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EDITOR’S NOTE ESG in 2020 Lawmakers demand FTC investigate Envestnet Yodlee ver my 20-plus years covering BY RYAN W. NEAL Ofinancial markets, ESG (en- vironmental, social and gover- THREE MEMBERS OF Congress are de- nance) investing has captured an manding the Federal Trade Commission inordinate amount of attention investigate Envestnet Yodlee to determine if from the business media. Cycli- the way the firm sells consumers’ personal cally, ESG woos the attention of financial data is breaking the law. journalists who are happy to spin Yodlee is argu- a tale where investing aspires to ably the largest ag- be more than a zero-sum financial KEY POINTS gregator of consum- game. So, I’ve been a skeptic. • Congress is er financial data in At this time last year, I saw questionning the country. Banks, ESG appear on the legality of brokerages, indepen- meeting agendas. how Yodlee dent advisers and However, the sells personal financial technology RON SHERROD ANNA content of those information. startups rely on Yo- WYDEN BROWN ESHOO meetings removed • Yodlee is the dlee to access, collect my skepticism. largest aggrega- and analyze infor- These firms tor of consumer mation from various Sen. Sherrod Brown, D-Ohio, and Rep. consumers’ personal information is bought weren’t discuss- financial data. financial accounts. It Anna Eshoo, D-Calif., Yodlee also sells ac- and sold, the greater the risk that it could be ing it blithely, was acquired by En- cess to this data. the subject of a data breach, like the recent GEORGE B. but instead were vestnet in 2015. “The consumer data that Envestnet breaches at Equifax and Capital One.” MORIARTY making meaningful According to the company’s website, Yo- collects and sells is highly sensitive,” the Envestnet Yodlee published a state- commitments. So, I’ve watched dlee partners with more than 1,200 compa- lawmakers wrote in the letter. “Consumers’ ment on its website saying it complies ESG closely, and, I can now say, nies, including 15 of the top 20 U.S. banks. credit and debit card transactions can re- with laws and regulations, and follows I’m a believer. Yodlee said its data aggregation reach- veal information about their health, sexual- industry best practices for data security, In the past week, we saw es 25 million people globally. According ity, religion, political views, and many other regulatory compliance and privacy. BlackRock announce that “the to the letter from Sen. Ron Wyden, D-Ore., personal details. And the more often that CONTINUED ON PAGE 24 firm would make investment decisions with environmental sustainability as a core goal.” And our Jeff Benjamin report- ed that sustainable investing “will has a sweep in this space, although they go down as one of the hottest don’t use that term anymore.” investment categories of 2019.” Regulators crack down on But there was negative news, COMPENSATION AND SALES too. CoreData shared research In a speech in November, Stephanie Ava- that indicates less than one in 10 kian, co-director of the SEC Division of global professional fund buyers teacher pension plans Enforcement, said the agency is prob- say ESG is a key factor when ing compensation and sales practices of selecting funds. third-party administrators. And Nir Kassir critiqued BY MARK SCHOEFF JR. Commission and the state of New York also BlackRock’s ESG strategy in a are investigating the sector. “BAD ACTORS Bloomberg News opinion piece A RECENT INVESTIGATION in Del- The teacher retirement plans are sim- last Thursday. aware of a company running a teacher ilar to workplace 401(k) programs. But WILL SEE THEY’RE If you’re a believer in ESG, pension plan that resulted in $500,000 in many 403(b) plans, which are mostly of- these items are as important as penalties and reimbursements could be a fered by school systems to K-12 teachers, ON THE RADAR .” the good news above. Typically, harbinger of a regulatory crackdown in are not covered by federal retirement ESG commentary would be read, an area rife with conflicts of interest, ac- law. That makes them vulnerable to in- TONY ISOLA, HEAD OF 403(B) PRACTICE smiled at and then put aside. This cording to experts. vestments that have high fees and oth- RITHOLTZ WEALTH MANAGEMENT week’s news flow is generating re- Earlier this week, the Delaware attor- er costly provisions, such as surrender sponses, and that is another signal ney general announced a settlement with charges and riders. “Among other things, we are digging that this time the interest is real. the Horace Mann Educators Corp. The “There’s going to be more to come,” into how administrators and their affiliates state is the most recent to zero in on 403(b) said Jim Lundy, a partner at Drinker Bid- choose and recommend investment op- [email protected] plans, which are vehicles for teacher retire- dle and Reath. “It’s a reasonable infer- tions, how they are compensated — includ- Twitter: @geomoriarty ment savings. The Securities and Exchange ence that the [SEC] enforcement division CONTINUED ON PAGE 24
Contents © Copyright 2020 by InvestmentNews LLC. All rights reserved. Vol. 24, No. 3, January 20, 2020. InvestmentNews (ISSN 1098-1837) is published weekly, except bi-monthly in July, August and the last two weeks in December by InvestmentNews LLC. The agent is Crain Communications Inc., 1155 Gratiot Avenue, Detroit, MI 48207-2912. Periodicals postage paid at Detroit, MI and additional mailing offices. POSTMASTER: Send address changes to InvestmentNews, Circulation Dept., 1155 Gratiot Avenue, Detroit, MI 48207-2912. U.S. subscription price: $89 a year. 2 | INVESTMENTNEWS January 20, 2020 INVESTMENTNEWS.COM Merrill continues focus on Morgan plans to training in 2020 add a million clients to wealth Bob Doll’s management 10 predictions BY BRUCE KELLY A YEAR AGO, Morgan Stanley said it was buying Solium Capital Inc.’s stock for 2020 plan business for $900 million in a bid to add younger clients and tech startups to BY JEFF BENJAMIN its stock-plan administration business. The wirehouse rm said it had set a uveen’s chief equity goal to convert 1 million of those stock- strategist, Bob Doll, plan investors to wealth-management Nis heading into 2020 relationships over the next ve-to-seven with a generally bullish years, through a variety of offerings on its BY BRUCE KELLY more attention to training and integrat- outlook. expanding platform. So far, the rm has ing less experienced brokers and advis- moved just 5,000 of the stock-plan clients AS IT RACKS UP record pro ts with the ers into its primary wealth management The world avoids to wealth management, according to a pre- stock market hitting new highs, Merrill business. 1 recession in 2020 as sentation the rm released last Thursday. Lynch will continue to eschew the re- U.S. GDP grows over The focus on the stock-plan clients cruiting of experienced advisers and in- 300 YOUNG ADVISERS 2% and global GDP comes as the rm drives its advisers to use stead introduce, or reinforce, programs For example, last April the rm said it in- grows over 3%. technology to chase trillions of dollars in that focus on training young or less ex- tended to seat up to 300 young advisers, customer assets held outside the rm. perienced professionals with the intent with some applicants coming from Mer- In ation and the 10-year of turning those newbies into full- edged rill’s online and robo-advising brand, Mer- 2 U.S. Treasury yield end wealth managers. rill Edge, in branch of ces with its most the year above 2% as “WE THINK Merrill has been steadily positioning experienced and pro table advisers, com- the Fed stays on hold itself to focus on new blood advisers for monly referred to as wealth managers. through the election. THIS IS A VERY the past few years. In 2017, Merrill Lynch, That is just one part of the strategy. along with key wirehouse competitors Merrill will continue to selectively hire Earnings fall short of INTERESTING Morgan Stanley and UBS, said it was advisers into what it calls its “accelerated 3 expectations, partially backing away from recruiting, a tradi- growth program,” designed for advisers due to rising wages. SPACE.” tionally but expensive way to hire new with two-to-seven years of experience JAMES GORMAN, CEO brokers and advisers. and from community markets. Stocks, bonds and cash Since then, Merrill, which has long The rm now has 75 managers ded- 4 all return less than 5% MORGAN STANLEY been the nancial advice industry’s lead- icated to coaching and training and is for only the fourth time ing trainer of young brokers, has put CONTINUED ON PAGE 24 in 25 years. Like Merrill Lynch and UBS, Morgan Stanley a few years ago said it was cut- Non-U.S. stocks ting back drastically on recruiting expe- 5 outpace U.S. stocks as rienced nancial advisers, which is costly the dollar retreats. and labor-intensive, and instead focusing more on growing the annual revenues of Value and cyclicals its current roster of brokers and advisers Wells Fargo loses more than 450 6 outperform growth and through technology and training. defensive stocks. SOLIUM ACQUISITION Financials, A long with the acquisition of Solium Capi- advisers in 2019 7 technology and health tal, Morgan Stanley said in September that care outperform it was adding more services for 401(k) par- utilities, real estate and ticipants and other workplace clientele as BY BRUCE KELLY consumer discretionary. part of a plan to grow its wealth manage- ment business as it seeks to become a sort WELLS FARGO ADVISORS’ head count Active equity managers of one-stop shop for their nancial lives. continued to drop at the end of last year, with 8 outperform their “We think this is a very interesting the rm reporting 13,512 nancial advisers indexes for the rst space,” said CEO James Gorman on a con- at the end of December, a drop of 456 — or time in a decade. ference call with analysts last Thursday. 3.3% — over the 12 months of 2019. He said it was part of the rm’s move to While some of those advisers moved to The cold wars within expand its universe of clients. competing rms, others retired and left the 9 the U.S. and between To that end, Morgan Stanley said that industry, company spokesperson Shea Leor- the U.S. and China 90% of its nancial adviser teams are us- deanu noted in an email. continue. ing digital tools. The rm has been goos- Compared to the quarter ended in Sep- ing nancial advisers to chase assets using tember, Wells Fargo Advisors reported a de- The U.S. concludes a new technology. In the middle of 2018, it un- cline of 211 nancial advisers. 10 tumultuous political veiled a revised pay plan to drive advisers’ Meanwhile, during a conference year with a status adaptation of technology. call with analysts to discuss quo election. fourth-quarter earnings, the [email protected] CONTINUED ON PAGE 24 Twitter: @bdnewsguy CHARLES SCHARF INVESTMENTNEWS.COM JANUARY 20, 2020 INVESTMENTNEWS | 3 TOPNEWS
