, Wenk says, and “The vast majority of our spend has now Should a front-end custodian switch advisors are connected to someone “typically shifted from frontend work to backend work underlying clearing firms, it can be disruptive within a minute or less.” They can then jump — to regulatory, to compliance, to reporting, for advisors, Skiles says. The process includes on the phone or screen share, he says. safety and soundness, customer protection,” negative consent letters that go out to clients. “They know our service people by name. says Stave. “That’s where we can make a “It certainly can be done. It’s not something They follow the people on our team on social difference. That’s our secret sauce. We can do that you can’t accomplish, but it does require a media individually. It’s a very different things there that a smaller fintech firm doesn’t lot of work,” Skiles says. relationship,” Wenk says. need to be bothered with.” Apex Clearing, which supports platforms ‘A very different relationship’ Pressured economics including Altruist and FusionIQ and recently Smaller custodians also say that they can offer Custodians are fighting for market share as announced plans to go public, is focused on more personalized customer service to RIAs, some sources of revenue shrink, particularly moving money between channels more and that they are adding upgrades to make after some players eliminated commission quickly, according to Tricia Rothschild, their support services more efficient. fees and the Fed cut interest rates. president of Apex Clearing. “If someone’s working on a complex transfer In an industry where revenue on client “If we’re going to have speed bumps along from another custodian to us, we’ll have them assets is small, scale is important. Schwab the way to investing, they should be speed speak to the person doing the actual work,” and Fidelity reap the benefit of sheer size. bumps that we get to choose, not speed Skiles says. Schwab is investing more in its advisor bumps that the system imposes on us,” The average employee has been working at technology than ever before, according to Rothschild says. SSG for 19 years, according to Skiles, which Bernie Clark, head of Schwab Advisor Trade settlement is a two-day process. has helped RIAs establish a relationship with Services. It is developing a tech platform While the time it takes has shortened, “I just the person serving them. that will harness both TD Ameritrade and think there’s room for improvement,” “Being able to deliver that consistent strong Schwab’s capabilities into one superior Rothschild says. relationship makes a huge difference,” he says. platform.

26 Financial Planning April 2021 Financial-Planning.com

026_FP0421 26 3/15/2021 2:08:42 PM Small custodians, big business Small custodians, big business

Apex is also reducing the time it takes to open accounts, which she says it can perform in fewer than 10 minutes. Custodians that use a third-party clearing firm to settle trades, including Altruist, TradePMR, and Shareholder Services Group, are making improvements to advisor support, user experience and daily workflow. Altruist is simplifying and streamlining account opening, funding, trading, reporting and billing processes for advisors, according to Wenk. They were the leaders in “What we’re trying to do is take these typical innovation from a technology points of friction that an RIA would have and really listen to our users,” Wenk says. Altruist is perspective to get to the scale building digital check deposit capabilities as well as a single unified billing system that that they are at today addresses multiple types of charging. — Noel Stave, COO of RBC Clearing & Custody When advisors choose a vendor, they have to look at both the front-end partner as well as the clearing firm operating on the back-end. “If you look at competitors like us, it’s an At Altruist, Wenk has tried to take a “Now we’re in a position where we’re talking important question: Who do you clear with? software-as-a-service strategy to its support about trillions of dollars,” Clark says. The And how long have you been with them?” for financial advisors. Most of their service company is leading the custody market “with Skiles says. requests come via chat, Wenk says, and the girth of Charles Schwab behind it, with the Should a front-end custodian switch advisors are connected to someone “typically bank presence behind it, with the commitment underlying clearing firms, it can be disruptive within a minute or less.” They can then jump [to financial advisors].” for advisors, Skiles says. The process includes on the phone or screen share, he says. Charles Schwab’ scale will help the negative consent letters that go out to clients. “They know our service people by name. company stay ahead of the curve when it “It certainly can be done. It’s not something They follow the people on our team on social comes to regulation and any upcoming market that you can’t accomplish, but it does require a media individually. It’s a very different challenges, Clark says. lot of work,” Skiles says. relationship,” Wenk says. “Being a custodian is about capability. It’s about relationships, and it’s about being able ‘A very different relationship’ Pressured economics to cover all the bases,” he says. Smaller custodians also say that they can offer Custodians are fighting for market share as It remains to be seen how other companies more personalized customer service to RIAs, some sources of revenue shrink, particularly with massive capital, such as Goldman Sachs and that they are adding upgrades to make after some players eliminated commission and Morgan Stanley, will invest resources into their support services more efficient. fees and the Fed cut interest rates. their own newly-acquired custodians. “If someone’s working on a complex transfer In an industry where revenue on client “I would love to be a fly on the wall of the from another custodian to us, we’ll have them assets is small, scale is important. Schwab Goldman custody strategy discussion, because speak to the person doing the actual work,” and Fidelity reap the benefit of sheer size. there is something going on there,” RBC’s Skiles says. Schwab is investing more in its advisor Stave says. The average employee has been working at technology than ever before, according to But small custodians say they’re not worried, SSG for 19 years, according to Skiles, which Bernie Clark, head of Schwab Advisor and that there are plenty of RIAs out there in has helped RIAs establish a relationship with Services. It is developing a tech platform the market — a growing number, in fact. the person serving them. that will harness both TD Ameritrade and “The group that we bet on way back when “Being able to deliver that consistent strong Schwab’s capabilities into one superior — independent RIAs — are thriving more relationship makes a huge difference,” he says. platform. today than ever before,” Skiles says. FP

