Special Thanks to J.P. Dahdah

We had our third Young Financiers meeting this past Tuesday and I want to thank J.P. Dahdah for acting as our guest speaker and sharing his insight with the group. I thought he would be an excellent candidate because he was in the financial services field for much of his career and still is so to say. I would like to share some takeaways I got from the meeting:

• J.P. began the conversation by having everyone introduce themselves by stating their name, the company they work with, and their role within that company. He wanted to get a feel of their background and develop relatedness with each member.

• Mr. Dahdah next spoke about his career history. He interned with Merrill Lynch while at U of A and then progressed on to American Express Financial Advisors. He commented on the great training program they had. While he was there, J.P. was involved in a mentorship type program where he was matched up with a more seasoned professional at the firm. I think this is valuable because learning from someone with experience is better than reading it from a book. There is something to be said about absorbing information (osmosis) from first hand knowledge.

• J.P. then talked about ending ties with AEFA and going on his own with his mentor. He talked about having his own clients, his partner having his own clients, and the two of them having mutual clients. I found this to be an interesting concept. He had formed Dahdah Global Wealth Management with the idea that he could give his clients more opportunity than a selected list of preferred funds and limited breadth and depth. Learning to run a business on your own is a powerful skill to have. There are elements of each business that are universal and can be carried across industries.

• Mr. Dahdah was continuing to search for various investment opportunities for his clients. A client had talked with him about putting real estate into their IRA. J.P. did not have the capabilities at AmEx or thereafter locally to act on this matter. He went to various sources seeking the truth. He found a company that could do this on the East Coast and was able to bring a solution to the client instead of saying, "this is not possible". I like the idea that he may not have known the answer, but he was sure going to find out.

• J.P. talked about discovering The Entrust Group and then creating the opportunity to own the license for Arizona. He acted on this opportunity and has been building this business ever since. The business of self-directed IRA's is growing more popular everyday. Many people have no idea you can place real estate or other alternative assets into IRA's. They are led to believe by the Schwab's and Fidelity's of the world that stocks, bonds, and mutual funds are only what's available to invest in. There is nothing wrong with not offering this, it is their model of doing things. Entrust is out there to educate the general public and investing community that investor's have options when choosing investments for IRA's.

• With his position of President at Entrust Arizona, J.P. has figured that it is more important he work on his business rather than in his business. He mentioned the word scalability. This clicked with me as he used an analogy of a doctor/lawyer/financial planner. If you are not there, the company does not make money. How could he structure something so that if he wasn't there, the company would make money? I believe he found his answer.

The next Young Financiers meeting will be in Mid-January. Happy holidays and finish out the year strong.

Recent PR for the Young Financiers

I wanted to make everyone aware of some PR the group has recently received across the valley. There have been two instances I am aware of within the past month where the group is noted.

The first is in the Financial Planning Association of Greater Phoenix's newsletter Newsline in their October issue. The issue can be found here on page 11. This is excellent because it goes out to the target market for potential members of our group. The article discusses the purpose of the group as well as contact information to get involved.

The second piece is pertaining to one of our actual members of the Young Financiers. Joe Clancy, Operations Manager and Portfolio Administrator at Perspective Financial Services, is featured in his firm's monthly newsletter A Broader Perspective for October as recently joining the Young Financiers. See the newsletter here. This is a way for Perspective to let their clients know the employees are taking on additional learning opportunities. What an excellent way to gain exposure to let clients know there is a group out there that caters to younger individuals in this business.

I look forward to sharing many more media pieces focused on this group, potentially in the Journal of Financial Planning and the Wall Street Journal.

Next Young Financiers Meeting

I wanted to make you all aware of our next YF meeting as we are having bi-monthly meetings now as opposed to quarterly. We are excited to have our guest speaker J.P. Dahdah:

• share his insights and experience running a wealth management company
• explore self directed IRA’s
• provide any other information pertaining to the group’s topics of interest

If you would like to read his biography, please look below the details. Here are the specifics for the meeting:

Who: Young Financiers

What: 3^rd Meeting for 2007

When: Tuesday, November 13^th, 2007 from 7PM-8PM

Where: Entrust Office (20860 North Tatum Blvd. Suite #240 Phoenix, AZ 85050), NW Corner of Tatum and the 101 @ The Desert Ridge Corporate Center

About J.P.

