- Susan Weiner Investment Writing

Portfolio managers want to outperform their benchmarks. There’s no question in my mind about this. But how much of an advantage do you need before you can claim outperformance?

Outperformance for stocks

To keep things simple, let’s focus on portfolios investing in stocks.

Is it okay to claim outperformance if your return exceeds the benchmark’s by more than 1 basis point (0.01%), 25 bps, 50 bps, or 100 bps?

Or should the margin be calculated relative to the benchmark’s return? After all, exceeding the benchmark’s return by 26 basis points (0.26%) looks better when the benchmark returns 0.01% than when it returns 45%.

Please answer the poll in the right-hand column of this blog. I’ll report on the results in my February e-newsletter.

Diverse opinions on “outperform”

I’m literal-minded. To me, a fund “outperforms” when it beats its index by the tiniest margin, though I doubt that I’d crow about that. However, asset management companies often report such returns as “in line with” or “closely tracking” the benchmark. The concerns of their legal or compliance departments probably influence this decision.

Here’s one example:

…the Wasatch Heritage Fund posted a return of 6.22% for the quarter. These results closely tracked those of the Fund’s benchmark, the Russell 1000 Value Index, which returned 6.78% over the same period.

Meanwhile, some managers–including the manager of the Wasatch Global Science & Technology Fund–question whether their returns should be compared to benchmarks.

Typically, the first paragraph of our quarterly letter to shareholders includes a statement regarding the Fund’s performance relative to its benchmark. We intend to move away from this approach beginning with this letter, as
we think the industry norm of tracking performance versus a broad index on a quarter-by-quarter basis distracts from the Fund’s long-term investment strategy. Our new mantra, forged by the pressure of the 2008–2009 credit crunch, is that we must invest “away from the market” as we attempt to deliver exceptional long-term returns.

I’m looking forward to learning what YOU think.

Dec. 27. Oops. I made a miscalculation in discussing the Heritage example, so I’m deleting the offending sentence thanks to David Lufkin.

Guest post: “Be Compliant When Using LinkedIn Messages”

November 16, 2010/2 Comments/in client communication, communication, compliance, financial advisor, LinkedIn, marketing, social media/by Susan Weiner, CFA

Social media compliance is a big worry for financial advisors, so I was delighted when Bill Winterberg offered to write a guest post on three easy steps to be compliant using LinkedIn messages. I’ve quoted Bill in numerous blog posts and tweets on technology, social media, and tweets because he’s a great resource.

Be Compliant When Using LinkedIn Messages

By Bill Winterberg, CFP^®

An earlier post on InvestmentWriting.com highlighted a “whopping flaw” in LinkedIn’s messaging system that poses compliance issues for financial advisors. The concern is that no viable solution exists to archive and retain messages using settings on LinkedIn.

I believe that advisors can use LinkedIn messages without violating regulatory requirements, provided they follow the three steps below. The key in all three steps is to leverage an existing e-mail archiving service to capture and retain messages sent via LinkedIn.

Here are three steps advisors can follow to demonstrate proactive compliance when using LinkedIn messages.

1. Use an e-mail archiving service and use the e-mail address being archived with all LinkedIn messages. If you’re not archiving e-mails today, you’re going to have a challenging time responding to audit requests by examiners. They almost always ask for e-mail communication in one form or another.

2. Configure your LinkedIn E-mail Notification settings to control how you receive e-mails and notifications. All of your General options should be set to deliver Individual E-mail, as shown below. This will feed all LinkedIn messages sent to you into your e-mail system, so they will subsequently get archived by the service you established in Step 1.

3. Here is the only part that requires you to do something manually. When you compose new LinkedIn messages−or reply to messages received−you must click the “Send me a copy” check box under your message window. Again, the copy of the message will be sent to your e-mail address that is subject to archiving through your archiving provider.

These three steps will leverage an e-mail archiving service to capture and retain message sent through the LinkedIn messaging system. Upon examination by a regulator, advisors will be able to quickly produce all messages sent using LinkedIn.

Bill Winterberg, CFP^®, is a technology consultant to financial advisors in Dallas, Texas. His comments on technology and financial planning can be viewed on his blog at www.fppad.com.

Brokers, CFA charterholders, and fiduciary duty: Charterholders are not always fiduciaries

November 8, 2010/in career, compliance, financial advisor, financial topics/by Susan Weiner, CFA

CFA charterholders have strong feelings about fiduciary duty. This showed up in responses to my blog post on ” ‘CFA credential implies a standard of care not always upheld,’ says Forbes opinion piece,” which discussed brokers and fiduciary duty. So I’m happy to see that the CFA Institute has addressed this topic in “What’s a Broker to Do? Fiduciary duty and obligations under the CFA Code and Standards (registration required)” by Jonathan Stokes, head of Standards of Practice at the CFA Institute.

