CU Times Editor-in-Chief PHOENIX, Ariz. – A sluggish economy, loss of consumer confidence, corporate scandals, growing unemployment, and a likelihood of war with Iraq all took a toll in 2002 on investor confidence and Wall Street’s performance. Financial services CUSOs have had to tweak the way they consult with their clients and manage their portfolios, but overall they’ve managed to come through the year not only holding their own, but attracting members’ investment dollars, even while some members bailed out on Wall Street all together to cut their losses. Becky Nilsen, president/CEO, Desert Schools Financial Services LLC said 2002 was “a great year” for the wholly-owned CUSO of Desert Schools FCU, Phoenix, Ariz. It wrote $35 million in gross sales in 2002, up from $23 million the previous year and increased the number of its full-time securities representatives from four to seven. Desert Schools Financial also generated $1.4 million in gross dealer concessions (GDC), and the CUSO’s net income for the year was about $43,000. Nilsen said Wall Street’s performance, while taking a bite out of investors’ portfolios, also sent a lot of members who had previously tried to make their own buying and selling decisions, looking to investment professionals like those at the CUSO, for expertise. “When the market didn’t rebound in the second quarter of 2002 as many economists had predicted, that worked to financial services CUSOs’ advantage because the public got more jittery and decided they didn’t want to make investment decisions themselves. They wanted to work with a trusted advisor and members turned to CUSOs for a level of protection.” Even though many members decided to sell part or all of their investments and deposit them in insured share accounts, Nilsen said “there’s a balance between how much members should have in insured funds and investments,” and that’s the message the CUSO tries to impart to members. Desert Schools Financial Services also offers investment services to non-members, and Nilsen said they account for 4-5% of the CUSO’s clients. Desert Schools Financial Services, like virtually all financial services CUSOs, has been studying whether it made sense for the CUSO to get its own broker/dealer license or roll the CUSO’s investment services back in to the credit union. “In light of the pending SEC decision, it makes sense for us to get our own broker/dealer license,” said Nilsen, and she said the CUSO is in the process of determining what kind of broker/dealer it will register as. The SEC code defines the different capital requirements for the various broker/dealer registrations. Nilsen said Desert Schools Financial will most likely register as an introducing broker/dealer which has a capital requirement of $50,000. “Everyone in the brokerage community had to deal with what went on with Wall Street last year,” said Pete Snyder, president, Addison Ave. Financial Partners. “The erosion of consumer investor confidence in the market and continued volatility of the market created a lot of skittish and hesitant investors.” Addison Ave. decided the best way to deal with the situation was to develop strategies for investing in the market’s climate and to be proactive with its current clients, as well as its new clients. “Most brokers were reactive to their clients,” said Snyder, “but bad things just don’t go away. You have to deal with them and show your clients there are ways to get through these times.” Addison Ave. reps sat down with their clients, reviewed their original portfolios, and then reviewed them again looking at how it would be affected by the market’s volatility. “We wanted to find out if their long term objectives remained the same and reassured them their portfolio would have cycles,” said Snyder. “We asked them if anything had changed in their investment goals since three or four years ago,” he said. “Those who answered no, we advised them to ride through the volatility, and those who answered yes, we advised them to do a responsible rebalancing process to minimize the volatility down the road.” As a result of Addison Ave.’s strategy, Snyder said the CUSO retained in excess of 98% of its clients. For new clients, Snyder said the CUSO took them through an education process. Their main concern was the market’s volatility, he said, and we explained that the market moves in cycles. Despite Wall Street’s roller coaster ride, 2002 wound up being a good year for Addison Ave. Its gross revenue for 2002 was $8 million, compared to $5.8 million in 2001. Its net income was $765,000, after paying $415,000 in final taxes when the CUSO converted to an LLC in September 2002. In addition, Addison Ave.’s assets under management increased 37.1% to $739 million from $539 million in 2001. The previous year its assets under management increased 24.8% from 2000. Like Snyder, Jim Hobday, president, Affinity Investment Services, a wholly-owned CUSO of Affinity FCU, Bedminister, N.J. said the CUSO had to spend more time meeting with clients, especially new ones, and discussing their investment objectives. “What happened on Wall Street last year made people more afraid and consequently made the process and time from when we sat down with clients to discuss their goals and objectives much longer. It required more hand holding,” Hobday said. Affinity Investment Services finished 2002 with more than $2.6 million in gross revenue, up 30% from 2001. It had $180 million in assets under management at year end. Affinity Investment Services’ focus in its talks with clients was to learn about their expectations and goals, and assess their risk tolerance. “In the past we might have had one meeting with a client as a fact finding meeting, and then a second one for their portfolio proposal. Now, with the investing public being more skeptical, it takes about four or five meetings. We have to reinforce the communication process,” he said. -

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