J.P. Dahdah began his professional career in 1997 as a financial advisor with American Express Financial Advisors, Inc., a Fortune 100 company. He graduated from The University of Arizona, where he earned dual degrees in Finance and Marketing. In 1999 he founded Dahdah Global Wealth Management, LLC, a comprehensive wealth management company which specialized in working with business owners. Throughout his career, Mr. Dahdah has been a featured speaker at various financial workshops throughout the United States, focusing on wealth accumulation, retirement planning, and estate conservation.

In June 2004, Mr. Dahdah founded Entrust Arizona Retirement Plan Administration, LLC, an affiliate of The Entrust Group. Entrust Arizona provides retirement plan administration and record keeping services to individuals and small business owners who wish to include non-traditional assets, such as real estate, as part of their tax-deferred and tax-free portfolios.

Internationally, Mr. Dahdah co-founded Capital Field Business Corporation (“CFB”) in 2005, a Latin American real estate investment company. CFB’s mission is to stimulate capital growth throughout Central America, primarily Guatemala, by creating investment opportunities in the real estate sector.

Mr. Dahdah is actively involved in the Arizona community, as well as, various philanthropic organizations. He is a member of Arizona State University’s School of Global Management & Leadership Dean’s Advisory Council, Treasurer for the Urban Land Institute’s (ULI) Young Leaders Group, and volunteers his time to Big Brothers Big Sisters of Arizona. In 2007, he was selected as a “40 Hispanic Leaders Under 40” Award recipient, presented by The Arizona Hispanic Chamber of Commerce and Univision Radio.

Revision From Previous Post

I received some feedback from the last post about the revision of a particular comment.

Michael Kitces was Chair of the 2007 NexGen Conference, but not the Chairman of NexGen Leadership. The role of Chairperson of NexGen Leadership for 2007 belongs to Tara Scottino. Tara was last year's NexGen president.

I appreciate the revisions so we have accurate information on the blog. Thanks for those who have provided insight thus far.

Introducing NexGen - the Next Generation of Financial Planners

I think it's time to discuss how NexGen could fit into the Young Financier's picture and vice versa. We will begin with an introduction of the concept, determine who is influential in this movement thus far, and complete the message with how we can play a role as the Young Financiers.

To give a background about NexGen, we would refer to the Financial Planning Association for inspiration. NexGen is the next generation of financial planners in the country (potentially the world someday). In the past, there had not been an avenue for the younger professionals to connect with one another in a formal fashion. The majority of the members of the Financial Planning Association were and are an earlier generation of professionals such as the Baby Boomers, Generation Jones, and the Baby Busters. There is nothing wrong with this, it just is the way it has been. The profession used to (and maybe still does) attract a career-changing individual, whereas now the trend seems to be toward those straight out of college wanting a career in financial planning. There are even colleges and universities who have degrees in financial planning, namely Texas Tech. Many students secure internships with financial planning firms that lead to full-time opportunities.

NexGen may have been underserved for some period of time, but a select set of individuals created an idea to do something about this. NexGen arose and now it is on to the growth stage of the organization. Michael Kitces, the Chairman of the group, was a key proponent in making this happen. Sabrina Lowell, the current President of NexGen, has been crucial in steering the ship for 2007. Mike Branham is the President-Elect and will chart the path for the following year. I read an article recently about Aaron Coates, another co-founder of NexGen. The professionals involved in this project are truly incredible and I look forward to getting to know them as NexGen progresses.