Financial-Planning.com April 2021 Financial Planning 27

027_FP0421 27 3/15/2021 3:02:51 PM going public? technology thinking and skills, so that is On SPACs, GameStop Rothschild: For the past couple months. job number one. When we think about opportunities in and crypto: Q&A with FP: Jon Ledecky, president of the the market, the bulk of our current SPAC, Northern Star Investment business, by far, is what you might call Corp II, said the company would be digitally native platforms and applica- Apex’s Tricia Rothschild eyeing strategic acquisitions. What tions that we support. But we know that do you have in mind right now? some of the more traditional investment After going public, the clearing firm plans to to grow and Rothschild: Our strategy, in general, is to managers, advisors, wealth managers nudge further into the traditional advisory space, says its focus on what we do best and where we are also looking to modernize the bring the most value, which is on the account opening and account funding. president. infrastructure — the pipes and plumbing Building things like non-purpose of trading and investing. There are some lending capabilities. We are continuing By Jessica Mathews things that are very integral to that to think about fractional share trading, process, where we rely on third-party fractional options. What about fixed Apex Clearing, a custodian with plans to go public. What does that mean for vendors today, where you could imagine income? How do we bring more move further into traditional wealth your company, and what will it look that we could acquire or make substan- transparency to the fixed-income management, is going public. like for your clearing clients? tial investments so that we can influence market and more liquidity with The deal, expected to take place via a Rothschild: In a nutshell, there is a the outcome more quickly. Then there are something like fractional fixed-income? merger with a special purpose acquisition market need for digitization and other areas as it relates to servicing There’s many things you can do, so a company this May or June, will boost the attention paid to the infrastructure that customers that we don’t necessarily lot of it comes down to prioritization. capital on the company’s balance sheet supports financial services. By becoming service today or haven’t serviced and offer financial a public company, we are traditionally in the advisory space. FP: You’ve already hinted at this, advisors more insight into able to raise capital to but what does Apex going public its business. facilitate our own growth FP: Can you be more specific? mean for RIAs and advisors? The company has and provide more Rothschild: If you look at what it takes to Rothschild: There is a need for choice been growing in recent transparency into what manage a trade, and you think about the months. It now custodies we do, why we do, and components that go into the reporting of $92 billion in assets, and how we do it. the trade — managing the tax reporting Clearing firms handle logistics to make it’s been making and other pieces of the actual trade markets less risky headway into the FP: Why is the com- transaction — that’s part of the core. With cash and securities on deposit, buyers and sellers are traditional RIA space via pany going public via [And then] think about the servicing layer protected during the two days it takes to settle a trade partnerships. a SPAC rather than an — what is it that happens that facilitates Apex is preparing for old-school IPO? that trade from the advisor perspective? both organic growth and “As we like to say, we’re the fintech for Rothschild: I would say What are the types of tools, what are the fintech,” Rothschild said. acquisitions, according to two reasons. One is the types of service layers or interfaces that

the clearing firm’s president, Tricia process is quick relative to the traditional an advisor needs or a compliance team Sellers Trades executed Buyers Request Request Rothschild, who sat down with Financial IPO process. Second, and really impor- needs? trade Clearinghouse trade Planning for an interview via Zoom to tantly, we found really great partners discuss the company’s plans and what through Northern Star, which is Jon FP: What are your plans for organic Broker dealer Delivering Delivering Broker dealer trade info trade info Delivering Delivering they mean for financial advisors. Ledecky and Joanna Coles. Joanna growth? trade info trade info Deposits

Read more to find out what’s coming Coles will be joining our board, and she Rothschild: The number one thing is $ next for Apex. The interview has been brings a lot of experience in consumer hiring a lot of technologists. As you can $ Cash & securities Cash & securities Clearing firm Clearing firm edited for clarity. brand and consumer understanding. imagine, especially as we grow and as we

facilitate more and more transactions Source: Arizent Financial Planning: Apex FP: How long have you been a and open more and more accounts, it will announced last week that it would part of conversations about Apex be important that we have the right Jessica Mathews is an associate editor of Financial Planning. Follow her on Twitter at @jessicakmathews.

28 Financial Planning April 2021 Financial-Planning.com

028_FP0421 28 3/15/2021 3:35:24 PM going public? technology thinking and skills, so that is and innovation. The independent can call on as needed. We did stop the Rothschild: For the past couple months. job number one. advisor market itself stands for choice trading for three hours, and then it was When we think about opportunities in and innovation. That is what has fueled resolved and we moved forward, and FP: Jon Ledecky, president of the the market, the bulk of our current the success of independent advisors in have not had any issues and have not SPAC, Northern Star Investment business, by far, is what you might call this country — along with trust. looked back. Corp II, said the company would be digitally native platforms and applica- As we like to say, we’re the fintech for eyeing strategic acquisitions. What tions that we support. But we know that fintechs. Is an RIA a fintech? I would say, FP: Is there an opportunity for do you have in mind right now? some of the more traditional investment well, yes. The whole process of thinking advisors when it comes to crypto? Rothschild: Our strategy, in general, is to managers, advisors, wealth managers about your money and managing your Rothschild: Whether they do or don’t focus on what we do best and where we are also looking to modernize the money will be increasingly digital. That want to advise them on crypto, bring the most value, which is on the account opening and account funding. allows advisors to focus on things that advisors probably want to know if their infrastructure — the pipes and plumbing Building things like non-purpose can’t be digitally enabled, so they can clients hold it. Being able to see it in of trading and investing. There are some lending capabilities. We are continuing do a better job of meeting their clients’ the account and understand as it things that are very integral to that to think about fractional share trading, needs in a more cost-effective way. relates to the overall investor clients’ process, where we rely on third-party fractional options. What about fixed exposure, I think that’s really important. vendors today, where you could imagine income? How do we bring more FP: Apex was one of the firms that that we could acquire or make substan- transparency to the fixed-income restricted GameStop trading in FP: What are you most excited tial investments so that we can influence market and more liquidity with January. Can you specify whether about that Apex is working on the outcome more quickly. Then there are something like fractional fixed-income? it had to raise capital at the time? now? other areas as it relates to servicing There’s many things you can do, so a Rothschild: We restricted the trading for Rothschild: I’m most excited about the customers that we don’t necessarily lot of it comes down to prioritization. approximately three hours on one day ability to connect the dots between all service today or haven’t serviced due to anomalous information that we these different silos. You have to have traditionally in the advisory space. FP: You’ve already hinted at this, got. We were fine by the end of the day. so many accounts for different things but what does Apex going public We have headroom in terms of the with different institutions. In the future, FP: Can you be more specific? mean for RIAs and advisors? capital available to us on our balance you can really have a more holistic Rothschild: If you look at what it takes to Rothschild: There is a need for choice sheet. We have lines of credit that we relationship from your paycheck to manage a trade, and you think about the paying your bills to managing your components that go into the reporting of emergency savings account to putting the trade — managing the tax reporting Clearing firms handle logistics to make the cash that you have to work. and other pieces of the actual trade markets less risky And then understanding the flip side. transaction — that’s part of the core. With cash and securities on deposit, buyers and sellers are When you need to pay for something, [And then] think about the servicing layer where do you take that money from? protected during the two days it takes to settle a trade — what is it that happens that facilitates What’s the best way to use the money that trade from the advisor perspective? that you have? Apex sits behind all these What are the types of tools, what are the applications and financial services firms types of service layers or interfaces that that are trying to solve these problems, an advisor needs or a compliance team Sellers Trades executed Buyers so it’s a fun position to be in, where you Request Request needs? trade Clearinghouse trade can facilitate that innovation and ultimately see where the improvements can come from and run with less friction. FP: What are your plans for organic Broker dealer Delivering Delivering Broker dealer trade info trade info Delivering Delivering growth? trade info trade info It really comes down to increasing Deposits