flows into the category to increased terly net outflows in the third quarter of awareness of ESG-related issues along 2015, when net outflows totaled approx- ESG funds ride with a growing supply of funds that are imately $1.5 billion. reaching the crucial three-year mark. On an individual fund basis, the top “There are still a lot of funds that five funds all had more than $1 billion ‘perfect storm’ to don’t have super high levels of assets, but in net flows last year, led by the $4.7 the general trend will be something that billion TIAA-CREF Social Choice Bond encourages them to stay around as they Fund (TSBIX), which had net inflows of build their assets,” he said. “Investor pref- more than $1.7 billion in 2019. record inflows erences are starting to show up.” Bud Sturmak, co-chief investment A LITTLE BIT OF EVERYTHING BY JEFF BENJAMIN officer at Perigon Wealth Management, The other funds making up the top five said the ESG space is experiencing “a bit represented a little bit of everything. SUSTAINABLE INVESTING will go of a perfect storm.” The $2 billion American Century down as one of the hottest investment “First and foremost, there is climate Sustainable Equity Fund (AFDAX) had categories of 2019, according to the change awareness from the investor per- more than $1.6 billion in net inflows. year-end tally from Morningstar show- spective, but there also has to be some- The $7.5 billion Vanguard FTSE So- ing $20.6 billion in net flows into sus- thing there for them to invest in,” he said. cial Index Fund (VFTNX) had $1.5 bil- tainable funds last year. “Over the last 10 years, we’ve had a mas- lion in net inflows. The explosive growth in net flows into sive transformation in this space.” The $5.1 billion Parnassus Mid-Cap 300 mutual funds and exchange-traded Mr. Sturmak who is responsible for Fund (PARMX) had $1.4 billion in net funds categorized by Morningstar as developing a stronger ESG focus at his inflows. applying environmental, social and gov- $1.4 billion advisory firm, said the cat- The $1.5 billion iShares ESG MSCI ernmental criteria is nearly four times egory has evolved from restrictive and USA ETF (ESGU) had $1.2 billion in net the total net flow in 2018. negative screening a decade ago to inflows. While net flows into ESG-strategy what is now more along the lines of al- Mr. Hale said the momentum favor- funds has been climbing steadily for pha-generating data. ing ESG strategies is not just a one-off several years, the year-end totals only “Now we have better data, better event, but something that will continue WisdomTree grew from $4.9 billion in 2016 to $5.5 standardization and better reporting by to gain traction. billion in 2018. companies,” he added. “You also have a “To me, it’s like electric vehicles. I don’t substantial body of research including own one, but the next time I buy a car I’m takes stake in ‘A LEAP FORWARD’ from large banks that show that ESG is sure it’s going to be an electric vehicle,” “It was about time for assets to take a both a risk-mitigation tool and potential he said. “Investors aren’t calling brokers leap forward given the amount of sup- source of alpha.” and advisers asking for everything to be Securrency port for ESG investing that has been Morningstar’s data show ESG-fund switched over to ESG, but the next time exhibited in survey after survey, but net flows surpassed $4 billion for each they have an investment decision they BY RYAN W. NEAL I didn’t expect the jump to be quite as of the first three quarters last year, then will be asking about ESG.” much,” said Jon Hale, Morningstar’s popped up to more than $7 billion during WISDOMTREE Investments an- global head of sustainability research. the last three months of the year. [email protected] nounced last Tuesday it led a $17.65 Mr. Hale attributes the spike in net The category last experienced quar- Twitter: @benjiwriter million Series A funding round in Securrency Inc., a technology start- $20.59B up that WisdomTree hopes will help bring blockchain technology to the ESG TAKES ROOT AS 2019 ENDS ETF space. Securrency uses blockchain, the digital ledger technology that under- pins digital currencies such as bitcoin, $4.95B $4.99B $5.31B $5.48B $2.69B $2.83B to build market infrastructure technol- $1.08B $.73B ogy, including an identity and compli- ance framework to support digital se- $-.61B $-.65B curities transactions on a global scale. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Using Securrency technology, finan- cial services firms can use tokens to is- sue, trade and service traditional secu- ESG FUNDS WITH THE GREATEST 2019 FLOWS rities and assets on a digital network. WisdomTree founder and CEO 2019 Morningstar Morningstar Date of Total fund Jonathan Steinberg said he believes Name Ticker net flows Morningstar category sustainability rating overall rating inception assets this technology can provide a more in- vestor-friendly securities wrapper than American Century AFDAX 1.66 billion US Fund Large Blend High 4 11/30/04 1.99 billion the current exchange-traded-fund Sustainable Equity A structure. The hope is that blockchain Vanguard FTSE VFTNX 1.48 billion US Fund Large Blend Above Average 5/31/00 7.48 billion can improve the current experience of Social Index Inv trading ETFs and expand its availabili- ty to more of the investing public. Parnassus Mid-Cap PARMX 1.38 billion US Fund Mid-Cap Blend High 5 4/29/05 5.09 billion iShares ESG MSCI USA ETF ESGU 1.19 billion US Fund Large Blend Above Average 4 12/1/16 1.49 billion HIGHER STANDARD OF COMPLIANCE Calvert Emerging CVMIX 0.99 billion US Fund Diversified High 5 10/31/12 2.67 billion Securrency’s technology meets a Markets Equity I Emerging Mkts higher standard of compliance with securities laws and regulations where iShares ESG MSCI EAFE ETF ESGD 0.85 billion US Fund Foreign Above Average 4 6/28/16 1.49 billion other blockchain technologies fall Large Blend short, Mr. Steinberg said. Brown Advisory BAFWX 0.84 billion US Fund Large Growth Above Average 5 6/29/12 2.0 billion “Our investment in Securrency Sustainable Growth I is the result of a multiyear review of Calvert Equity A CSIEX 0.69 billion US Fund Large Growth High 4 8/24/87 3.77 billion blockchain technology and the associ- ated landscape,” Mr. Steinberg said in Vanguard ESG US Stock ETF ESGV 0.66 billion US Fund Large Blend Above Average 9/18/18 0.94 billion a statement announcing the strategic Calvert Bond A CSIBX 0.51 billion US Fund Intermediate 3 8/24/87 1.76 billion investment. “In our review, we found Core-Plus Bond instances of unnecessary applications of the technology and poor compliance “Source: Morningstar Inc. data through Dec. 31, 2019. Includes ESG Integration, Impact, and Sustainable Sector funds as defined in Sustainable Funds U.S. Landscape Report, 2018. CONTINUED ON PAGE 24
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IN012184.indd 1 1/15/20 2:56 PM The Leading Information Source for Financial Advisers InvestmentNews.com
OPINION Chief Executive Of cer EDITORIAL / LETTERS / OP-ED / GUEST BLOGS Christine Shaw, [email protected] EDITORIAL Chief Content Of cer: George B. Moriarty [email protected] Managing Editor: Paul Curcio Assistant Managing Editor: Susan Kelly Special Projects Editor: Liz Skinner Copy Editor: Anne Marie D. Lee Contributing Editor: Mary Beth Franklin Senior Columnists: Jeff Benjamin, Bruce Kelly Senior Reporter: Mark Schoeff Jr. Reporter: Ryan W. Neal Director of Multimedia: Matt Ackermann Senior Multimedia Manager: Stephen Lamb Multimedia Project Manager: Audrey Rose Joseph Embrace the SECURE Act Special Projects Coordinator: Brittney Grimes ART DEPARTMENT Executive Art Director: Scott Valenzano Associate Art Director: Pablo Turcios Senior Graphic Designer: Kyung Yoo-Pursell not only has Congress allow businesses of different sizes and from different N PASSING THE SECURE ACT, DIGITAL, CUSTOM AND RESEARCH enacted the rst major retirement legislation in a de- industries to combine to offer multiple-employer retire- Senior Research Analyst: James Gallardo cade, it has also provided retirement plan advisers with ment plans. That could spark an explosion of plans — Research Analyst: Devin McGinley Senior Operations Manager: Gillian Albert a powerful opportunity to help small rms establish and provide work for retirement plan advisers. Digital Operations Manager: Thomas Markley 401(k) plans where previously they had no access. But to quote Winston Churchill: “With opportunity Digital Operations Specialist: Carla Flores Custom Content Producer: Jay Cooper Provisions of the legislation will, for the rst time, comes responsibility.” A separate aspect of the Setting Every Community ADVERTISING I Chief Revenue Of cer: Up for Retirement Enhancement Act, as it’s formally Scott Miller, [email protected] 212-210-0717 known, is expected to increase the number of annuities Business Solutions Manager: available in workplace retirement plans. Kevin Reardon, [email protected] 212-210-0476 Today only 9% of 401(k) plans offer annuity options Business Solutions Manager: because many business owners worry about their Lauren DeRiggi, [email protected] duciary duty of ensuring that these are appropriate 212-210-0154 LETTERS Business Solutions Manager: investments. Judith Kelly, [email protected] 212-210-0167 Business Solutions Manager: SHIFT IN LIABILITY John Shaughnessy, [email protected] 212-210-0112 Let individuals direct retirement assets The SECURE Act has changed the process that em- Business Solutions Manager: ployers use to pick an annuity provider and shifts the Jason Anciulis, [email protected] 312-280-3115 duciary liability of doing so. Under the new rules, Account Executive: Michelle Richard i George, the duciary worries will now fall on the insurance [email protected], 212-210-0238 Manager US Event Sales: As I was taking a Reg Ed licensing test on suitability, two companies that sell the annuities. Dan Rubinetti, [email protected] “suggestions” for “ nancial planning” intrigued me: And that’s why we’ll likely see more annuity options 212-210-0432 H Business Solutions Manager & U.S. Events: within 401(k) plans. Sabrina Straub, [email protected] 1. “Conservative interest rate in post-retirement planning should But that could leave employees who select an annu- 646-437-7956 Reprint Manager: Laura Picariello, not generally exceed 5% on an after-tax basis.” The phrase “in- ity option at risk if those plans come with high setup or [email protected] 732-723-0569 terest rate” was combined in a statement about current illustra- surrender fees. Sales Operations Manager: Letitia Y. Buchan, [email protected] 212-210-0451 tions approaching 10% to 12% as being wrong, so we can as- These investments are complex, and RPAs who ADVERTISING OPERATIONS sume the writer meant total return and not only interest rates. help companies Head of Digital Advertising Operations: Aside from averages, the S&P 500 total return since 1990 has set up retirement Berta Franco, [email protected] Sr. Digital Advertising Operations Manager: had ve negative years, six years 0 to 10%, seven years 10% to plans should Valdimir Severe, [email protected] 20% and 12 years over 20%. “The average annualized total return be prepared to RPA S … Digital Campaign Manager: Jess Friedman, [email protected] for over the past 90 years is 9.8%.” provide extra Digital Ad Operations Campaign Manager: guidance around SHOULD BE Kimberly Hall, [email protected] 2. Quoting the licensing test: “Financial models used should whether an annui- AUDIENCE, MARKETING AND EVENTS generally overestimate the rate at which in ation will contin- ty option makes Director of Audience and Analytics: PREPARED George Ortiz, [email protected] ue, using long-term historical levels of in ation that have ap- sense. Email Marketing Specialist: Nicole Chantharaj proached 4% to 5%; 5% is the conservative rate that should RPAs should Audience Data Specialist: Julie Vanderperre TO PROVIDE Marketing Director, Brand and Products: Katie Downey generally be used.” The Consumer Price Index in the last 30 embrace the Vice President, Events: years includes only two years when the increase was over 4% extra responsi- Josh Brous, [email protected] EXTRA Marketing Director: Sasha Burgansky (1990=5.4% and 1991=4.2%); seven years between 3% and 4%; bility of making Senior Operations Manager: Tara Means 14 years between 2% and 3%; seven years between 1% and sure employers Events and Operations Manager: Natalie Taylor Marketing Manager: Kate Arends 2%; and two years at less than 1%. This is not justi cation for are educated GUIDANCE. Social Media Manager: Scott Kleinberg planning clients’ using a “conservative rate of 5%.” Over the about the overall Content Producer: Letitia Bow last 40 years the average annual in ation rate is 3.22%. restrictions and Executive Assistant to the CEO: So, depending on the portfolio allocation, to prepare an illus- bene ts of annuities, and actively help them evaluate Irma Rodriguez, [email protected] 212-210-0430 tration using 5% after-tax and 5% in ation in a nancial plan the best one for the company’s plan. PRODUCTION would harm the client by encouraging them to spend less, unnec- And employers should be made to understand some Prepress/Production Director: Simone Pryce essarily reducing their lifestyle. of the nuances around these complicated investments Production Manager: Paul Vaccari
And that’s food for thought, George. —– for instance, that 401(k) funds are already tax-de- INVESTMENTNEWS OFFICES ferred — so there is no tax advantage to be gained by Headquarters: 685 Third Avenue, New York, NY 10017-4024 Bureau of ce: Washington: 601 13th Street, N.W. Suite Best regards, rolling those dollars over into an annuity. 900 South, Washington, DC 20005 Michael RPAs should be ready to help rms determine the value in offering annuities in workplace retirement Advertising main number: 212-210-0451 Michael J. Zmistowski plans and help them identify annuity providers with BONHILL GROUP, PLC Chief Executive Of cer: Simon Stilwell Recognized Personal Financial Planner/Certi ed solid track records. Chief Operating Of cer: James Robson Retirement Counselor Head Of ce: Bonhill Group, Plc Financial Planning Advisors 14 Bonhill Street, London EC2A 4BX
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6 | INVESTMENTNEWS JANUARY 20, 2020 INVESTMENTNEWS.COM INVOICES InvestmentNews readers react to top stories
IN THIS WEEK’S IN VOICES, we offer a reader mailbag from contributing editor Mary Beth Franklin. Mary Beth is a nationally recognized expert in Social Security claiming strategies. You can look for an update to her e-book – Maximizing Your Clients’ Social Security Retirement Bene ts — soon.