To get to how YF fits in the picture, I would like to give you a background of how we began. I had been attending the Financial Planning Association of Greater Phoenix meetings since June of 2006. I quickly learned that I was one of the youngest members in the chapter. It was great to speak with veteran planners in the industry, but I needed a deeper connection with others of my demographic with the similar passion for financial topics. Throughout the year and into 2007, I recognized individuals like myself who were recently out of school and working with independent financial planning firms as well as firms that support the financial planning process. I wanted to create an avenue where we could get together as a group to discuss various topics related to what we are doing in the field and develop long-term relationships to provide support throughout our careers. I identified about half a dozen individuals who stood out in this industry. Through conversations about what's possible, I generated interest within these people and created the Young Financiers. Since our first meeting in June of this year, I have discovered another half-dozen or so individuals who would be a great fit for our group.

NexGen has had annual conferences for the past couple of years, where young professionals from across the country traveled to attend an event to bring this group together. In fact, if I am not mistaken there were 120 members at the meeting this past July in Minnesota. On a national level, the group is picking up momentum. I believe the challenge now is to create a local and/or regional presence across the U.S. It seems as though the Young Financiers would be a good example of what the local presence of NexGen would look like. We would definitely like to pursue what this would look like. We are for the sharing of knowledge and providing assistance in the areas pertinent to our success.

I wanted to provide a few articles from national publications discussing NexGen:
NexGen: The Sequel from Financial Planning Magazine, September 2007
The Competition for Young Talent is Heating Up from FPA Solutions Magazine, October 2007
Young Rebel With a Cause from Investment Advisor Magazine, September 2007

Items from the Fall Meeting

I thought I would share with the group more about what was talked about during our meeting on Tuesday, September 18th and provide resources for further education.

The first area we spoke about was fundamental indexing. This seems to be a fairly new concept and Schwab is the first company to market to investors with mutual funds that use fundamental indexing. Rob Arnott and his company, Research Affiliates, created the methodology of the RAFI (Research Affiliates Fundamental Index).

On the Schwab website, they say the benefits of fundamental indexing are:

• Access to an indexing approach that can potentially help investors avoid overexposure to overvalued companies
• Reduced market risk through diversification
• Long-term growth potential by tracking the market

The group thought the concept was interesting, and some were looking into using it as a opportunity for their clients depending on the needs of the investor's situation.

There were a couple of items passed out during the meeting on this very topic, namely Efficient Indexing for an Inefficient Market by Research Affiliates (provided by Jared) and New Frontiers in Index Investing by Jason C. Hsu and Carmen Campollo (provided by Joe). A contrarian article is available here from the WSJ with John Bogle and Burton Malkiel entitled Turn on a Paradigm.

The next topic concerned fee/ low-load/ no-load insurance. This is drastically different from how insurance was structured in the past. The field has been commission-based and many independent fee-only advisors shied away from offering insurance because of this. A structure has been established to allow fee-only advisors to place insurance for their clients, all the while aligning the fiduciary responsibility of the registered investment advisor toward the client's best interests. There are several advisors who have created businesses out of being the insurance expert as part of the wealth management model for a client and set up the compensation to be fee-based as opposed to commission-based. An article that sparked an interest in discussing this topic was by one of the major proponent's of fee-only financial planning, Bob Veres. He writes columns and articles in various financial publications, and the one that caught my eye was New Life for Life Insurance in the September issue of Financial Planning magazine (click here for the article).

We as a group also discussed mentorship experiences within our firms and in our lives. The Cone of Learning by Edgar Dale (below) shows that we retain most of what we are exposed to by actually doing as opposed to reading or listening to a lecture.

(Click on Dale's Cone for larger view)

Mentorships are tremendously valuable because it is rare to find opportunities that allow you to learn more quickly, especially when you are in connection with someone who has "been there, done it". We agreed that we have had these experiences within each of our firms, but it was more of an informal structure and a learn-as-you-go model.

Toward the end of the meeting, we agreed it would be beneficial to have bi-monthly meetings as opposed to quarterly meetings. The participants thought it would be a better chance to develop relationships with other members.

Our next meeting will be scheduled for Mid-November. Details will follow within a month of the actual meeting (mid to late October).

Introducing the Young Financiers Fall Meeting

Good day Group,

This is Darin Shebesta. I am the current spokesperson for the Young Financiers. You had expressed interest in being a part of this group and I wanted to let you know the details of our next meeting.