Rothschild: The number one thing is $ access to the markets and continuing hiring a lot of technologists. As you can $ to ensure that people can participate in Cash & securities Cash & securities Clearing firm Clearing firm imagine, especially as we grow and as we their financial lives actively, regardless facilitate more and more transactions Source: Arizent of income or wealth. FP and open more and more accounts, it will be important that we have the right Jessica Mathews is an associate editor of Financial Planning. Follow her on Twitter at @jessicakmathews.

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029_FP0421 29 3/15/2021 3:35:26 PM Practice ALSO IN PRACTICE: HOW THE PANDEMIC HAS CHANGED US, P. 32 | AVOID LEGAL TROUBLE WHEN SWITCHING FIRMS, P. 33

are lower than men’s benefits because earnings for women are lower and women are more likely to pause working for a few years to focus on childcare. In addition, marriage rates and the average length of marriages have fallen over time, which impacts a woman’s ability to claim spousal and survivor benefits. Here are some conversations to have with your female clients. Start planning now. A strategy for claiming benefits can and should be developed as early as 10 or 15 years away from retirement. “Just because you can doesn’t mean you should!” Benefits can be reduced by up to 30% if a woman files for Social Security when she is first eligible. Patience is a virtue here; educate your clients about the benefit of delaying their claim. Even after they reach the age of retirement, if they continue to delay, Social Security tips for women they will receive 8% more per year delayed (up to age 70). Planning needs and strategies should focus on longevity and creating lifetime income Single women. For a single woman streams after a spouse has died. who has never married, or was married for fewer than 10 years, the claiming strategy rests on her expected longev- By Sophia Duffy ity. If she is in good health, explore whether she can delay claiming Clients often believe that there is no male-female marriage; however, many income stream to be insufficient for benefits until age 70, so they will be difference between retirement planning of the strategies discussed can also be your client’s needs, while claiming too higher. for men and women. applied to same-sex married couples. late will cause the income to be lost. If she is in poor health and may not However, women overall have a Social Security benefits are a lifetime There are three types of Social live until her full life expectancy, it may longer life expectancy, which makes it income stream that replaces, on Security benefits: a person’s own make sense to claim before 70. more likely they will run out of money average, about 40% of pre-retirement benefits stemming from their work Married and working. Married before they die, without proper income. Many clients plan to claim history, their spousal benefits and working women are eligible to claim planning. Social Security benefits when they or surviving spouse benefits for widows their own benefits and spousal benefits The planning needs and strategies their spouse retire. and widowers. (and survivor benefits if they become for a woman should focus more heavily However, strategies regarding the Modern trends for women show that widowed). This makes planning much on longevity and creating lifetime type of Social Security benefit that can the rates of working women have risen more complex. income streams after her spouse has be claimed, and the timing of the over time, so more women can claim If both spouses are alive, consider passed away. In this article, we discuss claims, should be carefully planned. their own Social Security benefits.

BLOOMBERG NEWS BLOOMBERG planning strategies assuming a Claiming too early may cause the However, average benefits for women Sophia Duffy is assistant vice president and director of regulatory compliance, as well as assistant professor of business planning, at The American College of Financial Services.

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ALSO IN PRACTICE: HOW THE PANDEMIC HAS CHANGED US, P. 32 | AVOID LEGAL TROUBLE WHEN SWITCHING FIRMS, P. 33

are lower than men’s benefits because the incomes earned by the spouses: the earnings for women are lower and lower-earning spouse can claim their women are more likely to pause working own benefit earlier, leaving the higher for a few years to focus on childcare. benefits to grow and be claimed by the In addition, marriage rates and the other spouse at age 70. average length of marriages have fallen The one spouse’s higher benefit will over time, which impacts a woman’s make the other eligible to claim a ability to claim spousal and survivor spousal and survivor benefit later on. benefits. This is even more advantageous if there Here are some conversations to have is a large age difference between the with your female clients. older, higher-earning spouse and the Start planning now. A strategy for younger, lower-earning spouse. claiming benefits can and should be Stay-at-home wife. Even if a woman