MARY BETH FRANKLIN
cord, those bene ts could be reduced for us advisers. I have a question age, is collecting his Social Secu- or totally eliminated by the Govern- about the Social Security earnings rity retirement bene t, and is still ment Pension Offset (GPO) rule. The test as it relates to those who le for working full-time. Wife has her own GPO reduces a potential spousal or Social Security bene ts in the year earnings record and is age 62. She Government Pension Offset/ survivor bene ts by two-thirds of the they reach full retirement age (FRA). would like to begin collecting her Windfall Elimination Provision amount of his noncovered government How does that work for folks who Social Security now. When Social Michael: Hi Mary Beth, I am in the pension with no dollar limit. So, start worked in the year they turned FRA, Security determines the penalty for midst of drafting a nancial plan for a by looking at his Social Security esti- the same year they le for bene ts? commencing bene ts before FRA, do new client. Their plan is heavily depen- mated bene ts statement and search they just go off the joint tax return, dent on the assumptions we have for for those telltale zeroes. MBF: Hi Chris, I’m glad you enjoy or each individual’s earning record? their de ned bene t income ... Social my columns. Thank you for taking I want to be sure she would not Security and government pension. I the time to write to me. The earnings be penalized due to her husband’s am concerned about the possibility test stops at FRA, meaning you can earned income. that the husband could be subject to earn as much as you like without for- the Government Pension Offset rule, feiting any Social Security bene ts MBF: If the wife starts Social Securi- and, as a result, I could be signi cantly Restricted Claim for if you claim Social Security at your ty at 62, her bene ts will be perma- overestimating his projected Social Spousal Benefits FRA or later. nently reduced for claiming early. At Security bene ts. The client has no idea Julie: John was born in 1953. Kathy The earnings test is more compli- her full retirement age — which is whether he is subject to the provision. was born in 1958. If Kathy collects cated for someone who retires before 66 and 6 months, assuming she was Do you know how I could go about Social Security at 62, her bene t is FRA. For example, an individual born in 1957 — her retirement ben- con rming one way or the other? Could approximately $1,000 per month com- can retire as early as age 62. Even if e ts would be reduced by 27.5% for the client call Social Security and they pared to her full retirement age ben- their earnings exceed annual limit claiming 54 months early. If her ben- would know? Would I be able to tell by e t of $1,400 at 66 and eight months. of $18,240 in 2020, they could still e ts as a spouse are larger than her looking at his earnings history on his If John collects spousal bene ts on receive full Social Security bene- own, the combined bene t would be Social Security statement? Kathy’s earnings record when Kathy ts if their earned income does not worth 32.5% of her husband’s FRA is 62, how much will he collect? John exceed $1,520 per month ($18,240/12) amount versus 50% if she claimed at MBF: If your client worked for one of plans to le for his own maximum once they retire. This special rst her FRA. the dozen or so state governments that retirement bene t of approximately year in retirement rule is designed In addition, if the wife is still do not participate in Social Security, $2,950 per month when he turns 70. Is for people who retire in midyear. It working, her Social Security bene ts or was employed under the old federal Kathy stuck with $1,000 per month if can only be used once. The earnings are also subject to limits on her Civil Service Retirement System where she collects at 62, or can she take 50% test starts over again the following individual earnings. But if she is not his earnings were not subject to Social of John’s bene t when he is 70? January. If they’re not working, no working, she is not subject to earn- Security payroll taxes, his Social Secu- problem. If they are, they are subject ings restrictions and her husband’s rity earnings history would show “zero” MBF: Once Kathy claims her reduced to the earnings restrictions until income will not affect her bene t. FICA taxes paid for those years of em- Social Security bene t at 62, John, who they reach FRA, losing $1 in bene ts However, their joint income would ployment. If that is the case, he could be is at least 66 years old and who was for every $2 earned over the annual be used to determine how much tax subject to two different rules that could born before the Jan. 2, 1954 cutoff date, limit. they each would pay on their Social reduce or even eliminate his potential can le a restricted claim for spousal There is a higher earnings limit Security bene ts. Social Security bene ts. bene ts and collect half of Kathy’s for people who reach FRA in 2020. If he receives a pension based FRA amount (not half of her reduced They can earn up to $48,600 in 2020 on his noncovered employment and amount). Once John claims his bene t in the months before their 66th birth- has also worked long enough in the at 70, Kathy may be able to step up to a day without sacri cing any bene ts. private sector — generally at least 10 slightly larger bene t, but it would be If their earnings exceed that limit, years — to be eligible for Social Secu- worth less than half of John’s age 66 they would forfeit $1 in bene ts for Survivor Benefits rity, he would receive a Social Security amount (not half of his age 70 amount) every $3 earned over that amount. Ryan: A 16-year-old girl lived with retirement bene t but it would be because she claimed her bene t early. Someone who retires in midyear at her divorced father who died in reduced by the Windfall Elimination However, if John dies rst, she will age 66 or older could still receive full November 2018. She receives a $400 Provision (WEP). The WEP can reduce still be entitled to full survivor ben- bene ts if their monthly earnings per month Social Security survivor any potential Social Security bene t e ts worth 100% of what John was don’t exceed $4,050 ($48,600/12) once bene t on her late father’s earnings by up to half of the amount of the non- collecting at time of death, including they retire. Earnings restrictions record. She now lives with her moth- covered pension, but not by more than any delayed retirement credits. At that disappear once you reach FRA. er and will turn 17 this year. Under $480 per month in 2020, assuming he point, her own smaller Social Security what circumstances could the girl paid FICA taxes on substantial annual retirement bene t would disappear. continue to receive Social Security earnings for 20 years or less. The WEP after her 18th birthday? penalty is reduced if he paid FICA taxes for 21 to 29 years and disappears MBF: A dependent child is eligible if he contributed to Social Security for Individual or Joint Income? for Social Security dependent ben- 30 years or more. Lisa: I hope this nds you well. This e ts based on the earnings record Separately, if he tried to collect Earnings Test question is regarding a couple that of the disabled, retired or deceased Social Security spousal or survivor Chris: Mary Beth, thank you for con- has been married 30-plus years. parent until the child’s 18th birthday bene ts on his spouse’s earning re- tinuing to put out educational articles Husband has reached full retirement or up to age 19 if still in high school.
Mary Beth’s expert eye provides the IN community with invaluable insight into managing these issues for your clients. Do you have a question for Mary Beth or any of our staff writers? Please reach out to them directly, or to Chief Content Of cer George Moriarty at [email protected].
