Brokers pan Finra-AARP tie

The Financial Industry Regulatory Authority Inc. is drawing the ire of some brokerage firms by partnering with the AARP — a group that some in the industry see as a competitor. In November, Finra of New York and Washington teamed up with the Washington-based AARP to promote automatic 401(k) enrollment. Finra explained the effort as a way to boost employee participation. Critics of the partnership don't dispute the importance of increasing savings and the effectiveness of automatic enrollment. But AARP, through its for-profit financial services unit, Tewksbury, Mass.-based AARP Financial Inc., sells a variety of financial products, including a lineup of direct-marketed AARP-branded asset allocation funds targeted to the individual retirement account rollover market.
AARP "competes with us in providing financial services," said Jed Bandes, president of Mutual Trust Company of America Securities Inc., a Clearwater, Fla.,brokerage firm. "Finra is now de facto promoting [AARP] products," said Joel Blumenschein, president of Freedom In-vestors Corp. of Hartland, Wis., another brokerage firm. The recent AARP-Finra collaboration is called Retirement Made Simpler, which also involves the Washington-based Retirement Security Project, a research institute.

AUTO-ENROLLMENT

Retirement Made Simpler promotes automatic 401(k) enrollment by offering tools and information to employers. The Retirement Made Simpler website prominently describes the program as "three trusted organizations coming together." Some people "might see [the AARP and Finra] logos there together" on the Retirement Made Simpler site "and figure [the AARP funds] must be OK," Mr. Blumenschein said. But Retirement Made Simpler is "not targeted at investors, it does not promote any specific investment products, and it does not involve rollovers," said Sarah Bohn, spokeswoman at Finra. AARP Financial is an investment adviser, so Finra doesn't regulate it. "Investment counselors" employed by AARP Financial to service its fund shareholders are registered representatives with Alps Fund Services Inc. of Denver, a Finra-regulated firm. Alps is not affiliated with AARP Financial, Ms. Bohn said. Alps did not respond to requests for comment. "Our affiliation with Finra is as a nonprofit, to do advocacy work and provide information," said Jean Setzfand, director of financial security at AARP in Washington. "None of our funds are on a 401(k) platform, so I don't think there's any conflict of interest here," she said. The AARP funds' closest competitors might be other no-loadfunds, said Karen Keene, manager of research at AARP Financial. "But our minimums are much lower [than competing funds] — as little as $100," she said. "We feel we have a unique value" in giving smaller investors access to some advice they might not otherwise get, Ms. Keene said. AARP has focused marketing on its members, said Ms. Keene. "We're trying to leverage the AARP brand," she said. AARP Financial pays AARP 0.05% of fund assets per year to use the AARP name and gain access to its contact list of 38 million members. SSgA Funds Management Inc., a unit of State Street Corp. in Boston, subadvises the funds, which were rolled out at zero at the beginning of 2006 and have since grown to $138 million in assets. In 2005, AARP discontinued a licensing relationship with Scudder Investments of New York. Scudder has since become part of Deutsche Asset Management Inc. of New York. AARP Financial also sells fixed annuities and a variety of insurance, including life insurance. Those products are developed with outside vendors, including New York Life Insurance Co. and Simsbury, Conn.-based Hartford Life Inc. AARP funds come in three flavors — aggressive, moderate and conservative — that invest in a mix of index funds holding U.S. stocks, foreign stocks and bonds. The company also offers a bond fund and a money market fund. They are marketed to older investors who have IRA rollovers. Prospects are encouraged to speak with an investment counselor who can help determine goals and risk tolerance, and provide "personalized service," according to AARP fund marketing materials. AARP Financial promotes its investment counselors, who are registered representatives, as people who "put your interests first, because they are compensated with salary, not via commissions." The investment counselors are limited to recommending just the AARP funds. Investment counselors "can do a suitability analysis for AARP funds" and can answer general questions, Ms. Keene said. "If we find out that an AARP fund makes sense, we can tell [an investor] that, and if not, we will discuss that too," she said.

SEPARATE ENTITIES

AARP takes pains to stress that AARP and the AARP funds are separate entities. A notice on AARP Financial's materials says that "while AARP has licensed the use of its name to AARP Funds, AARP cannot recommend that you purchase shares of a particular fund or any security, because the AARP is not a registered investment adviser or broker-dealer." AARP does, however, offer lots of information on saving, investing, insurance and other financial issues. A planning and retirement page on the AARP website offers guidance on choosing a financial adviser. The group warns that while the big financial services firms have sophisticated tools, the "companies can be impersonal and corporate mandates can drive sales of proprietary products." Smaller independent advisers may have more investment options, the AARP site says, but "often do not have the impressive resources, in terms of research and support, of the larger firms." Dan Jamieson can be reached at djamieson@crain.com