Event: Young Financiers Fall Meeting 2007

Date: Tuesday, September 18, 2007

Time: 7:00PM-8:00PM

Place: Jackson Financial Advisors Conference Room, 9590 E. Ironwood Square Drive #110 Scottsdale, AZ 85258 (map), Courtesy of Jared Roskelley

Potential Topics for Discussion:

-Fundamental Indexing

-Fee/low-load insurance

-Mentor experiences

-Anything else that would like to be brought up

Please let me know if you are able to attend by responding to this email. Please let me know if you have any questions or concerns. I trust everyone is well. Take care and make it a stellar day.

Darin Shebesta

The Broker-Dealer Rule

I found this article regarding the transformation of the Broker-Dealer Rule very informative, especially the timeline of the rule since inception. I'm not sure if we have seen the last of the FPA/SEC brawl since there are many clients with fee-based advisory accounts at broker/dealer firms. Will the broker/dealer industry adapt to the new rules or will they force others to adapt to their rules?

http://www.fpanet.org/journal/articles/2007_Issues/jfp0507-art2.cfm

(click for PDF)

Source: The Journal of Financial Planning

In the End, Votes Count in the Broker/Advisor Donnybrook
by Duane Thompson

Duane Thompson is managing director of the Financial Planning Association's Washington, D.C., office. Chronology: Evolution/Devolution of the Broker/Dealer Rule Spring 1940. Congress approves Investment Advisers Act of 1940; act provides for limited industry exemptions, including brokerage firms that give advice in connection with stock sales. Summer 1999. Major wirehouses meet with SEC regarding new fee-based "brokerage" programs and exemption from Investment Advisers Act of 1940. November 4, 1999. SEC proposes additional exemption for brokerage firms in a no-action rule titled "Certain Broker/Dealers Deemed Not to Be Investment Advisers." SEC staff states it would not recommend enforcement action against broker/dealers complying with proposed rule. January 14, 2000. SEC deadline for submitting comments on the rule. December 20, 1999–July 10, 2004. SEC receives 248 comment letters regarding the proposed rule. Of this total, 96 percent are opposed, 1 percent is opposed in part, 3 percent support the rule. July 20, 2004. Lawsuit filed in federal court by FPA challenging the rulemaking on technical grounds. August 18, 2004. SEC reopens comment period on rule, citing FPA legal challenge. August 27, 2004. D.C. Circuit Court of Appeals orders delay of lawsuit, following motion for delay by SEC, which promises final action on rule by December 31. Court orders reports by SEC every 45 days. September 22, 2004. SEC deadline for submitting new comments; additional 1,500 letters received since lawsuit filed, overwhelmingly opposed. December 22, 2004. SEC adopts temporary rule to extend broker exemption through April 15, 2005, proposes modified rule. Commissioners publicly pledge final rule adoption by deadline. Reopens comment period for third time. February 7, 2005. SEC deadline for submitting comments on amended rule; receives another 300 letters for cumulative total of 2,000. February 9, 2005. D.C. Circuit Court orders SEC and FPA to file new motions related to the lawsuit by April 29, or no more than 30 days after SEC adopts final rule, whichever comes first. March 29, 2005. SEC focus groups express confusion over the many titles used by financial services agents and are generally unaware of the different standards for consumer protection. April 6, 2005. SEC unanimously adopts the broker/dealer rule (IAA Rule 202(a)(11)-1). April 28, 2005. FPA files a petition in the United States Court of Appeals for the District of Columbia Circuit challenging the SEC's final rule exempting certain broker/dealers from the requirements of the Investment Advisers Act of 1940. FPA also seeks, with the SEC's consent, to file a motion consolidating the petition with FPA's pending petition, filed on July 20, 2004, concerning the rulemaking proceeding. December 16, 2006. SEC issues a no-action letter easing the restrictions on brokerage firms offering financial planning services and effectively allowing them to offer and deliver financial plans and similar services to customers under similar-sounding marketing terms. January 31, 2006. Implementation deadline of the broker/dealer rule goes into effect: brokerage firms can no longer hold out as a financial planner or offer financial planning services, or deliver a financial plan to a customer. March 23, 2006. FPA submits written brief to court citing that the SEC improperly created a new exemption for the brokerage industry that defies congressional intent and puts the investing public at risk. May 11, 2006. SEC responds to FPA's brief, challenging its standing to bring the lawsuit, and contesting its version of legislative history. May 25, 2006. FPA responds to SEC. October 5, 2006. Oral arguments are held in FPA v. SEC in the U.S. Court of Appeals for the District of Columbia Circuit. March 15, 2007. FPA seeks formal interpretative guidance from the SEC in understanding the differences between financial planning and fee-based brokerage services under the broker/dealer rule. FPA also notes clear violations of the financial planning and disclosure requirements, and questions timing of the delivery of the required disclosure of potential conflicts of interests by brokers as inadequate. March 30, 2007. U.S. Court of Appeals for the District of Columbia Circuit rules in FPA's favor in FPA v. SEC in a 2-to-1 decision, vacating the broker/dealer rule in its entirety. The ruling of the U.S. Court of Appeals for the District of Columbia Circuit and the legal briefs filed in the case can be reviewed online at www.FPAnet.org/member/govt_relation/lawsuit-against-sec-broker-dealer-rule.cfm.