INVESTMENTNEWS.COM JANUARY 20, 2020 INVESTMENTNEWS | 7 BEHAVIORAL FINANCE CONTINUES TO GARNER ATTENTION AS MORE ADVISERS SEEK WAYS TO COACH CLIENTS FROM MAKING BAD FINANCIAL DECISIONS BASED ON EMOTIONS BY ADAM SHELL
client of financial adviser Michelle Spa- advisers who are incorporating behavioral finance, or BeFi, ziani recently proposed a plan to recoup concepts into their practices. There’s increasing recognition money on a past land purchase that didn’t among advisers of there being more to the adviser-client re- pan out. lationship than selecting funds, focusing on returns, drawing But a red flag went up. up asset allocations or bombarding clients with spreadsheets The couple’s scheme involved borrow- and pie charts. ing money to build an income-producing While it’s hard to pinpoint the tipping point, there’s been house on the land, now worth 50% less increasing interest in and greater adoption of behavioral finance than they paid before the 2008 housing by financial advisers since the Great Recession, Ms. Spaziani bust. But taking out a big loan was at odds with their finan- said, mainly because coaching people to make the right financial cial plan and would undo all their hard work to get debt-free decisions was “desperately required” during and after the worst before retirement. Ms. Spaziani, a proponent of behavioral financial crisis since the Great Depression. finance, an increasingly popular field of study that contends that peoples’ biases, emotions and irrational behavior can ‘COACHING’ COMPONENT lead to poor investment decisions, thought it was a bad idea. They’re embracing the idea that there’s a greater chance After hearing them out, she concluded their plan was driven a client will both stay with them longer and stick to their by a behavioral bias. long-term plan if they add a behavioral finance “coaching” As part of Ms. Spaziani’s intervention, she introduced component to their services. the couple to the behavioral finance concept known as loss The goal is to improve the client experience and portfolio aversion, or the tendency to avoid taking a loss because it’s returns by helping clients avoid emotion-driven miscues, such as too psychologically painful. selling at the bottom in a bear market or holding on to a losing “I told them they were exhibiting all the signs of loss aver- investment that has little chance of bouncing back. sion,” recalls Ms. Spaziani, a veteran FA who in 2018 founded Nearly three-quarters (71%) of advisers say they incorpo- Summit Behavioral Wealth in Greenfield, Mass. “They were rate behavioral finance principles into their “client communi- avoiding the idea of selling the land now at a depressed price [to] cations and interactions,” according to “BeFi Barometer 2019,” avoid pain. The husband was totally fascinated by the concept. a survey of 300-plus advisers sponsored by Charles Schwab He had never heard of this before. I told them about the pain Investment Management (CSIM). Another 58% say they they were feeling, and that research shows it’s a real thing.” apply the concepts when building client portfolios. Advisers Her clients got the message. They decided not to borrow that InvestmentNews interviewed who offer these nonport- money to build the house, although they were unwilling to folio-driven services to combat biases say they don’t charge sell the land at a loss. “They’re still not there,” Ms. Spaziani extra for the service. said, “but at least they’re not doing more damage to their Other behavioral biases include: retirement plan.” Recency bias — Being easily influenced by recent news Ms. Spaziani is one of a growing number of financial CONTINUED ON PAGE 10
8 | INVESTMENTNEWS January 20, 2020 INVESTMENTNEWS.COM INVESTMENTNEWS.COM January 20, 2020 INVESTMENTNEWS | 9 CRASH COURSES IN BeFi CONTINUED FROM PAGE 8 events or experiences like the S&P 500’s nearly 30% inancial advisers who want to learn more about behavioral finance and how behavioral coaching can add rise in 2019. value to client relationships should consider educating themselves on the topic. Here are a few ways to get Confirmation bias — Seeking information that F up to speed: reinforces your own views. • Kaplan Financial Education and Think2Perform offer an online course program dubbed “Behavioral Fi- Anchoring — A tendency to focus on a specific nancial Advice.” The two-course package, priced at $895, “is designed to train, develop, and improve the reference point when making investment decisions. moral and emotional competencies necessary to help you, as well as your clients, make better decisions Advisers identified a few ways incorporating throughout the financial planning process.” After the successful completion of this online program and behavioral finance is beneficial. Nearly half (46%) say passing a certification exam, you will receive the BFA (Behavioral Financial Advisor) designation. it helps them better manage client expectations. Four For more information, go to: https://portal.kupace.com/learn/think2perform out of 10 say it helps reduce their client’s short-term • The Investments and Wealth Institute, which held its 1st Annual Behavioral Advisor Forum in 2019, emotional decisions. And three in 10 say it helps keep is planning its second annual event on Sept. 10-11, 2020, in San Francisco. The two-day conference is clients invested during periods of volatility. for “advisers who wish to incorporate the latest research and best practices in the field of behavioral Better returns are another benefit of not making science.” Regular priced-packages range from $895 for IWI members to $1,345 for nonmembers. financial decisions based on emotions. A Vanguard For more information, go to: https://investmentsandwealth.org/conferences/2020/ study in 2016 estimated that financial advisers that 2020-behavioral-advisor-forum/registration-en provide behavioral coaching added a net return of 150 • The IWI also offers a course, “Applied Behavioral Finance,” which “gives advisers the tools to under- basis points to a client’s annual return. stand and properly navigate their clients’ roller coaster of emotions and unspoken biases toward “You don’t want to have to talk someone off the investing, as well as their own.” ledge — you make sure they never get close to the For more information, go to: https://investmentsandwealth.org/abf ledge in the first place,” said Jay Mooreland, founder • Duke University offers a three-week online “Behavioral Finance” course taught by Emma Rasiel, of The Behavioral Finance Network and a behav- associate economics chair and professor at Duke. ioral finance coach who sends out weekly coaching For more information, go to: https://www.coursera.org/learn/duke-behavioral-finance#instructors messages to his adviser clientele that often seeks to limit damage from ill-timed portfolio moves caused by scary financial headlines that spook investors.
‘A CONSISTENT MESSAGE’ For coaching to be effective, it must be “proactive and deliver a consistent message,” Mr. Mooreland said. “What we are trying to do is decouple the emotions from financial decision-making. [As an adviser], you are trying to dictate the discussion. If you don’t, the media will.” But not every financial adviser is buying into the cognitive biases. behavioral finance add-on, the CSIM survey found. “YOU DON’T WANT Then Richard Thaler came along. A professor at the Of those who said they’re not incorporating these University of Chicago, he built on the psychologists’ concepts into their practices, 65% said it was because work and won the Nobel Memorial Prize in Econom- they have “difficulty translating behavioral theory TO HAVE TO TALK SOME- ic Sciences in 2017 for integrating economics and into implementation.” Another 54% blamed a lack of psychology. All three men are regarded as the founding software and tools. fathers of behavioral finance. “I am definitely a skeptic around the value of advisers ONE OFF A LEDGE — YOU But it was Mr. Thaler, through his research papers, marketing themselves as behavioral experts,” Michael speeches and best-selling books, who caught the atten- Kitces, partner and director of wealth management at MAKE SURE THEY NEVER tion of financial advisers and the investment community. Pinnacle Advisory Group in Columbia, Md., told Invest- “Nudge,” which he co-wrote with Cass Sunstein in mentNews via email. “Not that it’s bad to be a behavioral 2008, suggested that subtle interventions could steer expert, but it’s not something clients are necessarily GET CLOSE TO THE LEDGE people toward a desired action, such as saving for re- looking to buy.” tirement. “Misbehaving: The Makings of Behavioral Eco- Research suggests clients still measure their finan- nomics” was released in 2015. Mr. Thaler made the con- cial advisers on performance. Mr. Kitces points to a 2019 IN THE FIRST PLACE.” cepts digestible and relatable.Financial advisers finally Morningstar survey of individual investors that found understood that when it came to managing money, the that an adviser’s ability to help “control their emotions” JAY MOORELAND, FOUNDER way their clients were wired psychologically was some- ranked last in a list of 15 things client’s value. THE BEHAVIORAL FINANCE NETWORK times an obstacle that needed to be overcome. Still, Omar Aguilar, chief investment officer of equities and multi-asset strategies at CSIM, said A PIVOTAL CHANGE advisory firms that add behavioral finance to their Gary Droz, managing director of MainLine Private offerings can “differentiate” themselves in a competi- Wealth in Wynnewood, Pa., said that listening to a tive marketplace. educate them on how behavioral biases impact their speech by Mr. Thaler, nearly five years ago, "literally “It sounds counterintuitive but understanding what decision-making. changed" his business. clients’ biases and behaviors are is more important To help protect investors from themselves, Ryan “It hit a nerve with me,” Mr. Droz said. “I’ve been an than returns,” Mr. Aguilar said. “The reason why Shuchman, partner at Cornerstone Financial Services adviser for 35 years and I used to always scratch my behavioral finance is so relevant is because the use in Southfield, Mich., uses a “fact-based” approach to head about a lot of things my clients did. It all made of these concepts allows advisers to build better and bust biases. sense after learning about behavioral finance.” longer-lasting relationships.” Clients influenced by news headlines, for example, Mr. Droz immediately began attacking common who fear that an ongoing trade war between China behavioral biases that were holding clients back. EASIEST PIECE OF THE PUZZLE and the U.S. will cause a recession, are shown current In dealing with loss aversion, Mr. Droz works As Ms. Spaziani puts it, the investment piece is the easi- economic data that prove otherwise. “We tell our clients tirelessly to teach clients not to panic during market est piece of the puzzle. While we have little control over we’re looking at the facts, the underlying fundamentals swoons. He explains in “excruciating detail” how vola- markets and the economy, what we can control is our and economic data, and we are not seeing signs that a tility works and how stocks have rebounded from past behavior and “how we react” to stimuli and triggers. downturn is imminent,” Mr. Shuchman said. plunges, including the 2008 financial crisis. “We have “I view my job as trying to stop a client from Coaching clients on a continuous basis is part of Mr. trained clients to stand pat,” Mr. Droz said. “Unless you making a silly decision,” said Ms. Spaziani, who felt Shuchman’s strategy. educate clients, they do stupid things out of panic.” so strongly about letting people know her practice “You want to make sure their short-term impul- He’s dealing with investor inertia, too. Just as Mr. was focused on more than just picking the right fund sive decisions don’t get their retirement plans and Thaler’s research showed 401(k) investors were less that she included the word “behavioral” in her firm’s accounts off track,” he said. likely to sign up for a retirement savings plan on name. “[In volatile markets], my clients aren’t saying their own, and that auto-enroll was the only way to to me, ‘Show me another spreadsheet.’ They’re calling FOUNDING FATHERS get them to participate, Mr. Droz has set up systems me, saying, ‘Please help me understand why this is The roots of modern-day behavioral finance date back whereby his staff enrolls clients in accounts, and fills happening and what I need to do.’ to the late 1970s, when psychologists Daniel Kahneman, out forms and submits documents for them. “They’re starving for a different approach, some- a Nobel Prize winner, and the late Amos Tversky peered “We don’t give clients homework, because they one to coach them, somebody who sees this as money into the psychology of decision-making and put behav- won’t do it. We do it for them,” Mr. Droz said. “That is therapy rather than a consultation about what mutual ioral finance on the radar. how behavioral finance permeates everything we do.” fund to buy,” Ms. Spaziani added. To reinforce her Their research showed that peoples’ investment message, she sends out monthly emails to clients that decisions are influenced by irrational factors like Adam Shell is a freelance writer. 10 | INVESTMENTNEWS January 20, 2020 INVESTMENTNEWS.COM We know what’s important to you in a custodian: superior service, always-improving technologies, and now, $0 commissions.*
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IN012179.indd 1 1/9/20 11:18 AM NUMBER OF MEDICARE BENEFICIARIES WHO RECEIVE THEIR COVERAGE THROUGH MEDICARE ADVANTAGE PLANS THAT ARE ADMINISTERED BY PRIVATE INDUSTRY 22M INSURERS, HENCE ELIGIBLE FOR DO-OVER OPTIONS. RIAs / INDEPENDENT BROKER-DEALERS / WIREHOUSES / M&A / CUSTODIANS / INDUSTRY GROUPS
