In Practice May 16, 2016

Boomer Clients Still Eyed Eagerly by Many Advisers

It’s a simple formula that keeps more than half of advisers primarily targeting Baby Boomers: They have the most money saved and are the most in need of immediately actionable advice.
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Survey data released by D.A. Davidson & Co.’s Individual Investor Group shows more than half of financial advisers are still primarily going after new clients who are Baby Boomers—although the majority is unlikely to hold out that much longer.  

According to D.A. Davidson, about six in 10 (59%) advisers are “most focused on attracting Baby Boomers (age 52 to 70) as future clients.” More than half (53%) of these respondents, in turn, believe that Baby Boomers are the “most attractive generation because of the advice needed based on their current life stage.”

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Advisers identified a variety of familiar services they would like to deliver to more Baby Boomer clients, from traditional investment portfolio support to holistic financial wellness consulting, including guidance on Social Security claiming strategies, budgeting, structuring income, etc. Many expect challenges to some of these offerings related to the Department of Labor’s (DOL) new fiduciary rule, but D.A. Davidson executives feel the industry has more than enough brainpower and resources to solve short-term business challenges.

Andrew Crowell, vice chairman of D.A. Davidson & Co.’s Individual Investor Group, tells PLANADVISER the findings also underscore a significant opportunity for advisers to engage younger clients. For many advisers this will represent first targeting Generation X clients who are well-established in their own careers and who are likely entering their peak earning years—but the firm also encourages advisers to think longer-term, about the earning power Millennials are already starting to build in the labor force.

“Millennials are very rapidly becoming the largest generation in the workforce, and many of them are very closely plugged into their Baby Boomer parents’ own finances,” Crowell explains. “Having gone through the financial crises essentially right at the start of their working careers, and with the likelihood of a large amount of wealth transferring from Baby Boomers to Millennials, it is certainly the time to start forming a presence among young people in the workforce.”

NEXT: Communication challenges 

The question is, of course, when does a Millennial shift from a prospective future client to someone you’re targeting to have as a client today? From D.A. Davidson’s perspective, Crowell says the formula that seems to work best amid real regulatory reform and difficult markets is “essentially to leave this decision about the timing of starting a formal relationship up to the client.”

“Practically, this means that we have to be using channels like social media and getting into the workplace to create some awareness of who we are and what we do,” Crowell adds. “We need to start making young people aware of the value of financial advice, especially when it is sought out early so that a good long-term plan can be put in place. If we do a good job on all of this we will naturally invite Generation X and Millennials in at the right time.”

While the appeal of winning new Baby Boomer clients is fairly obvious, it’s also a pretty simple formula that makes Generation X and Millennials a sensible target today.

“We have a tremendous opportunity to advise Gen Xers and Millennials for decades to come,” explains Michael Purpura, president of D.A. Davidson & Co.’s Individual Investor Group. Those advisory firms who move early to serve these generations have a chance to win literally decades of loyalty, and they will be driven to stay in tune with the latest technology, product developments, communication strategies—even business models. In the end it's healthy for the client and the adviser. 

The survey data shows roughly one-third (37%) of advisers are most looking to attract Gen Xers (ages 34 to 52), and “only 2% say they are primarily focused on attracting Millennials (ages 18 to 33).”

Roughly half (52%) of those looking to attract Gen Xers as future clients say that this generation is most attractive because of their future earnings potential; and one-third (35%) say that it is the advice needed based on life stage that makes them appealing. “Notably, 62% of advisers surveyed believe that younger generations are not working with advisers because they think they do not have enough investable assets,” Purpura concludes. 

Compliance May 13, 2016

ESOP Fiduciaries Don't Escape Liability for Mispriced Stock Purchases

An appellate court agreed with a lower court that the fiduciaries failed to act in participants’ best interest and to monitor providers.
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The 5th U.S. Circuit Court of Appeals has found that fiduciaries of Bruister and Associates, Inc. (BAI) employee stock ownership plans (ESOPs) violated their duties of prudence and loyalty under the Employee Retirement Income Security Act (ERISA) regarding company stock purchases to the ESOP.

In a three-year period from 2002 to 2005, BAI’s owner Herbert C. Bruister sold 100% of his BAI shares (also representing 100% of BAI’s outstanding shares) to BAI’s employees through a series of transactions with the ESOPs.  Bruister and Amy O. Smith are named defendants in the suit.

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The trustees set the sales price for each transaction based on valuations of BAI’s fair market value performed by Matthew Donnelly. The Department of Labor (DOL) and other named plaintiffs dispute whether Donnelly was truly independent and whether the trustees’ reliance on his valuations was reasonably justified. The basic claim is that the valuations were inflated, which caused the ESOP, and therefore BAI’s employees, to pay too much for the BAI stock. BAI suffered serious business reverses and went out of business in August 2008.

The appellate court found the U.S. District Court for the Southern District of Mississippi did not err in finding “[t]he  duty  of  loyalty  was  breached  from  start  to  finish.”  The 5th Circuit noted that among other things, the lower court found that Bruister: fired the ESOP’s counsel for being “too thorough;” caused David Johanson, Bruister’s personal lawyer, to influence Donnelly’s supposedly independent valuations to get the highest selling price he could for himself; caused Donnelly to send “valuation drafts to the seller [Bruister] before sending them to the buyers [ESOP trustees] to whom he owed his sole allegiance;” cut the ESOP’s counsel out of all communications regarding valuation; adjusted assumptions and figures used by Donnelly to obtain a higher valuation; and generally, did not “speak up for the ESOP participants.” 

NEXT: Failing to act in participants’ best interest and to monitor providers

The District Court also concluded that the trustees were affected by Bruister’s self-interest and thus failed to act solely in the interest of the ESOPs’ beneficiaries and participants. According to the appellate court, testimony from the trustees challenged the lower court’s findings, but the testimony was “far from sufficient to demonstrate clear error” on the district court’s part.

The appellate court also agreed with the District Court’s findings that the trustees, including Smith, conducted insufficient investigation into Donnelly’s background and qualifications; overlooked communications in which “Donnelly and Johanson were obviously working together to increase the value” of the shares in question; failed to inform Donnelly of significant information and risk factors for the company that should have influenced his valuation; and failed to double-check or significantly review Donnelly’s ultimate conclusions. 

In its opinion, the 5th Circuit wrote: “The trustees’ actions were not those of prudent men.”

In 2014, the U.S. District Court for the Southern District of Mississippi issued a judgment and order requiring fiduciaries to pay more than $6.48 million to the two employee stock ownership plans sponsored by BAI. The appellate court approved this amount.

Last month, a federal judge has entered a consent order expanding substantially the scope of a previous judgment and order between the DOL and Johanson. The judgment settled the DOL’s allegations that Johanson and his prior law firm committed contempt of a previous consent order.

The 5th Circuit’s opinion goes on to clarify some of the legal issues surrounding leveraged ESOP sales presented by the case. The text of the opinion is here.

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