Compensation Models

I was sure that the fee-only structure was the best compensation model available for everyone. The article below made me think twice when making a blanket statement such as this. I have colored the phrases in the executive summary of the article below that stood out to me. I look forward to discussing this topic with the group.

http://www.fpanet.org/journal/articles/2007_Issues/jfp0507-art7.cfm

(click for PDF)

Courtesy of the Journal of Financial Planning

Who's the Fairest of Them All? A Comparative Analysis of Financial Advisor Compensation Models
by John H. Robinson

Executive Summary There are three primary modes by which investors pay for financial advice: commissions, asset-based fees, and flat fees. This paper examines the economic incentives at work in each and suggests that the debate over which model is "fairest" is flawed because all three models contain incentives that can lead to conflicts of interest and each may also represent an optimal choice for certain investor circumstances. The recent trend away from commissions in favor of fee-only planning may not represent a best-practice model for the profession. Alternatively, the ideal compensation platform may be one that incorporates all three models. While conflicts of interest in the commission model are seemingly obvious, data exist to suggest that the impact of these conflicts may be overstated and that the commission model may have a cost advantage for some investors. A clear advantage of asset-based fees is that advisor compensation is tied to performance. Still, conflicts in this model may arise from inherent disincentives to recommend strategies that lead clients to reduce assets under management, even if such strategies are in the clients' best interests. The flat-fee model is the only one that truly allows the client to pay for broad-based financial planning guidance that is not merely incidental to the investment plan. Nonetheless, shirking and over-billing are potential conflicts of interest that arise under this model. There is little evidence to suggest that regulatory differences lead fee-based advisors to be either more qualified or to act more ethically than commission-based advisors; however, the fee-based models are clearly superior with respect to fiduciary disclosure requirements. It can be argued that regulatory inequality denigrates the commission model's credibility. John H. Robinson is branch manager and managing director of a Honolulu, Hawaii-based wealth management practice. He has been in the industry since 1989. "Incentives are the cornerstone of modern life. And understanding them—or, often, ferreting them out—is the key to solving just about any riddle, from violent crime to sports cheating to online dating." —Steven D. Leavitt and Stephen J. Dubner, Freakonomics

1st Group Meeting

The Young Financiers first meeting will be Tuesday, June 12^th at 7:00PM in the Coffee Plantation located at the Biltmore Fashion Park (24^th St. and Camelback, see here for map).

On the Agenda

Introduction of members

Discussion of compensation models (commission vs. fee-based vs. fee-only vs. fee for service)

Broker-Dealer Rule in the courts

Anything else pertinent to the conversation

Please RVSP to darin@tfsformunis.com whether you will make it or not.