of success there are the more con dence 11,500 advisers and boost assets to more seller and buyers will have and that leads than $450 billion. to willingness to do deals” WHO: Goldman Sachs acquires United THE BIGGEST DEALS OF 2019 Capital WHO: Charles Schwab acquires TD Amer- WHAT: Business lines acquired include an itrade RIA with $25 billion AUM that’s focused WHAT: Business lines acquired include a on the mass af uent market, as well as brokerage platform and custodian busi- the turnkey asset management platform ness that services more than $1.3 trillion FinLife, which boasts about $23 billion in in assets. contracted assets. WHEN: November 2019 WHEN: May 2019 HOW: Estimated transaction value of $26 HOW: Estimated transaction value of $750 billion and 12x to 15x EBITDA multiple. million and 18x to 22x EBITDA multiple. WHY: Schwab’s mantra for the upcoming WHY: The United Capital platform is one year at its annual Impact conference was of the industry’s most successful and re- “All In,” and the announcement of a poten- nowned platforms for providing nancial tial merger with TD Ameritrade is a testa- advice to the mass af uent market (net ment to the slogan (as well as a reaction worth $1 million to $15 million), an area to increased fee pressure in the brokerage of the market that Goldman had not his- business). Some industry observers are torically focused its wealth management worried that the consolidation of two of services on. The deal signi es a change in the biggest players could ag antitrust is- strategy for the bank and provides a plat- sues. The new entity will hold more than a form for cross-selling other products such third of the RIA custody market but only as personal lending and its growing mort- 11% of total client assets in the retail - gage presence. nancial services market. WHO: Principal Financial acquires assets WHO: Warburg Pincus acquires Kestra Fi- from Wells Fargo Another record year of nancial WHAT: Business lines acquired include WHAT: Business lines acquired include an Wells Fargo’s de ned contribution, de- independent broker-dealer platform that ned bene t, executive deferred compen- serves more than 2,000 advisers and $92 sation, employee stock ownership plans, M&A in the RIA space billion AUA. institutional trust and custody and institu- WHEN: February 2019 tional asset advisory businesses. HOW: Estimated transaction value of $600 WHEN: April 2019 BY JEFF BENJAMIN are more careful about how they share million to $800 million and an EBITDA HOW: Estimated transaction value of $1.2 the cash ow, pro ts and ownership of the multiple between 9x and 12x. billion and 8x to 12x EBITDA multiple. WITH A SEVENTH consecutive year of rm.” WHY: Warburg’s investments in the sec- WHY: Through this acquisition, Principal record-setting merger and acquisition ac- Aggregators, consolidators, emerging tor include The Mutual Fund Store (ex- will double the size of its U.S. retirement tivity on the books, there appears to be independent RIA leaders, large nancial ited), Financial Engines (exited), and business by the number of total record- little standing in the way of the momen- services rms and private equity capital Facet Wealth (current). The private equi- keeping assets. In addition to increased tum behind the consolidation among reg- have fueled the increase in deal volume, ty behemoth is a well-versed buyer and scale, Principal will gain a strong foothold istered investment advisers. according to Echelon. has the capital and resources for Kestra with midsize employers as more than two- According to a report last Monday “Speci cally, within private equity to conduct M&A in the IBD and RIA thirds of Wells Fargo’s institutional retire- from Echelon Partners, 2019 saw 203 RIA there is a new appreciation for the recur- market (via its new venture Bluespring), ment assets are in plans ranging from $10 acquisitions, up 12% from 2018 and repre- ring revenue associated with the wealth improve its technology platform and million to $1 billion. Fee compression and senting a 15.4% annual growth rate over management industry,” Mr. Seivert said. further develop its investment manage- increased regulatory insight into how re- the past ve years. Citing such PE-backed buyers as Mer- ment division. tirement assets are managed were likely Daniel Seivert, Echelon chief execu- cer Capital, Wealth Enhancement Group drivers of the deal. tive, cited increased access to credit and and Allworth, the Echelon research said WHO: Reverence Capital Partners ac- a growing list of quality buyers as among PE-backed deals have grown to 80 in 2019 quires Advisor Group WHO: Envestnet acquires TXN and Mon- the key drivers behind from 34 in 2017. WHAT: Business lines acquired include an eyGuidePro the rapidly accelerating Strategic buyers and independent broker-dealer platform that WHAT: Business lines acquired include a M&A trend. KEY POINTS consolidators represent- serves more than 7,000 advisers and $268 web application for consumer spending “There are lots of • 2019 saw 203 RIA acquisi- ed 41% of buyers in 2019, million AUA. analytics, competitive intelligence and new players entering tions, up 12% from 2018. followed by RIAs at 28%. WHEN: August 2019 surveys (TXN) and nancial planning the [lending] space and That compares to 2018, HOW: Estimated transaction value of $2.3 software (MoneyGuidePro). they’re all trying to lend • Increased access to credit when strategic buyers billion with an EBITDA multiple between WHEN: TXN acquired August 2019; Mon- about $200 million to and quality buyers are key and consolidators made 12x and 15x. eyGuidePro acquired March 2019 $300 million a year,” he drivers behind the trend. up 47% of the buyers and WHY: The transaction is part of a growing HOW: Estimated transaction value of $90 said. “Also, the number of RIAs were 27%. theme in private equity consolidating the million for TXN, $500 million for Mon- quality buyers is up dra- Average assets under broker-dealer landscape. Although Advi- eyGuidePro. matically over the past three years.” management per deal was $1.47 billion sor Group has signaled that M&A is not WHY: The race to complete the most diver- Mr. Seivert de nes quality buyers as last year, up from $1.27 billion in 2018, its primary strategy, we expect the com- si ed WealthTech product suite is heating rms with speci c teams dedicated to do- and continuing a growth trend that goes pany and its subsidiaries (FSC Securities, up. Envestnet is among the largest Wealth- ing deals. They typically have their own back to 2013, when the average deal AUM Royal Alliance, SagePoint Financial, and Tech providers and has built technology capital and deal focus, and they don’t take was $456 million. Woodbury Financial) to be more acquisi- solutions spanning modeling & execution, a disproportionate share of the economics, “Our expectation is that the environ- tive with the fresh infusion of capital. In CRM, accounting & reporting, operations he said. ment will just continue getting better fact, Advisor Group announced a prospec- & compliance, and decision support. “In the old days, the buyers were taking for advisers selling their businesses,” Mr. tive merger with Ladenburg Thalmann too much of the economics at the seller’s Seivert said. “In addition to nancing and only months later, which would create a [email protected] expense,” he said. “The quality buyers now quality of buyers, the more case studies mega platform serving approximately Twitter: @benjiwriter
12 | INVESTMENTNEWS JANUARY 20, 2020 INVESTMENTNEWS.COM More consolidation coming in online brokerage market
BY RYAN W. NEAL Paul Bragan, a senior partner at Wakefield cash holdings is necessarily a good out- Beyond cash sweeps, which the Finan- Research and the author of the report. come for end investors. cial Industry Regulatory Authority Inc. re- THE $26 BILLION merger of Charles “The market is going to incentivize “It might make financial sense for the cently added to its list of examination prior- Schwab and TD Ameritrade is only the and favor and push for consol- firms to consolidate, but for the ities, financial advice for a fee is going to be beginning of the consolidation in the on- idation because when commis- end investor, are they really go- increasingly important for online broker- line brokerage market, according to a new sions are no longer a revenue ing to see an improvement in ages as a revenue source, Mr. Bragan said. report from Wakefield Research. stream … it favors large cash their experience?” Mr. Beaure- He predicted that Schwab and Fidelity As nearly every major brokerage on hand,” Mr. Bragan said. gard said, adding that Fidelity’s Investments will likely emerge as the dom- has eliminated trading commissions in Fidelity spokesman Robert $26B position as a private company inant players because both already have the wake of Schwab’s move in October, Beauregard agreed with the PRICE OF means it doesn’t need to make significant scale as well as strong service firms will increasingly look to make up report’s conclusion that more up the lost revenue to appease offerings that generate fee-based revenue. lost revenue by investing retail inves- consolidation will happen. SCHWAB AND shareholders. For example, Schwab now charges a tors’ cash. This business model requires “Revenue streams are get- TD AMERITRADE flat $30 monthly fee for unlimited access to a large volume of customers, leaving ting harder to come by in the BEYOND CASH SWEEPS a financial adviser on its digital platform, consolidation as the only viable path for- online brokerage world,” Mr. MERGER Instead of sweeping cash into a Schwab Intelligent Portfolios. ward for many companies. Beauregard said. low-yield bank account, Fidelity Only a few providers are likely to re- However, he said that Fidelity doesn’t defaults cash in brokerage accounts into a [email protected] main after the MandA dust settles, said agree that driving scale in order to increase money-market fund, Mr. Beauregard said. Twitter: @ryanwneal Former Fidelity exec to Wells Fargo team head up Goldman Select moves to RayJay INVESTMENTNEWS
BY RYAN W. NEAL loans appeal to investors DANIEL KASCHMITTER and Wil- who want to keep their liam Gelegotis, who managed $800 GOLDMAN SACHS IS tapping a for- portfolios fully invested. million at Wells Fargo Advisors in Salt mer Fidelity executive to head up Gold- The program launched Lake City, have joined the employee man Sachs Private Bank Select, its with a relationship with unit of Raymond James. business offering registered investment Fidelity Clearing and Cus- Mr. Kaschmitter, who began his advisers and independent broker-deal- tody and in 2018 expand- career at PaineWebber, was with ers access to securities-backed loans. ed to advisers with LPL Wells Fargo and its predecessor firms Anthony Rochte, who most recently Financial. Goldman says for 18 years. oversaw Fidelity’s more than 150 RIAs and Mr. Gelegotis, who has more than digital wealth man- IBDs are now eligible to use GS Select, Rochte said. “What GS Select will bring 40 years of financial services expe- agement platform and about 50,000 advisers tap into the is helping the adviser think about the rience, spent the last 18 years with as head of Fidelity platform. asset accumulation period and also the Wells Fargo and its predecessors. Institutional invest- Now that the bank has proven there liability management of that relation- ments and tech- is an appetite among independent ad- ship. It ties the adviser even closer to nology solutions, visers for these kinds of loans, it's hop- the end client.” will take over as ing to tap into Mr. Rochte’s deep expe- managing director rience with the intermediary world to PART OF GROWTH STRATEGY and head of GS supercharge GS Select’s growth. The independent adviser market seems Select. Mr. Rochte Mr. Rochte has more than 25 years to be an increasing part of Goldman’s Mercer acquires ANTHONY ROCHTE succeeds Whitney of experience in the industry, with most growth strategy. After acquiring United Magruder, who of it in the RIA, IBD, bank brokerage Capital, Goldman decided to contin- helped launch GS Select in 2017 and and family office market. Before joining ue licensing out the FinLife Partners $140M RIA will remain with Goldman Sachs Pri- Fidelity’s FITS team, Mr. Rochte was technology to independent firms and vate Bank. president of Fidelity Selectco, Fidelity’s installed a company veteran, Rachel INVESTMENTNEWS GS Select was an expansion of Gold- ETF business, and a senior managing Schnoll, to grow the business. man’s existing private bank business director at State Street Global Advisors’ Wirehouse advisers have long of- MERCER GLOBAL Advisors has ac- in Private Wealth Management, which SPDR ETF business. fered clients access to securities-backed quired CCP Inc., a registered invest- extended lending services to non-PWM He hopes his industry relationships loans, Mr. Rochte said. GS Select offers ment adviser in Chicago that manag- clients via a digital platform. With GS and experience developing products additional firepower to independent es $140 million. Select, advisers can offer clients up to will help not only the technology side of advisers who want to maintain the ser- The firm is owned by Steve Rob- $25 million in loans backed by securi- GS Select, but the commercial success vices they offered at wirehouses. erts, who will be joining an existing ties held in nonretirement investment of the program as advisers look to ex- “The fee-based and fee-only side of Mercer office in Chicago along with accounts at partner firms. pand the range of services they provide the adviser market is growing at a faster Carin Pankros Roman and the entire clients. clip than traditional commission-based CCP staff. Terms of the acquisition NONPURPOSE LOANS “The financial adviser was primar- broker-dealers. This is just one more were not disclosed. The loans are also called nonpurpose ily focused on the asset management digital tool in the toolkit,” he said. Like Mercer Advisors, CCP was loans, and the borrowed money can solution maybe 10, 15 years ago. That founded in 1985. In 2009, Mr. Roberts be used for virtually anything except quickly evolved to wealth manage- [email protected] became its owner, president and chief buying more investment securities. The ment alongside financial planning,” Mr. Twitter: @ryanwneal compliance officer.