developed as early as 10 or 15 years has never worked, or worked for fewer A longer life expectancy makes planning different away from retirement. than 10 years, she can claim both the for women than for men, says Sophia Duffy. “Just because you can doesn’t mean spousal benefit and survivor benefit if you should!” Benefits can be reduced she becomes widowed. own benefit. by up to 30% if a woman files for Social Divorced women. Divorced women Security when she is first eligible. Social Security benefits who were married for at least 10 years Patience is a virtue here; educate your replace, on average, can claim a spousal benefit at age 62 clients about the benefit of delaying about 40% of pre- as long as they are not remarried, and their claim. retirement income. the benefit is higher than their own Even after they reach the age of benefit. They should understand that, if retirement, if they continue to delay, A client who plans to delay claiming they remarry, they will lose the benefit Social Security tips for women they will receive 8% more per year her benefits must develop other income but can claim under their new spouse. delayed (up to age 70). sources. This might include taking out a For women who plan to remarry, this Planning needs and strategies should focus on longevity and creating lifetime income Single women. For a single woman life insurance policy on her husband or could cause an issue, and the loss of streams after a spouse has died. who has never married, or was married transferring income-producing assets income needs to be mitigated. for fewer than 10 years, the claiming into her name, such as rental income If your client is thinking about strategy rests on her expected longev- from a property or dividends from a divorce, it may be worthwhile to ity. If she is in good health, explore brokerage account. consider delaying the divorce until the whether she can delay claiming In addition, remember that the 10-year mark. They should also be income stream to be insufficient for benefits until age 70, so they will be income-earning spouse must start aware that a spousal benefit can’t be your client’s needs, while claiming too higher. claiming benefits in order for the claimed within two years of divorce. late will cause the income to be lost. If she is in poor health and may not spouse to claim spousal benefits. Additionally, as part of the divorce There are three types of Social live until her full life expectancy, it may Widows. Widowed women can claim proceedings, they should not waive Security benefits: a person’s own make sense to claim before 70. survivor benefits, which can be up to their rights to spousal benefits. benefits stemming from their work Married and working. Married 100% of the deceased spouse’s benefit, While these Social Security claiming history, their spousal benefits and working women are eligible to claim depending on whether they can claim tips provide a general framework for surviving spouse benefits for widows their own benefits and spousal benefits their own benefit first and if the spouse planning, it’s best to run the numbers and widowers. (and survivor benefits if they become was claiming benefits. Depending on with your female clients to get an Modern trends for women show that widowed). This makes planning much income levels, the widowed partner accurate picture of how the benefits the rates of working women have risen more complex. may be able to claim the decedent can help create a foundation for over time, so more women can claim If both spouses are alive, consider spouse’s benefit, while delaying their lifetime income. FP their own Social Security benefits. However, average benefits for women Sophia Duffy is assistant vice president and director of regulatory compliance, as well as assistant professor of business planning, at The American College of Financial Services.

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before this long-term work-from-home environment began was an incredible benefit, but now it’ll drive the expecta- tion for innovation even higher, which will benefit clients and our profession in the long run.

Change = evidence of client loyalty Aside from increased technology

Jodi L. Perry is president of Independent Contractors Division, Raymond James Financial Services. How to avoid legal trouble when switching firms

It’s complicated, but possible, for financial advisors to limit risk and liability while moving their practices.

How the pandemic has changed us By Mark Kowalsky Career mobility and heightened client dependence are two unexpected byproducts of extreme uncertainty. When financial advisors are looking to move their practice to a new firm, there’s By Jodi L. Perry a long list of complexities and considerations that must be taken into account, from compliance issues and fiduciary As we enter year two of the coronavirus The consolidations, pressures put on expected some experienced advisors to responsibilities, to professional ethics and pandemic and the unique disruptions payouts or cross-selling policies at their consider expediting their retirement. But legal and procedural obligations. Here it’s wrought on our industry, I’ve found current firms are driving them to consider that didn’t end up being the case. are the top five considerations for that advisors and their clients have other options. Citing clients’ need for human advice advisors to keep in mind before, during evolved in surprising — even counterin- I’ve also heard from advisors that during this time and into the near future, and after a transition. tuitive — ways. Here is some of what 2020’s surprises have motivated them to some advisors have said they’re simply I’ve been seeing. solidify their catastrophic plans. not ready to retire. 1. Plan ahead Make sure you get sound legal counsel Change = more stability Change = more options Change = more comfort with tech and professional advice before your From a recruiting perspective, on the Initially, many advisors put everything on The accelerated adoption of technology transition. Planning ahead is critically independent contractor side, we’re hold when the pandemic hit home in the has changed the client experience. It’s so important, and engaging an attorney continuing to see growing interest from U.S. last March — including plans to important that firms and advisors early in the process can help you avoid advisors who had never considered move. That shifted, and, in fact, we continue to develop and embrace or resolve a lot of potentially costly independence before. I’m hearing from recruited more advisors at the end of our technology that enables increased headaches before they become a many recruits that the reason they are fiscal year than we did at the beginning. mobility for advisors and clients. problem down the road.

BLOOMBERG NEWS BLOOMBERG looking to move is to gain more stability. When the pandemic started, we also Having the technology in place well NEWS BLOOMBERG An attorney can assist not only with

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before this long-term work-from-home adoption, advisors are reporting that willing to go without their trusted advisor environment began was an incredible their clients are more available. Clients for any period of time. benefit, but now it’ll drive the expecta- seem incredibly responsive and are tion for innovation even higher, which signing and returning forms quicker. The The future will benefit clients and our profession in retention rate of clients that advisors are No one knows how long this pandemic the long run. citing is as high — if not higher — than and the uncertainty it has caused will it’s been in the past. Given the uncer- last, but one thing history has shown us is Change = evidence of client loyalty tainty with the pandemic, school that volatility always presents unique Aside from increased technology planning and more, clients seem less opportunities. FP

Jodi L. Perry is president of Independent Contractors Division, Raymond James Financial Services. How to avoid legal trouble when switching firms

It’s complicated, but possible, for financial advisors to limit risk and liability while moving their practices.

How the pandemic has changed us By Mark Kowalsky Career mobility and heightened client dependence are two unexpected byproducts of extreme uncertainty. When financial advisors are looking to move their practice to a new firm, there’s a long list of complexities and considerations that must be taken into account, from compliance issues and fiduciary expected some experienced advisors to responsibilities, to professional ethics and consider expediting their retirement. But legal and procedural obligations. Here that didn’t end up being the case. are the top five considerations for Citing clients’ need for human advice advisors to keep in mind before, during during this time and into the near future, and after a transition. some advisors have said they’re simply not ready to retire. 1. Plan ahead Make sure you get sound legal counsel Change = more comfort with tech and professional advice before your The accelerated adoption of technology transition. Planning ahead is critically legal advice, but also with the practical what kind of client contact is appropri- has changed the client experience. It’s so important, and engaging an attorney elements that are so often overlooked, ate and more. important that firms and advisors early in the process can help you avoid such as what your agreement requires continue to develop and embrace or resolve a lot of potentially costly and if the Broker Protocol applies to 2. Stay out of the gray area technology that enables increased headaches before they become a you, how and when to submit your Understand and abide by your legal mobility for advisors and clients. problem down the road. resignation, how to draft a letter to and professional obligations. An

