Letters to the editor

I wholeheartedly agree with the editorial “Time to put real teeth on accredited-investor rules” (March 28).

The Securities and Exchange Commission has a few different rules for defining a sophisticated investor.

There is one standard for “high-net-worth individuals” for investment advisory services. There is another for “accredited investors” for private placements.

There is yet another for performance fee programs. And, there is still another for “qualified investors.”

The challenge is that each rule defines a sophisticated investor differently.

It would serve everyone’s interest to establish a common standard. And, it would seem proper to base a common rule on net worth, excluding one’s primary residence.

Whether today’s number is $2 million or higher, there is certainly little doubt that $1 million is inappropriate.

Todd C. Ganos

Principal

Doolittle & Ganos Investment Counsel LLC

Carmel, Calif.

In the editorial “Time to put real teeth on accredited-investor rules” (March 28), InvestmentNews reached the pinnacle of nonsense.

The editorial spent nine paragraphs explaining how the Securities and Exchange Commission needs to watch over inept, unskilled investors who need to be protected from themselves. Then, in a breathtaking and candid about-face, the editorial conceded that this type of SEC intrusion into our financial matters is completely ineffective.

“To be sure, no amount of regulation can protect the greedy and stupid from themselves or from dishonest brokers and financial advisers,” the editorial states.

The editorial goes on to say that “at best, the assumption that the size of one’s bank account or paycheck — or the value of one’s home — is a good barometer of his or her investment savvy is naïve.”

This is absolutely true. But because it is true, why would you go through the world-class literary contortions to attempt to say otherwise?

I can’t think of a more inept federal organization than the SEC.

Let us remember that the SEC staff auditors reviewed and audited Bernard Madoff not once, but twice.

Both times, the auditors found nothing particularly unseemly about his business practices. Possibly they went easy on Mr. Madoff in order to gain favor and possible offers of future employment.

The United States is a country based upon the concept of liberty, something the author of your editorial seems to have forgotten or perhaps never knew.

How would you like to sell your services into a market where the U.S. government, in its collective wisdom, has precluded 99% of us from participating, even if we wanted to? That is exactly what has happened as the result of these foolish accredited/qualified investor restrictions imposed by the SEC.

It would be far better to go in the other direction and dismantle Dodd-Frank, dismantle the SEC and the 1933 Exchange Act and get the federal government out of our lives. Let investors decide whether they want to invest, and let them learn how to perform due diligence.

The bottom line is that if the investor has a dollar and a hedge fund manager is willing to accept that dollar into his fund, there should be no laws precluding that transaction from occurring. Under the system you are proposing, the citizen continues to lose liberty to control his or her financial life as seen fit, and a meddling, ever more socialistic government gets bigger.

Is this good for a country organized around the principles of liberty and personal responsibility? I think not.

Craig Matson

President

Vineyard Equity Partners

San Antonio, Texas

The article “Good, bad and downright ugly: Advisory partnerships revealed” (April 11) should be well-received and considered as instructional among those later-career financial advisers who are investigating their succession-planning options.

I would like to add several points that counter the too-often negative experiences discussed in the article, based on my work with hundreds of partnerships during the past 15 years.

First, a partnership, be it newly formed or already existing, is the most client friendly of all succession-planning strategies. Clients aren’t subjected to suddenly meeting an adviser who they haven’t been exposed to and a new owner, a new office location and new employees, all of which are typical in an external sale.

Implemented properly, this internal business transfer method allows for a seamless transition of ownership, all within a familiar setting for clients.

Second, partnerships rarely work when client bases are kept separate. Owners should have entity ownership in exchange for “owning” individual clients.

Otherwise, you have a silo arrangement, not a true partnership.

Third, partnership compensation shouldn’t be based solely on who produces what, though that should be a component.

Owners should establish a fixed salary set by the specific management responsibilities and the number of the firm’s clients being serviced. A second level of compensation should be directly related to business development efforts (read: additional compensation to those who bring in new business), and the owner’s compensation should be a percentage of ownership, which is a reward for the enterprise’s true net profitability.

Finally, perhaps the biggest mistake in adviser partnerships is the lack of a profession-specific shareholder or operating agreement that is designed to mitigate all the challenges mentioned in the article. Owner responsibilities and behaviors should be clearly defined in such a way that it gives both penalties and incentives for individuals not only to think of themselves during decision making.

For example, owners should be required to give advance notice, say six months, in requesting redemption of shares so another partner isn’t blindsided or better yet, to encourage the parties to work through tough challenges.

In addition, owners should always be required to divulge outside business activities to partners, (in some cases, they should divulge and seek voting approval) to ensure that a partner doesn’t become involved in an activity that doesn’t reflect well on the business or catches the eye of regulators.

I know of many partnerships that haven’t and most likely never will deal with the “downright ugly” elements spoken of in your article because they took a more diplomatic and strategic planning approach, to ensure a higher level of success. This is contrary to the repeated reports we hear about in the profession from those who entered the model with visions of grandeur but in a very sloppy manner.

David Goad

President

Succession Planning Consultants Inc.

Newport Beach, Calif.