INVESTMENTNEWS.COM January 20, 2020 INVESTMENTNEWS | 13 PERCENTAGE OF FULL-TIME WORKERS WHO HAVE TAKEN A LOAN OR MADE AN EARLY WITH- DRAWAL FROM THEIR 401(K) OR IRA ACCOUNT. SOURCE: THE TRANSAMERICA PLANNING 31% CENTER FOR RETIREMENT STUDIES RETIREMENT / SOCIAL SECURITY / INSURANCE / TAX / MEDICARE / COLLEGE / TRUST & ESTATE / PHILANTHROPY What’s new for Social Security in 2020
he new year brings myaccount to access their some changes to So- estimated bene ts state- T cial Security payroll ments and apply for retire- taxes and bene ts, as well ment bene ts. as a promise by the new MARY BETH FRANKLIN Social Security Commis- HIGHER PAYROLL TAXES sioner to improve custom- Higher-income workers er service in 2020. will pay more Social Se- ONRETIREMENT Andrew M. Saul was curity taxes in 2020. The sworn in as Commission- maximum taxable wage er of Social Security in June, the rst base increased by $4,800, from $132,900 increase in the base Medicare premium. that were available to earlier retirees. Senate-con rmed head of the agency in in 2019 to $137,700 in 2020. Individuals whose modi ed adjusted People who were born on are before more than six years. With a term running Employers and employees each con- gross income exceeds $87,000 and mar- Jan. 1, 1954, are still eligible to le a re- through January 2025, Mr. Saul is respon- tribute 7.65% of gross wages to fund So- ried couples whose joint income exceeds stricted claim for spousal bene ts if they sible for administering the Social Security cial Security bene ts and pay a portion $174,000 are subject to monthly surcharges wait until age 66 or later to claim Social Se- retirement, disabili- of Medicare costs. Self-employed individ- ranging from an additional $57.80 to an ad- curity, allowing them to collect half of their KEY POINTS ty and survivors’ in- uals pay both the employer and employ- ditional $347 per month per person above spouse’s or ex-spouse’s full retirement age surance programs, ee share for a combined FICA tax rate of the base premium in 2020. bene t amount while their own retirement • Changes have which pay over $1 15.3% of net self-employment earnings. bene t continues to grow by 8% per year been made to trillion in bene ts As a result of the higher taxable wage HIGHER EARNINGS LIMIT up until age 70. People born after that date SS payroll taxes each year to about base, workers earning $137,700 or more Social Security bene ciaries under full — including those who turn 66 this year — and benefits for 64 million bene - will see their FICA taxes increase by retirement age who continue to work can are not eligible to use this claiming strategy. 2020. ciaries. The agen- $367.20 to $10,534.05 this year. Self-em- earn more money in 2020 than they could This year also marks the nal phase • In April, the file- cy has more than ployed individuals will pay twice that last year before losing any bene ts to the out of another valuable claiming strate- and-suspend 63,000 employees much, up to $21,068.10 in FICA taxes earnings cap. Bene ciaries who are under gy. People who were 66 or older, and who claiming option nationwide. in 2020. Workers earning less than the full retirement age for the entire year can led and suspended their bene ts by the will be history. In an open let- taxable maximum amount will see not earn up to $18,240 this year without losing April 29, 2016, deadline, were able to trig- ter to the public, change in their FICA contributions. any bene ts, $600 more than in 2019. If they ger dependent bene ts for eligible family Mr. Saul pledged earn more than that, they will forfeit $1 in members while their own retirement ben- to improve customer service this year BIGGER BENEFITS bene ts for every $2 earned over that limit. e t continued to grow. Their retirement by hiring 1,100 new frontline employees A 1.6% cost-of-living adjustment will boost Someone who reaches full retirement bene ts will automatically begin when to staff the agency’s crucial 800 number maximum Social Security bene ts for age in 2020 can earn up to $48,600 with- they turn 70. This lucrative claiming op- (800-772-1213). someone retiring at their full retirement out losing any bene ts, up $1,680 from tion will be relegated to the history books In addition, Social Security Adminis- age this year to $3,011 a month, an increase last year. Bene ts are reduced by $1 for when the last group of eligible retirees tration eld of ces resumed full-day op- of $150 per month from the 2019 maximum every $3 earned over that limit. The earn- turns 70 in April. erations on Wednesdays as of Jan. 8. Field bene t. Average retirement bene ts will ings cap disappears at full retirement (Questions about new Social Security of ces had closed at noon on Wednesdays increase to $1,503 in 2020, up just $24 per age and any bene ts lost due to excess rules? Find the answers in my new ebook since 2012, when budget cutback curtailed month from the previous year. earnings would be restored in the form of at InvestmentNews.com/mbfebook.) service hours. Now, all SSA eld of ces But increased deductions for Medi- larger monthly bene ts. will be open from 9 a.m. to 4 p.m., Monday care premiums will offset some of the Mary Beth Franklin, a certi ed nan- through Friday. COLA hike. The standard Part B pre- DISAPPEARING CLAIMING STRATEGIES cial planner, is a contributing editor for However, the agency continues to urge mium for outpatient services, which is Individuals who reach full retirement age InvestmentNews. the public to conduct as much business as usually deducted directly from Social in 2020 and beyond will not be able to use possible online, including setting up per- Security bene ts, increased by $9.10 per any creative claiming strategies to maxi- [email protected] sonal accounts at www.socialsecurity.gov/ month to $144.60 in 2020. That’s a 6.7% mize their lifetime Social Security bene ts Twitter: @mbfretirepro
offer a target-date fund, and 95% of plans offered some form of guidance or adviso- Managing 401(k) fees remains top plan sponsor concern ry service to participants. The prevalence of custom solutions increased modestly to INVESTMENTNEWS the past year, the study found. within participant communica- 17.3% in 2019. Conducted in the fall of 2019 tion for the third consecutive “What’s surprising is that over 45% of MANAGING PLAN fees is the main pri- by Callan, the survey of 114 year. sponsors don’t evaluate indirect revenue ority for corporate de ned-contribution plan sponsors — including Cal- 45% Among other notable sur- as a part of their fee review,” said Jamie plan sponsors in 2020, according to the lan clients and other organiza- NUMBER OF PLAN vey ndings was that cyberse- McAllister, a DC plan consultant at Cal- results of an annual survey by Callan, an tions — found participant com- SPONSORS THAT curity increased only slightly in lan. institutional investment consulting rm. munication closely followed priority from last year. “Since indirect revenue from sourc- For the fourth consecutive year, plan fees as the top area of focus for DO NOT EVALUATE es such as managed accounts or rollover sponsors ranked reviewing plan fees as 2020. INDIRECT REVENUE CUSTOM SOLUTIONS assets can be meaningful, we feel it’s im- the most important step they took to im- Financial wellness ranked AS PART OF The survey found that 87% of portant that it be considered in the overall prove their plan’s duciary position over as the most important area FEE REVIEW plans offer a Roth feature, 93% fee evaluation,” Mr. McAllister said.