Having the technology in place well NEWS BLOOMBERG An attorney can assist not only with make sure you say the right things, experienced attorney can chart you on

Financial-Planning.com April 2021 Financial Planning 33

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the right side of the line and outside of important you believe the client is or new agreement with similar restrictions the gray areas. Knowing what you can how much you think you can trust him could hurt your argument. Watch for do is just as important as knowing what or her. punitive fees or overly restrictive terms, you can’t do. Everything you say, both before and and adjust accordingly. If there’s a For example, generally you can talk after you leave, will inevitably get back chance you might have to spend to your new employer, sign agreements to your firm. Once you’ve moved on, $50,000 in legal fees, for example, it and set up office space before your there are ways to promote the new firm, might make more sense to renegotiate official resignation — as long as you but be sure not to bad mouth your your current agreement and revisit provide 100% effort to your existing former employer. things a bit down the road. employer (business as usual, same number of client visits, etc.). 4. Read the fine print 5. Talk the talk On the flip side, even something as Read the terms of your employment Finally, coordinate your actions with small as downloading one file, sending agreement carefully. Agreements differ your new employer. Connect with your one email to a personal account or an case-by-case. There are likely to be new firm and talk through its expecta- increase in copier usage can be used specific details on how to handle tions and your plans and obligations for against you. records and documentation. the transition before you plan and There may be geographic or time make your move. Maintaining open 3. Keep it quiet restrictions on your actions. Every dialogue with your future employer and The golden rule of any transition is to agreement and situation is different. securing its buy-in throughout the not tell any of your clients beforehand. Keep in mind that, if you claim your process can literally and figuratively Don’t make exceptions, no matter how current agreement is unfair, signing a pay off for you. FP

BLOOMBERG NEWS BLOOMBERG Mark Kowalsky is a partner at business law firm Jaffe, Raitt, Heuer & Weiss, P.C., in Southfield, Michigan.

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outcome. It is essential to: A second look at the 4% rule - Determine clients’ essential vs. discretionary Based on their stage, each client has different long-term needs. expenses and objectives. - Fill gaps between Social By Vijay Khetarpal Security and essential expenses, preferably using an annuity to eliminate the Since entering this profession almost 40 years — advisors must help clients recognize and longevity risk. ago, I’ve noticed the distribution recommenda- focus instead on the amount of income - Ensure adequate life tions advisors make in retirement fall into one needed in golden years. insurance and LTC insurance of five approaches. They are: for the no-go phase. 4% rule: Withdraw 4% of an account Key phases - Divide remaining assets balance initially and adjust for inflation None of the approaches above provide to be used for discretionary annually. (Given current low rates, it’s question- optimized outcomes for the majority of clients. spending using the bucket able if this is sustainable.) Instead, advisors can enhance plan — the buckets being Fixed percentage: Withdraw strategies by recognizing the “now” (the next 1-2 years), the same rate annually based three phases of retirement as “soon” (3-5 years), and “later” on prior year-end values. follows: (years 5-plus) and invest in Fixed-dollar amount: 1. The go-go phase: Early capital preservation, fixed Withdraw a set dollar amount years in retirement are when income and growth equity every month or year. clients are very active. They strategies respectively. We Systematic withdrawals: include travel and acquisition typically use 20/30/50 Withdraw only interest and — buying a new toy such as a allocations. dividend income leaving boat, etc. - Optimize allocations and principal intact. 2. The slow-go phase: distributions by using a Bucket plan: Hold some Typically, in the middle years, tax-diversified approach. assets in cash equivalents, some clients are settled and mellow In my practice, a client’s The most critical risk to guard against in fixed-income, and some in out. portfolio factoring in the is the longevity risk, Khetarpal writes. equities, filling the cash bucket 3. The no-go phase: In this above methods is designed to when low from the fixed-income bucket or the phase, the retiree could require much caregiver generate about 6% income equities bucket. help, long-term nursing home care, and for the go-go phase and These are vulnerable to factors including includes the final act of passing away. provide about 4% income for market volatility, low-interest rates, inadequate For different reasons, phases one and three the slow-go stage. We ensure savings and investments in place. Then there’s are each more expensive than phase two. that the long-term care costs the possibility of clients retiring too early, living Therefore, using the 4%, fixed-percentage, are shifted to an insurance too long, risk-tolerance mismatch, inflation fixed-dollar amount, systematic withdrawal, or company and legacy benefits risks, unknown tax consequences and out-of- bucket plan methods do not work as they do are tax-free via life insurance. pocket health care costs. The most critical risk not alleviate all the risks optimally. We’ve found that this to guard against is the longevity risk because provides peace of mind, and it’s a multiplier of the others. I contend that Blend and customize that clients who have greater unlike the accumulation phase when clients A blended approach, customized to suit each certainty of outcomes live are more focused on the total amount of client’s situation, when combined with longer, healthier, and more assets, in the distribution phase — retirement insurance strategies, provides a better purposeful lives. FP

Vijay Khetarpal is CEO of Integrity Financial Group

Financial-Planning.com April 2021 Financial Planning 35

035_FP0421 35 3/15/2021 2:02:06 PM Portfolio ALSO IN PORTFOLIO: IT’S TIME TO REVISIT THE IRA TRUST. HERE’S WHY, P. 38 not an apocalyptic omen. Clients need to understand that a delisting doesn’t mean that they can’t Listed chinese stocks as a percentage of total U.S. that raise capital in U.S. sell their stock; they just can’t trade on market capitalization markets are required to be the exchange. registered with the PCAOB There are several second-tier levels 4.0% and adhere to stringent U.S. in the market ecosystem where audit standards under the investors holding delisted stocks can 3.5% Sarbanes-Oxley Act of 2002. still buy and sell shares of “less quali- 3.0% However, the PCAOB and fied” companies in markets such as the 2.5% Chinese authorities have OTC Bulletin Board or the “pink sheets.” been unable to agree to a For advisors, it is critical to under- 2.0% joint inspection program, stand the financial situation of each 1.5% despite more than 13 years of client and how much exposure these 1.0% intermittent negotiations. investments comprise of their overall