CFA charterholders who are brokers aren’t always fiduciaries

Stokes sums up the obligations of CFA charterholders who work as brokers as follows:

Although members and candidates must comply with any legally imposed fiduciary duty, the Code and Standards neither imposes such a legal responsibility nor requires all members to act as fiduciaries. In particular, the conduct of CFA charterholders who are broker/dealers may or may not rise to the level of being a fiduciary, depending on the type of client, whether the broker is giving investment advice, and the many facts and circumstances of a particular transaction or client relationship. (Bold added by Susan Weiner.)

Obligations vary by broker type

Charterholders challenges and obligations vary by broker type, according to Stokes’ article.

Execution-only brokers are not subject to fiduciary duty, but conflicts of interest should be disclosed. “Among the conflicts brokers should disclose are whether they offer different levels of services to all clients and whether they pay referral fees to outside organizations,” writes Stokes.

Retail brokers‘ clients should understand they’re in a relationship with conflicts of interest. I wonder how many grasp this. Clients often don’t absorb the significance of what’s written in a hastily skimmed client agreement.

Stokes says

For those who work in a sales capacity rather than a true advisory role, the client relationship is often based on the understanding that the range of investment advice is limited to that firm’s proprietary products or to other firms with distribution agreements with the brokerage firm…. Where the client agreement clearly states the nature of these conflicts, the client is deemed to understand that he will receive selective and potentially conflicted investment advice.

Institutional brokers “pose a particularly challenging area for application of the Code and Standards,” says Stokes. He notes that “disclosure of all relevant transaction details, including costs and commissions, is essential.” Moreover, “With multiple clients’ interests and objectives at stake, the institutional broker must remain impartial and reconcile (to the best of his or her ability) any conflicting client directions.”

Poll: Is the SEC’s plain language requirement for Form ADV Part 2 a good idea?

November 7, 2010/in client communication, compliance, financial topics, marketing, SEC, writing/by Susan Weiner, CFA

SEC-registered advisors must rewrite Part 2 of their Form ADV using plain language. The requirement takes effect in 2011.

You won’t be surprised to learn that I favor plain language, but I’m curious to know what you think of the new requirement.

Please answer the poll in the right-hand column of my blog, asking “What do you think of the plain language requirement for Form ADV Part 2?”

Bad idea
Okay, but will cost too much time and money
Good idea, but I’m not sure if it’ll be implemented effectively
Great idea, I’m looking forward to it
None of the above (please leave a comment)

By the way, the SEC’s plain English handbook is a great resource for your Form ADV rewrite, as Deborah Bosley and Libby Dubick point out in “Lemonade from legislative lemons: New ‘plain language’ rules for Form ADV give advisors a chance to stand out.” Investment News (Oct. 4, 2010, registration required).

LinkedIn’s fatal flaw for financial advisor compliance

October 21, 2010/5 Comments/in client communication, compliance, LinkedIn, marketing, social media/by Susan Weiner, CFA

LinkedIn has a whopping flaw for advisors who’d like to keep their compliance officers 100% happy, and there’s no solution in sight. At least, not to my knowledge.

The problem is records retention, which is at the heart of conservative management of compliance risks from advisor communications. Much of what you post to LinkedIn can be automatically saved and archived using solutions provided by third-party vendors. But there’s no way to do this for messages sent via LinkedIn.

How to cope with LinkedIn’s weakness

If you’re a solo financial advisor who’s not subject to rigorous compliance controls, you may use one of the following approaches:

Taking the risk of neither automatically nor manually archiving messages
Manually copying your LinkedIn messages to your corporate email account, which I assume is automatically archived, by clicking on “Include others on this message” and then checking the “Send me a copy” box below the message.
Avoiding the use of LinkedIn messages, although the LinkedIn message function cannot be disabled–at least not to my knowledge

If you work for a large, conservative organization, your compliance department may ban you from using LinkedIn. I know this happens.

What’s the problem?

The barrier to solving this LinkedIn message problem may lie with LinkedIn, according to a communication from the @Backupify Twitter account. But I’m not sure if this is a challenge specific to Backupify or to all vendors.Meanwhile, I must thank @BillWinterberg of FPPad for connecting me with Backupify.

To back up what you can on LinkedIn

In the meantime, if you’re looking for a partial solution, Arkovi backs up most of LinkedIn. I believe that some of the firms listed in my blog post on “FINRA/SEC compliance for bloggers,” such as Smarsh and Socialware, also tackle this problem.