14 | INVESTMENTNEWS JANUARY 20, 2020 INVESTMENTNEWS.COM Maximizing the M&A Opportunity: A Roadmap for Advisory Firm Buyers and Sellers
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IN012187.indd 1 1/16/20 4:47 PM AMOUNT OF PASS-THOUGH INCOME EARNED BY HIGH-INCOME TAXPAYERS WITH GROSS INCOMES OF MORE THAN $100,000 IN 2016. YOURPRACTICE 46% SOURCE: THE TAX FOUNDATION TECHNOLOGY / BUSINESS DEVELOPMENT / MARKETING / NEXT GEN / CLIENTS / EMPLOYEES Coalition seeks expansion of pass-through deduction
BY MARK SCHOEFF JR. islation last year and may want to do more, said Jorge Castro, a member at the SEVERAL FINANCIAL rms and trade law rm Miller & Chevalier. associations are pushing for legislation “Both sides are going to come back that would make nancial advisers eligi- this year looking to enact another tax ble for a small-business tax break includ- bill,” Mr. Castro said. ed in the 2017 tax-reform law. Service professionals, such as advis- The tax measure provides a 20% de- ers, accountants and lawyers, were orig- duction on quali ed business income for inally denied access to the pass-through so-called pass-through businesses, such tax breaks as a way to narrow the pro- as partnerships or sole proprietorships. vision’s focus on businesses that make Many brokerage and advisory rms are capital investments. It was also a way to set up in these arrangements. lower the cost of the tax break. But the tax law excluded most profes- CHUCK RICHARD But real estate and insurance brokers sional services — including brokers, - GRASSLEY NEAL were made eligible for the deduction. nancial planners and investment advisers “While we recognize that nancial — with incomes above a certain threshold advisers, nancial planners and invest- from taking advantage of the tax break. monwealth Financial Network, Financial to pursue ri e-shot changes like the one ment advisers are regulated differently Planning Association, Financial Services being sought for nancial advisers. than real estate and insurance, as small ‘CLARIFYING LEGISLATION’ Institute, Investment Adviser Associa- business owners, they face the same bur- In a Dec. 18 letter, a coalition of rms tion, LPL Financial, National Association SECOND LOOK dens and challenges,” the letter states. and groups representing the advice sec- of Personal Financial Advisors and Ray- Neil Simon, vice president of government “Congress should not pick winners and tor urged leading tax policy lawmakers mond James. relations at the Investment Adviser Asso- losers.” to write “clarifying legislation” that would The letter was sent to House Ways and ciation, said it’s imperative to get the issue Brokers and advisers are making a allow nancial advisers to qualify for spe- Means Committee Chairman Richard in front of Capitol Hill tax writers. point that might persuade lawmakers, cial pass-through tax treatment. Neal, D-Mass., Senate Finance Committee “It is highly likely — it may not be this Mr. Castro said. “The current statutory language un- Chairman Chuck Grassley, R-Iowa, and Congress, it may be a future Congress — “I think they’re going to consider it fairly and unintentionally disadvantag- other high-ranking panel members. that they are going to take another look at seriously,” he said. “This may open up the es nancial advisers, nancial planners Capitol Hill Republicans have been re- several provisions of the tax cuts act,” Mr. lane for other groups that feel they were and investment advisers and diminishes luctant to reopen the 2017 tax law to make Simon said. “It’s important that we work unintentionally excluded.” their ability to invest in and build their changes, such as restoring the deduction to ensure that this is a provision that gets businesses,” states the letter, which was for state and local taxes. It’s not clear attention from Congress.” [email protected] signed by Cetera Financial Group, Com- whether legislators will have an appetite Congress approved tax extenders leg- Twitter: @markschoeff
current and clear? Whether you’re a 30-, losing money on some clients and identify 50-, or 70-year-old solo adviser, a continu- others who aren’t getting their fair share of Planning strategies for the solo ity plan is a must. service. How does this look to an outsider Document your processes. Solo advis- who may want to buy your practice? ers are different: They don’t Understand your nan- have to coordinate how they “FAILING cials. It is surprising that ad- practitioner: 2020 and beyond get things done with anyone visers evaluate their business else. Still, critical process- TO PLAN IS only on assets under man- es, such as prepping for a agement or top-line revenue ave you outlined your business plan meeting and following up PLANNING without heeding the expense for 2020? Some rms started the busi- GUESTBLOG afterward, are useful to doc- side of the ledger. The growth Hness planning process months ago JONI YOUNGWIRTH ument should a triggering TO FAIL.” of the business, including and have already rati ed their game plan event kick your continuity taking on new ideal clients, for the new year and beyond. plan into gear. Documentation is just the and nancial margins are equally critical. It’s a more formal process, typically, ensembles, the solo practitioner seems to beginning. You and your staff need to con- for larger ensemble rms, as they need be going the way of the dinosaur. Whether sistently follow the processes you establish. A LONG-TERM GAME PLAN to get many people aligned and moving that's true or not, there are a lot of larger Categorize clients and align catego- Solo advisers are often in business by in the same direction. Other organiza- rms that view these solos as a way for ries with appropriate service levels. Firms themselves for a reason. They love running tions may have taken the week between them to become even larger. should know their clients individually but things their way and not having to com- Christmas and New Year’s to do all their So, it might be wise for solo advisers to also as a whole. In solo practices, there promise with others. Still, it’s impossible to planning. And still others skip the process take steps to maximize the value of their may be a tendency to give time and ener- miss what’s happening in the industry. So, altogether, deeming it unnecessary. rms. Here are a few strategies to consider gy to clients who ask for it, rather than to for many, their long-term strategy is to pre- But remember the mantra: Failing adding to your 2020 plan. those who pay for it. Undertaking a scale pare their practice for future acquisition — to plan is planning to fail. With all the Update your contingency plan. Do you and capacity exercise can help you assess when the time is right. And when it is time change occurring in our industry, even the have one? When was it last reviewed? Re- each client household using quanti able to sell, doesn’t it make sense to enter the solo practitioner should have a plan for member, if it isn’t documented and signed criteria. You can then attach service lev- marketplace prepared with a stellar book the road ahead. by all parties involved, you don’t have els to the client categories you create, of clients and a well-run practice? an agreement. Does your plan identify including everything from the number of THE SOLO STRATEGY the correct bene ciaries? Has anything meetings and proactive calls you offer, to Joni Youngwirth is managing principal of As more advisers in the industry become changed since you created the document? event invitations, holiday gifts and more. practice management at Commonwealth part of multi-adviser organizations and Is the valuation methodology articulated, Advisers who do this often nd they are Financial Network.
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IN012189.indd 1 1/17/20 1:02 PM NUMBER OF ADVISERS WHO ANTICIPATE THEIR ALLOCATION TO ETFS WILL CONTINUE TO INCREASE IN 2020, ACCORDING TO A RECENT INVESTING 73% SURVEY BY BROADRIDGE FINANCIAL SOLUTIONS. EQUITIES / FIXED INCOME / MUTUAL FUNDS / ETFS / ALTERNATIVES / MARKETS / ECONOMY Time to check under the hood of that index fund
BY JEFF BENJAMIN That’s not a big deal until KEY POINTS you consider that the iShares WITH PUNDITS AND market • Market analysts Russell 1000 Value ETF (IWD) analysts mostly calling for val- call for value gained 26.1% last year while ue stocks to outperform growth stocks to its growth counterpart, the iS- stocks in the year ahead, the outperform hares Russell 1000 Growth ETF trick for nancial advisers will growth stocks. (IWF), gained 35.9%. be picking the right index for The difference in the per- the transition. • Before picking formance spreads between the If you’re in the camp that an index, take two popular indexes comes ria, in this case the S&P value index was ly on past performance.” expects value stocks to en- a close look down to the way growth and bene tting in 2019 from the inclusion of Matt Chancey, a wealth manager at joy an advantage over growth at how fund value characteristics are de- Apple, a stock that gained more 100% Dempsey Lord Smith, said he has been stocks in 2020, the rst step is managers are ned and identi ed. last year. pivoting client portfolios to favor value to ignore the past performance defining value. Todd Rosenbluth, director of S&P’s year-end rebalancing has since stocks over growth stocks. Mr. Chanc- of the indexes and take a close mutual fund and ETF research moved Apple over to the growth index, ey said that the situation can be further look under the hood to learn how fund at CFRA, said the value criteria for the and the stock is now the largest holding, complicated by value indexes that are managers are de ning value. S&P index include book value, earnings, at around 9%, for both the S&P and Rus- enhanced with speci c elements, such as For an example of how investors and and sales to price, while the Russell index sell growth indexes. dividends or share buybacks. advisers can get tripped up, consider the uses just book to price. “This is a really good example of why “All indexes are not the same because 2019 performance of the SPDR S&P 500 you shouldn’t rely on past performance,” everyone has their own ideas of how to Value ETF (SPYV), which gained 31.7% UNIQUE CONSTRUCTION CRITERIA Mr. Rosenbluth said. “Because stocks are implement a strategy,” he said. and outperformed its growth counterpart, While it’s completely normal for even the not permanently part of a growth or a the SPDR S&P 500 Growth ETF (SPYG), broadest and most generic-looking in- value ETF, investors need to focus more [email protected] by 80 basis points. dexes to have unique construction crite- on what’s inside rather than relying sole- Twitter: @benjiwriter
that’s continued,” Mr. Flanagan added. have been overbought for much of the past Liquidity concerns that have plagued three weeks ended Jan. 9, while an RBC the sector since its inception seem to be Capital Markets survey of institutional in- fading. While anxiety about a potential vestors in December found the fewest peo- mismatch between the liquidity of a fund ple describing themselves as “bearish” since and its underlying securities hasn’t disap- the third quarter of 2018, just before the peared, bond ETFs seem to be inspiring S&P’s 19.8% rout. more con dence as time goes on and they In addition, the onslaught of diverg- endure market uctuations. ing headlines about U.S. and China trade Fixed-income funds currently make talks and Brexit negotiations have given up about 20% of the $4.4 trillion U.S. ETF investors whiplash, while growing tensions market, but a BlackRock Inc. report from with Iran may reignite a search for havens. June suggests assets could explode to Throw in mixed economic data from coun- more than $2 trillion globally over the tries around the world and it’s little wonder next few years. that bonds remain attractive to many. In Europe, bond ETFs attracted more “There’s increasingly concerns we’re money than stock funds for the rst time in late cycle,” said David Perlman, ETF in three years in 2019, data compiled by strategist at UBS Global Wealth Manage- Bloomberg Intelligence show. Flows into ment. “If we are, xed income can help to Bond ETFs come of age debt ETFs almost doubled in Australia, buffer some of the risk of equities.” and Taiwan’s ETF market surged thanks to interest from life insurers. SPURT OF CREATIVIY BLOOMBERG NEWS ently conservative, the ease and low cost of “There’s a huge wave of wealth re- Adding to the popularity of xed-income ETFs are rapidly wooing converts. Worries tiring, and bonds are traditionally the ETFs is a spurt of creativity in how they can WELCOME TO THE big time, bond ETFs. that stocks have reached their peak, contin- safe-haven asset that preserves wealth,” be used. Banks are employing bond ETFs Long overlooked as the younger sibling ued uncertainty over the direction of U.S. said Will McGough, chief investment of- to facilitate portfolio trades that allow in- of equity exchange-traded funds, strate- interest rates and rampant geopolitical cer of retirement strategies at Stadion vestors to seamlessly move large numbers gies focused on corporate or government risks have bolstered demand — especially Money Management. of bonds on and off their balance sheets. debt took in more than $150 billion in the as traders nd more and more innovative Other users are relying on xed-income U.S. last year, the most on record and just ways to strategically use these products. CAN THE BULL MARKET LAST? ETFs as a hedge, to earn returns on money shy of the sum netted by their stock coun- “Investors are seeing the ef ciencies By contrast, even with the S&P 500 In- they’re waiting to allocate elsewhere, or as terparts. It was the biggest annual leap for that can be found using the ETF vehicle,” dex continuing to beat records, many a tool to adjust their portfolios. bond ETFs since 2014, boosting assets to said Kevin Flanagan, head of xed-income are wondering how long the bull market It helps that the fee-compression more than $800 billion, data compiled by strategy at WisdomTree Investments Inc. in U.S. equities — now entering its 11th wave sweeping the ETF industry has Bloomberg Intelligence show. In nance, “typically you see equity folks year — can last. made xed-income strategies cheaper While the xed-income world is inher- take the lead and bond guys follow, and Technical indicators suggest stocks than ever.