0.5% This Jan. 13, the Trump investment and current liquidity needs. administration announced Clients who have pressing liquidity 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 that U.S. investors who have needs will need to develop an exit put money in the soon-to-be strategy faster than accredited investors Source: Jeeho Bae/Goldman Sachs data delisted Chinese firms have who are more bullish on growth in until November 2021 to trade China and who can wait longer to sell their shares on the NYSE. their stock. Chinese firms — delisted Clients could also wait to see if the Defrauded investors Biden administration might change U.S. exchanges may end trading in shares of certain China- At the core of Trump’s based companies. Here’s what this may mean for your clients. executive order was a significant case involving a Stock price performance of delisted Chinese By Earl Carr Chinese company defraud- telecommunication companies in China ing U.S. investors. (listed in Hong Kong) In April of 2020, Luckin The lack of coordination and coherent policy this mean for financial advisors and their Coffee, which competes 20.00% on China has sent mixed signals and clients? And should Beijing retaliate, what are against Starbucks, admitted

confusion to American investors who are the critical implications this could have on to fabricating $309 million in 15.00% putting money into Chinese companies listed U.S. and global markets? sales revenue. As a result, on U.S. exchanges. Collectively, this repre- This about-face in policy is part of a Americans who invested in 10.00% sents over $1 trillion worth of shares trading broader set of disputes between the U.S. and Luckin saw the share price in the U.S. Chinese regulators. plunge by 75% overnight, 5.00% In an unprecedented move, on Dec. 31, For years, American regulators have and the firm was required to 2020, the NYSE announced it would delist complained that firms whose parent compa- pay a $180 million penalty to three Chinese telecoms. This followed nies are based in China but have subsidiaries the SEC. 0.00% then-President Donald Trump’s November in the U.S. are not held to the same audit Luckin Coffee in June 1/1/2021 1/3/2021 1/5/2021 1/7/2021 1/9/2021 1/11/2021 1/13/2021 1/15/2021 1/17/2021 1/19/2021 1/21/2021 12/22/202012/24/202012/26/202012/28/202012/30/2020 announcement banning U.S. investments in standards as U.S. firms. 2020 suspended its appeal of -5.00% Chinese companies tagged by Washington Trump, in August of 2020, issued a set of its delisting by the Nasdaq. as being owned or controlled by the military. recommendations intended to address the Advisors, RIAs and family -10.00% Over the next 24 hours, the exchange inability of the Public Company Accounting offices advising clients on China unicom (Hong Kong) Ltd. China mobile Ltd. China telecom corporation Ltd. reversed this decision — and then, under Oversight Board to inspect accounting firms what to do with investments pressure from the Treasury Department, based in China whose audit involves clients in Chinese companies forced Source: Jeeho Bae/Yahoo Finance data again said it would delist the stocks. listed on U.S. stock exchanges. to delist should begin by Under the Biden administration, what does Accounting firms that audit companies reassuring them that this is Earl Carr is an adjunct instructor at New York University’s Center for Global Affairs. Follow him on Twitter at @excarr.

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ALSO IN PORTFOLIO: IT’S TIME TO REVISIT THE IRA TRUST. HERE’S WHY, P. 38 not an apocalyptic omen. course on the delisting ruling. China when they cross-list in New York, Clients need to understand that a has so far taken a wait-and-see compared to companies that do not delisting doesn’t mean that they can’t attitude toward the ruling and any cross-list. that raise capital in U.S. sell their stock; they just can’t trade on Biden changes. For advisors and clients looking for markets are required to be the exchange. It’s unlikely that the Biden adminis- growth and yield during a global registered with the PCAOB There are several second-tier levels tration will rescind the order, though. pandemic, China may provide an and adhere to stringent U.S. in the market ecosystem where One of the byproducts of the Trump attractive market. audit standards under the investors holding delisted stocks can administration’s adversarial tone on China surpassed the U.S. as the Sarbanes-Oxley Act of 2002. still buy and sell shares of “less quali- China policy is that it resulted in both world’s top destination for new foreign However, the PCAOB and fied” companies in markets such as the Republicans and Democrats on Capitol direct investment in 2020. Early that Chinese authorities have OTC Bulletin Board or the “pink sheets.” Hill taking a harder stance on China, year, largely due to Chinese officials’ been unable to agree to a For advisors, it is critical to under- particularly as it relates to American actions and mismanagement of joint inspection program, stand the financial situation of each consumer and corporate interests. information involving COVID-19, FDI in despite more than 13 years of client and how much exposure these What has been fascinating is that, China declined by 42% to $859 billion, a intermittent negotiations. investments comprise of their overall despite a trade war and executive 30% drop from even the lows of the This Jan. 13, the Trump investment and current liquidity needs. orders calling for Chinese companies 2009 financial crisis. administration announced Clients who have pressing liquidity to be delisted, Chinese firms have However, Chinese officials immedi- that U.S. investors who have needs will need to develop an exit continued to list or “cross list” on U.S. ately took measures to control the put money in the soon-to-be strategy faster than accredited investors stock exchanges. spread of the pandemic and reassure delisted Chinese firms have who are more bullish on growth in Cross-listing is the listing of a firm’s investors. As China’s recovery gained until November 2021 to trade China and who can wait longer to sell common shares on a different exchange traction, while the pandemic continued their shares on the NYSE. their stock. than its original one. Chinese and other to spread globally, foreign investors Clients could also wait to see if the foreign companies choose to do this returned to Chinese investments. Defrauded investors Biden administration might change because they can get higher valuations At the core of Trump’s Due diligence executive order was a However, it is critical that advisors and significant case involving a Stock price performance of delisted Chinese clients alike do their due diligence when Chinese company defraud- telecommunication companies in China investing in Chinese companies. ing U.S. investors. (listed in Hong Kong) In the case of Luckin Coffee, the In April of 2020, Luckin company opened 500 stores in less than Coffee, which competes 20.00% eight months faster than Starbucks, against Starbucks, admitted doubled its valuation to $12 billion in to fabricating $309 million in 15.00% eight months and then went public in sales revenue. As a result, only two years. Americans who invested in China’s ability to control COVID-19 10.00% Luckin saw the share price within its borders has enabled it to plunge by 75% overnight, reopen to investors, but that doesn’t 5.00% and the firm was required to mean that it’s a panacea for all pay a $180 million penalty to investments. Advisors must develop a the SEC. 0.00% more nuanced understanding of the Luckin Coffee in June business, legal and geopolitical risks, 1/1/2021 1/3/2021 1/5/2021 1/7/2021 1/9/2021 1/11/2021 1/13/2021 1/15/2021 1/17/2021 1/19/2021 1/21/2021 12/22/202012/24/202012/26/202012/28/202012/30/2020 2020 suspended its appeal of -5.00% and explain these issues to their clients. its delisting by the Nasdaq. Even more important, they must Advisors, RIAs and family incorporate a diversified portfolio, as -10.00% offices advising clients on well as a hedge to downside risk, to China unicom (Hong Kong) Ltd. China mobile Ltd. China telecom corporation Ltd. what to do with investments more effectively quantify the overall in Chinese companies forced Source: Jeeho Bae/Yahoo Finance data investment opportunity. FP to delist should begin by reassuring them that this is Earl Carr is an adjunct instructor at New York University’s Center for Global Affairs. Follow him on Twitter at @excarr.