Please tell me if I’ve overlooked a solution. I’d like to share it with my readers. Meanwhile, check with your compliance professional about how to keep them satisfied as you use LinkedIn. You CAN do it.

“CFA credential implies a standard of care not always upheld,” says Forbes opinion piece

August 13, 2010/11 Comments/in compliance, financial advisor, financial topics/by Susan Weiner, CFA

Edward Siedle questions the integrity of some CFA charterholders in “Investors Misled By Brokers Masquerading As Fiduciaries: CFA credential implies a standard of care not always upheld,“ an August 9 “Expert View” on Forbes.com. Siedle is a former SEC attorney and the president of Benchmark Financial Services.

While I think Siedle overstates his case, he raises an interesting point.

Suitability standard vs. fiduciary duty

His basic argument: If CFA charterholders work for broker-dealers, they’re bound to a standard of suitability, rather than fiduciary duty. This is a conflict I hadn’t thought about before reading his article.

Apparently many brokerage firms handle the potential conflict by forbidding use of the CFA credential by those who use the suitability standard.

Siedle quotes Robert Dannhauser, the CFA Institute’s director of advocacy outreach. Dannhauser says, “…in many such instances, the firms do not allow CFA charterholders to display the CFA designation after their name on business cards or other publicly available material, so that clients do not perceive any different standard than what the firm has adopted for all of its employees. This hopefully offers clients a clearer view of what they’re getting. The key is for practitioners to not represent themselves as one thing but offer a different level of service than might otherwise be expected given that representation.”

Siedle counters by saying, “However, in my experience, many brokers do use their CFA status in marketing themselves to investors–especially to institutional and high-net-worth investors who are most likely to be familiar with the designation.” Moreover, “Unfortunately, it’s only after the retail broker dressed up like a fiduciary screws up that the investor might discover that he and his employer do not accept a fiduciary standard of duty.” I don’t know the details of the case that Siedle uses as an example.

Siedle seems to imply that every charterholder who works for a company such as Bank of America works for a broker-dealer. This is an exaggeration. The companies he names are not pure broker-dealers. Many of the charterholders at these firms may work for registered investment advisors that explicitly require them to act as fiduciaries.

Challenge for the CFA Institute’s ethics curriculum

Still, I’d be curious to know if the conflict between fiduciary duty and the suitability standard comes up in the CFA Institute’s ethics curriculum. If not, it sounds like a good topic for the future. As a CFA charterholder myself, I feel confident that the CFA Institute will tackle this issue.

FINRA/SEC compliance guidance for bloggers

July 15, 2010/15 Comments/in blog, career, compliance, marketing, social media/by Susan Weiner, CFA

Photo by Steffe

Registered representatives and registered investment advisors (RIAs) fall under two different regulators when they blog. Reps must grapple with FINRA’s regulations, while RIAs enjoy more freedom under the Securities and Exchange Commission (SEC), as I learned from Bill Winterberg’s guest post in December 2008. Do things right because “You can be sure that FINRA is going to start including social media reviews in their next round of examinations,” as attorney Mark Astarita said in “Advisors Allowed To Get Social.” That goes for the SEC, too.

However, if you treat your blog posts as sales literature or advertising, you’re unlikely to run into problems with your compliance department. This is true whether you’re a rep or an RIA. This has implications for your content, administrative processes, and recordkeeping.

You’ll find some guidelines below. Don’t rely solely on this blog post for guidance because I only skim the surface. Always check first with your compliance officer. If you’re the compliance officer, it’s important to monitor compliance developments for more details–and because standards may change quickly. You’ll find compliance resources at the bottom of this blog post.

Content: No recommendations

“The bottom line here is do not make specific recommendations in any of your communications. You should keep your comments, posts, and interactions general in nature if you are referring to anything that is financially related,” says Stephanie Sammons, CEO of Wired Advisor, in “The Good News/Bad News of FINRA’s Social Media Guidelines Release.”

If you’re regulated by the SEC, you should observe the following policies when writing content, as summed up by Triplestop LLC’s Joe Polidoro in “Social Networking for RIA’s.”

Disclose all material facts
Don’t publish testimonials–When you wander off your blog, this includes LinkedIn recommendations, Twitter favorites, and the Facebook “like”
Don’t use “RIA” improperly

Polidoro also stresses that, aside from crafting your content carefully, you monitor your sites frequently so you can remove testimonials and other noncompliant content, keep records (see more details below), and develop and post your social media policy.

Some SEC compliance tips I picked up include during my dealings with compliance professionals include

Never make guarantees
Use “we believe” to make statements more palatable to your compliance officer
Avoid mentioning specific products, especially specific mutual funds, whenever possible, or you subject yourself to onerous disclosure requirements

Process: Preapproval preferred

Reps must get their blog content approved by a registered principal before they post to the web, according to Polidoro’s How FINRA Regulations Play Out in Social Media, At a Glance. RIAs have more leeway, especially if they’re at a small firm. I believe that larger RIA firms are likely to demand preapproval.