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benefits, IRA trusts have drawbacks, including various expenses. Typically, drafting a trust that will be beneficiaries. Distributions the IRA beneficiary won’t increase costs might be paid to a surviving significantly if a client is having a will current spouse, but children or revocable trust prepared anyway, from a prior marriage could notes Jason Cross, an attorney and a be assured of collecting the wealth advisor with McGill Advisors, a remaining balance after the division of Brightworth in Charlotte, survivor’s death.” North Carolina. IRA trusts often are used “The higher costs come on an for large accounts, but not annual basis with the annual tax always. return and associated forms that a CPA will have to put together,” he says. Many IRA trusts “Because it is trust work, these costs face a 10-year are typically higher.” distribution rule, Moreover, trusts reach the highest which curtails tax bracket of 37% when they go above tax-deferred $13,050 of taxable income in 2021; by buildup. contrast, married couples filing jointly don’t hit the 37% rate until they earn “If the beneficiary is a over $628,300 of taxable income. disabled or chronically ill person, a trust may be Tax liabilities worthwhile for a relatively The painful tax bite on money retained small account,” says Sotelo. in an IRA trust for control and asset “That’s because direct protection can be another cost to It’s time to revisit the IRA payments to the beneficiary consider. might have an impact on trust. Here’s why government benefits that individual may be receiving.” Tax rates, estates and trusts, 2021 The decision to choose a All trusts named as beneficiaries before the Secure Act may trust as IRA beneficiary If taxable income is: The tax is: need to be updated, says one analyst. depends on what the account owner wants for the Not over $2,650 10% of the taxable income By Donald Jay Korn trust beneficiary, says Schucher. Over $2,650 but not “If a trust beneficiary is $265 plus 24% of the excess over $2,650 IRA trusts may have lost some of their luster beneficiary of his or her IRA,” says Adam known to be a spendthrift, a over $9,550 in the wake of the Secure Act. Schucher, partner in the Miami office of the trust can make sense Over $9,550 but not Under the act, long-term tax deferral is still law firm Katz Barron. regardless of the IRA’s value,” $1,921 plus 35% of the excess over $9,550 over $13,050 permitted for certain IRA beneficiaries, but Many IRA trusts face this 10-year rule, he says. ”Similarly, if the trust others must empty the inherited account which curtails tax-deferred buildup. Never- beneficiary has an outstand- within 10 years. theless, IRA trusts still can be valuable. ing judgment, which assets Over $13,050 $3,146 plus 37% of the excess over $13,050 Beneficiaries of employer-sponsored “A trust could make sense,” says Tania received directly from the qualified plans face the same new rules. Sotelo, an estate planning attorney in Coral IRA may be required to be “The term ‘IRA trust’ may be used to Gables, Florida, “when the IRA owner has a used to settle, a trust can be Source: irs.gov describe an irrevocable trust established specific reason for this choice, perhaps to a good choice.”

BLOOMBERG NEWS BLOOMBERG during an IRA owner’s life that is named as guarantee no change in contingent Along with their multiple Donald Jay Korn is a contributing writer for Financial Planning in New York.

38 Financial Planning April 2021 Financial-Planning.com

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benefits, IRA trusts have drawbacks, How do the new rules impact IRA trusts? Ives says. including various expenses. “The Secure Act provides a benefit,” says He notes that, if the IRA owner were Typically, drafting a trust that will be Cross, “because it simplified naming a to die now, the trust would pay out beneficiaries. Distributions the IRA beneficiary won’t increase costs trust as beneficiary. nothing for 10 years and then distribute might be paid to a surviving significantly if a client is having a will the entire balance to the son. current spouse, but children or revocable trust prepared anyway, Drafting a trust that will Consequently, the IRS and more- from a prior marriage could notes Jason Cross, an attorney and a be the IRA beneficiary talented gamblers would be the be assured of collecting the wealth advisor with McGill Advisors, a shouldn’t increase probable winners. remaining balance after the division of Brightworth in Charlotte, costs significantly if “This is why all trusts named as IRA survivor’s death.” North Carolina. a client is having a beneficiaries before Secure need to be IRA trusts often are used “The higher costs come on an will or revocable trust revisited and updated,” says Ives. “That’s for large accounts, but not annual basis with the annual tax prepared anyway. also why they don’t work as well now.” always. return and associated forms that a In such a situation, depleting the IRA CPA will have to put together,” he says. “It’s not necessary to worry about is a possible remedy, he says, if the tax Many IRA trusts “Because it is trust work, these costs required income distributions to satisfy hit would be acceptable. One idea is to face a 10-year are typically higher.” the RMD requirements. That allows a use the withdrawn IRA dollars to buy life distribution rule, Moreover, trusts reach the highest shift from complex drafting to a focus insurance, then name the trust as the which curtails tax bracket of 37% when they go above on whether to put the asset into a trust.” beneficiary of the life insurance policy. tax-deferred $13,050 of taxable income in 2021; by However, Andy Ives, an IRA analyst “There are no 10-year payout rules for buildup. contrast, married couples filing jointly with Ed Slott and Company, finds IRA life insurance, and the proceeds from life don’t hit the 37% rate until they earn trusts less appealing now because the insurance can be tax-free, so this would “If the beneficiary is a over $628,300 of taxable income. account may have to be paid out be a far better source to fund a trust,” disabled or chronically ill within 10 years. Ives says. person, a trust may be Tax liabilities “Suppose an IRA owner has a son In other words, if an IRA owner wants worthwhile for a relatively The painful tax bite on money retained with a gambling problem. Prior to the to leave those dollars to an heir who small account,” says Sotelo. in an IRA trust for control and asset Secure Act, such a client might have doesn’t know when to fold ‘em, a “That’s because direct protection can be another cost to named an IRA trust as beneficiary, non-IRA trust may be a better place to payments to the beneficiary consider. limiting distributions to those required,” hold ‘em. FP might have an impact on government benefits that individual may be receiving.” Tax rates, estates and trusts, 2021 The decision to choose a trust as IRA beneficiary If taxable income is: The tax is: depends on what the account owner wants for the Not over $2,650 10% of the taxable income trust beneficiary, says Schucher. “If a trust beneficiary is Over $2,650 but not $265 plus 24% of the excess over $2,650 known to be a spendthrift, a over $9,550 trust can make sense regardless of the IRA’s value,” Over $9,550 but not $1,921 plus 35% of the excess over $9,550 he says. ”Similarly, if the trust over $13,050 beneficiary has an outstanding judgment, which assets received directly from the Over $13,050 $3,146 plus 37% of the excess over $13,050 IRA may be required to be used to settle, a trust can be Source: irs.gov a good choice.” Along with their multiple Donald Jay Korn is a contributing writer for Financial Planning in New York.

Financial-Planning.com April 2021 Financial Planning 39

039_FP0421 39 3/15/2021 4:24:00 PM APRIL 2021 CE Quiz

VISIT FINPLANCEQUIZ.COM TO TAKE FINANCIAL PLANNING’S CE QUIZ.

From: How to handle IRA beneficiaries under the SECURE Act From: How advisors can serve U.S. expat clients 1. If a client wants to leave their IRA to a spouse as an 6. American citizens living abroad must file their tax return to eligible designated beneficiary, the spouse must withdraw all the U.S. every year by which date? inherited assets in what time frame, per the Secure Act. 1. April 15 1. By Dec. 31 of the 10-year anniversary of the original IRA 2. May 15 holder’s death. 3. June 15 2. By Dec. 31 of the 15th anniversary of the original IRA holder’s 4. December 15 death. 3. By Dec. 31 of the 20th anniversary of the original IRA From: The smart way for women to think about claiming Social holder’s death. Security 4. The surviving spouse may stretch withdrawals out over their 7. Divorced women who were married for at least how many remaining life expectancy. years can claim a spousal Social Security benefit as long as they don’t remarry. 2. Conduit trusts are required to pay out all distributions how 1. 15 years often to beneficiaries? 2. 10 years 1. Annually 3. 20 years 2. Every two years 4. Divorced women cannot claim a spousal Social Security 3. Every four years benefit from an ex-spouse 4. There is no specific payout requirement 8. If a client who has reached full retirement age holds out on From: Crypto creates new hurdles for financial advisors this tax collecting Social Security benefits until age 70, they will see an season increase of what percentage to their annual payout for each 3. Cryptocurrency firms that send out a 1099-K typically go year they waited? only to investors who have made at least how much in gross 1. 10% proceeds from crypto investments? 2. 5% 1. $100,000 3. 8% 2. $50,000 4. 12% 3. $20,000 4. $10,000 From: How to study for (and pass) the CFP exam 9. The CFP Board allows CFP test takers how many total From: It’s time to revisit the IRA trust. Here’s why attempts at passing the exam? 4. In 2021, the highest 37% income tax bracket for trusts is 1. Two reached at how much taxable income? 2. Three 1. $45,062 3. Five 2. $25,048 4. There is no limit on how many times someone can take the 3. $75,235 CFP exam 4. $13,051 From: Funds with the best 15-year returns 5. Married couples filing jointly reach that highest tax bracket 10. Which of these funds has had the strongest 10-year of 37% at what amount of taxable income? annualized return? 1. $550,301 1. Fidelity OTC (FOCPX) 2. $628,301 2. Columbia Seligman Communications & Information A 3. $700,201 (SLMCX) 4. $495,701 3. Transamerica Capital Growth A (IALAX) 4. Morgan Stanley Insight A (CPOAX)

Financial Planning offers its Continuing Education Quiz exclusively online at FinPlanCEQuiz.com To earn one hour of continuing education credit from the CFP Board of Standards, please visit our website and answer the questions above. Planners must answer eight out of 10 questions correctly to pass. Credit will count under CFP Board subject A: financial planning process/general principles. The deadline for participation is April 30, 2022. In addition, the Investments & Wealth Institute, formerly the Investment Management Consultants Association, has accepted this quiz for CIMA, CIMC and CPWA CE credit. Advisors must answer eight out of 10 questions correctly to pass. The deadline is April 30, 2022. If you need assistance, please contact Arizent customer service at [email protected] or (212) 803-8500.

40 Financial Planning April 2021

040_FP0421 40 3/15/2021 2:06:25 PM Earn CE credits with Financial Planning Easily earn up to 12 hours of CE credit from the CFP Board and the Investments & Wealth Institute. Read the articles and answer the appropriate questions correctly to qualify for CE credit.

Financial Planning does not provide a certificate of completion. However, you will receive confirmation if you’ve passed the quiz. Please keep the confirmation for your records. Financial Planning reports results to the CFP Board weekly. The board may take an additional two weeks to post results.

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