Recordkeeping: Archive your posts so they’re easily retrieved

FINRA wants you to keep your records for at least three years; the SEC, for at least five years. There are plenty of vendors that would like to provide you with an automated solution for tracking your social media. You’ll find some of them in the list of “Twitter and other resources.”

Reports, articles, and regulations on social media compliance

Here are resources that complement the blog posts I’ve mentioned above. If you’re aware of more, please let me know.

The Companion Guide to FINRA/SEC Social Networking Compliance, published by Smarsh
FINRA and Social Media, published by FactRight and provided by EverydayTenacity.com
FINRA Regulatory Notice 10-06 Guidance on Blogs and Social Networking Web Sites, published by FINRA
How FINRA Regulations Play Out in Social Media, At a Glance, published by Triplestop
Update Your Status: A Guide to Embracing Social Media in Regulated Industries, published by SocialWare

Twitter and other resources on social media compliance

Most of the people named below don’t focus on social media compliance. But they have put out useful information in the past. I expect they’ll do so again. Thanks to Bill Winterberg for adding some names to this list. Check Bill’s compliance list on Twitter in case new resources emerge.

This list gives Twitter names first. You can recognize Twitter names because they start with the @ sign. They’re followed by blog or website links. If the resource lacks a Twitter name, I give their real life name.

Do you recommend other resources on social media compliance for financial advisors? Please add them in the comments. I’m especially interested in resources for investment managers, wealth managers, and financial planners who blog.

April 2016 update: For a more recent post, read “Top 3 Compliance Concerns When Writing Your Blog.” In April 2016 correspondence, Cindi Hill confirmed that her advice is still current.

Using CFP in your Twitter name–Read the CFP Board’s position

May 23, 2010/in blog, client communication, communication, compliance, financial advisor, financial topics, marketing, social media, social networking/by website admin

Using a term such as CFP in your Twitter name makes sense as a marketing strategy for financial advisors. It immediately identifies you as a credentialed professional. However, it also means you’re violating the CFP Board’s rules.

Twitter alerted me to this issue. When I dug into the CFP Board’s Guide to Use of the CFP Certification Marks, I discovered that point 1.7 says “CFP certificants may not own or use an email address or internet domain name that includes the CFP mark.” (Sorry CFP Board, I don’t know how to make the (R) mark appear in a Blogger blog).

Here are some examples from the CFP Board of proper and improper use of their mark.

A Twitter name isn’t an email or a URL. But Twitter does make the name into a URL following the format http://twitter.com/TWITERNAME.

I contacted @CFPBoard to ask if a Twitter name using CFP would violate its rules. Here’s the reply:

It sounds as if the CFP Board is open to your feedback about using CFP in Twitter names. So shoot SLaBonte an email, if you’d like to be heard.
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The compliance-constrained advisor’s guide to LinkedIn, Part II: Status updates

May 20, 2010/2 Comments/in compliance, LinkedIn/by website admin

Your LinkedIn status updates are powerful reminders of your existence to clients, prospects, and referral sources. You can use them in ways that even compliance officers can love.

My top three suggestions are to use materials that are already compliance-approved, share your professional interests, and share your professional interests.

1. Use compliance-approved materials
Every firm has materials that are approved for use with the general public. It could be your quarterly investment commentary, a newsletter, or even a brochure. Take advantage of this information by writing about it in your status update line.

You can say something as bland as “Check out our 2nd quarter market commentary at http://…” or spice it up by asking a provocative question and following the question with a link. Check with your compliance officer to learn how much you can say without raising his or her anxiety.

2. Share your professional interests

You can mention professional meetings that you’re attending or topics that you’re reading about.

Let’s say you’re trying to attract clients with complex estate planning needs. Your prospects will probably feel reassured to learn that you’re reading journal articles and attending panels on these topics. Your update about an upcoming event may lead to your referral source setting an appointment to meet you there.

You can also share company news, such as the hiring of a new relationship manager or the debut of a new product.

3. Share your personal interests

People like to do business with people whom they like. Share your volunteer interests, hobbies, or even something that makes you smile. It’ll help people to develop a connection with you.

Compliance note: For more on the compliance aspects of social media, check out Bill Winterberg’s excellent article in the Journal of Financial Planning, accessible to members only. Chad Bockius’ “LinkedIn Compliance Self-Assessment” focuses on compliance for registered reps. Both articles point to the importance of monitoring and archiving social media activity.

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