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IN012190.indd 1 1/17/20 1:03 PM INVESTING Brand-name loyalty can be a disservice
BY JEFF BENJAMIN zero expense ratios just for the so- lace that might come from investing ‘Opportunity FINANCIAL ADVISERS who place in funds offered by the big five in the too much emphasis on low fees and ETF space: BlackRock, State Street brand-name asset managers might Global Advisors, Vanguard Group, zone’ funds draw be doing their clients a disservice Invesco and Charles Schwab Corp. by overlooking funds that could en- Three ETFs launched early last hance their portfolios. year that charge zero expense ratios According to a new research re- combined had seen less than $70 in $2.26B port from Cerulli Associates, a dis- million in net inflows through last proportionate focus on things like month. BLOOMBERG NEWS liquidity and expense ratios, which That compares to three more are typically associated with the established ETFs from brand-name THE CONTROVERSY keeps mount- largest and most popular asset man- providers that charge 4 basis points ing over a new tax break for investing agement companies, introduces the and have seen combined net inflows in poor U.S. communities. But inves- risk of missing out on or ignoring of $3.9 billion over the same period. tors keep piling in. better investment opportunities. If brand names are going to be They just pumped $2.26 billion into “Especially within the ETF space, the focus, advisers should at least funds that are planning to take advan- we found that advisers tend to use big “Part of the issue is that advisers tend take the time to find the best versions of tage of “opportunity zone” tax incen- brand names as a proxy for quality and to be exceptionally focused on costs, and strategies within those higher-profile fund tives, a 51% jump from early Decem- liquidity,” said Ed Louis, a senior analyst they fear bigger bid-ask spreads will lead companies. ber, according to a survey released Jan. at Cerulli. to higher transaction costs,” Mr. Shapiro In 2018, for example, State Street 9 by tax adviser Novogradac. The research, which was sponsored said. “We’re saying advisers should evalu- Global Advisors launched SPDR Gold To line up the full benefit, investors by Rafferty Asset Management, the ad- ate a wider range of investment MiniShares Trust (GLDM) as had to commit their capital by the end viser to Direxion ETFs, shows that the options and not just focus on a a 10-basis-point version of of last year. But the figure also rose three largest ETF providers represent single product line.” SPDR Gold Trust (GLD), which because the survey’s sample included 82% of all ETF assets. That market share charges 40 basis points for the more funds and because respondents jumps to 90% if you include the top five ’THE EASY BUTTON’ same strategy. updated how much they raised. ETF providers. Todd Rosenbluth, director of 82% Later this month, SSGA Once heralded as a novel way mutual fund and ETF research TOTAL OF ALL will launch cheaper versions to help distressed parts of the U.S., INVESTMENT PERFORMANCE at CFRA, said an over-reliance ETF ASSETS of existing ETFs tracking plain opportunity zones are now being A Cerulli survey of financial advisers on expense ratios and brand vanilla large-, medium-, and slammed as a government boondog- lists investment performance as the names is “hitting the easy but- REPRESENTED small-cap indexes, which savvy gle. The perks — included in the fed- leading attribute when allocating to an ton.” BY THREE advisers should be all over. eral tax overhaul that President Don- ETF, followed by liquidity and the ex- “They will miss out on some BlackRock made a similar ald J. Trump signed in late 2017 — are pense ratio. high-quality products that offer LARGEST ETF move in 2012 when it launched being used to juice potential invest- Liquidity is closely associated with a differentiated approach more PROVIDERS iShares Core MSCI Emerg- ment returns in luxury developments a fund’s asset size because larger funds consistent with how advisers ing Markets ETF (IEMG) as a from Oregon to Florida. Several re- tend to have tighter trading spreads. choose individual stocks and 14-basis-point version of iS- ports have shown politically connect- “When we spoke with advisers about bonds,” he said. “Fees have come down so hares MSCI Emerging Markets (EEM), ed investors influenced the selection why they were only using products from much in recent years that what’s inside which charges 68 basis points. of zones to benefit themselves. the largest brands, they talked about a is a bigger driver of future results, and Ultimately, even if advisers are intent hesitancy to use products from smaller there are lots of compelling products on sticking to a brand name, there are WAITING ON GUIDANCE issuers because they were concerned that are under the radar but are worthy often ways to add value by digging a lit- While Congress weighs changes to about things like liquidity and about the of attention for those willing to do a little tle deeper. the law to boost transparency and smaller funds possibly shutting down,” extra homework.” ensure the poor benefit, the Trump ad- said Daniil Shapiro, an associate direc- In fact, the focus on brands is so [email protected] ministration has been working to get tor at Cerulli. strong that investors are often bypassing Twitter:@benjiwriter more money flowing. Last month, the Treasury Department issued a final set of rules about what will qualify. Some investors had held off on com- mitting to funds until the government provided more guidance. “We expect even greater levels of Pimco sees US growth slowing investment in the coming weeks and months thanks to the additional clar- ity provided by the final regulations,” BLOOMBERG NEWS The bond giant in December 2018 Michael Novogradac, the tax adviser’s said there was a 30% recession prob- managing partner, said in a statement. U.S. GROWTH IS likely to slow in the ability over 12 months. The new re- first half even as the likelihood of reces- port doesn’t include a similar number UNDER THE RADAR sion recedes globally amid reduced trade but warns that when a recession hits, The group’s tally — now at $6.72 tensions with China and further accom- it may be worse because central bank from about 2.3% in 2019, with most of billion — is also probably an under- modation by central banks, according to easing has left “less monetary policy the gains coming in the second half. Po- count. Funds aren’t required to say Pacific Investment Management Co. space available for future action” while litical uncertainty surrounding the U.S. publicly that they’re claiming the tax “Just as the U.S. cycle lagged behind spurring risk-taking by companies and elections could hold back “animal spirits” breaks, let alone how much they’ve the global cycle during 2018 and 2019 households that “could come back to if progressive high-tax, high-regulation raised. Many wealthy individuals and with the U.S. economy slowing later and haunt them and their creditors.” Democrats seize momentum. corporations have formed opportuni- by less than the rest of the world, we ex- GDP growth outlook outside the ty funds that aren’t seeking outside pect global growth to trough out and re- US GDP GROWTH TO SLOW U.S.: 0.75%-1.25% in both the euro area capital and have remained under the bound earlier than U.S. growth this year,” Other highlights in the outlook, based on and the U.K., 0.25%-0.75% in Japan and radar. Joachim Fels, global economic adviser, a December forum at the firm’s Newport 5%-6% in China. “It’s easy to estimate that the actu- and Andrew Balls, chief investment offi- Beach,-Calif., headquarters, include: Inflation: Buy protection as central al dollars raised to date are double or cer for fixed income, wrote in an outlook Expect real U.S. gross domestic prod- bankers prefer “the devil they know” triple $6.72 billion,” Mr. Novogradac released Jan. 7. uct growth to slow to 1.5%-2% in 2020, over deflation. wrote in a separate blog post.
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IN012191.indd 1 1/17/20 1:04 PM SPEECH
SEC commissioner flags danger of collecting too much investor data
ecurities and Ex- change Commission member Hester Peirce is a conserva- tive who often raises Sred flags about what she sees as regulatory overreach. In a Dec. 12 speech to the National Econ- omists Club in Washington, D.C., she warned of the problems that could arise from the SEC col- lecting too much investor data for a pending market surveil- lance system, the Consolidated Audit Trail. She also questioned whether regulators have a role in promoting sustainable invest- ing. A Republican appointee, Ms. Peirce has a dry wit that she sprinkles into her speeches, as HESTER PEIRCE
she did with this one to a group ERIN SCOTT/REUTERS of economists and economic
policy professionals. bottom of the cup. “What happened to outcome, not necessarily the most expe- and at the frequency we require. They the rest?” demands the angry plaintiff. dient or convenient one. also may experience other kinds of It is an honor to be among econo- “Sorry, man, the class-action lawyers costs if the data fall into the wrong mists today. I am not sure why, but every already drank the rest.” ECONOMISTS LOVE DATA hands. Form PF, for example, is the time I speak to economists, I feel com- We often tell corny jokes at the My first question is: How much data form that collects information as part pelled to tell a joke. Maybe it is because expense of lawyers, and rightly so, is enough? One thing I have noticed of a post-crisis effort to get better the securities lawyers of which I am one but I have a special fondness for about the economists with whom I insight into the activity of hedge funds and with whom I routinely surround jokes that take aim at both lawyers work at the SEC is that they love data. and other private funds. The form myself can be a rather serious bunch. and economists, and not just because I understand why. Economists can use takes a long time to complete. The data Instead of starting with jokes, they insist they are more efficient. I like that they data to finger fraudsters, determine collected on that form are commer- that we start our talks with the follow- juxtapose the unique characteristics of where a regulatory threshold should be cially sensitive, so concerns about the ing disclaimer: The views I represent are the two professions. The truth is that set, or assess the effect of a regulatory security of the data are real. There is my own and not necessarily those of the economists and attorneys have distinct obligation. It is quite impressive to see also a question about how useful the Securities and Exchange Commission skills and analytical tools that make it the work our economists produce from data we collect on Form PF actually are or my fellow Commissioners. That duty important for them to work hand-in- the data they have more readily at their to the SEC. done; I am going to tell my joke. glove with each other. fingertips than ever before. Because filling out the form requires A beekeeper, an economist, and a At the SEC, we have a large team of Economists are not the only ones each firm doing the reporting to make plaintiff walk into a coffee shop. “What economists under the capable leader- who find the data interesting; regu- judgment calls about what data are can I get you?” the barista asks the ship of S.P. Kothari who support our latory lawyers and examiners like it responsive to each field, data collect- beekeeper. “I’ll have a latte with honey,” rule-making and enforcement func- too because it can give them a better ed from one fund may not actually replies the beekeeper. “Done,” says the tions. They have been extremely helpful handle on the industry they oversee. As correspond to the data collected from barista, as he serves up a steaming in honing our thinking in both realms. you might expect, then, our rule writers other funds, which makes it difficult (or cup of deliciousness. The barista then Economists are also important partners and examiners ask for a lot of data. misleading) to conduct cross-industry prepares a mocha with soy milk for the in analyzing difficult questions of a The temptation to collect more analyses of the data. There are also in- economist. “That will be $5.75, Ma’am,” more fundamental nature — questions data only grows with the sophistica- consistencies between what funds have says the barista. “Wait, you didn’t even that are not specific to any particular tion of our analytical techniques and to supply to the Commodity Futures ask me what I wanted,” says the econo- rule or enforcement action. I want to tools. Collecting data, however, is not Trading Commission and what they mist. “Doesn’t matter” replies the barista, raise three of these questions with free — not for us, not for the industry have to supply to the SEC. “You can assume it’s whatever you you today. In soliciting your input, I from which we collect it, and not for It is also unclear whether the data want.” The barista next quickly prepares am looking for thoughtful approaches investors. Registrants that provide the are fit for purpose; Form PF is sup- the plaintiff’s drink: a large coffee cup that balance competing considerations data often incur very large direct costs posed to focus on the risk a fund poses with just enough coffee to cover the with an eye toward achieving the right to produce the data in the timeframe to the financial system, but it collects 22 | INVESTMENTNEWS January 20, 2020 INVESTMENTNEWS.COM a lot of data points that lack any real ensuring that brokers’ customers can to build an economy that serves this nexus to systemic stability. “ONCE WE get information about how their orders generation and future generations well, have been executed, more data can be but I disagree that such an economy THE CONSOLIDATED AUDIT TRAIL START DOWN a powerful tool for market participants. will result from regulators taking on Another example of the no-holds-barred Armed with the data, market partici- the role of stewards of morality. In fact, drive for data is the Consolidated Audit THE ROAD OF pants are able to make better decisions. I think the opposite is true. Well-func- Trail. The so-called CAT, which is not yet Even for some functions that are often tioning financial markets are key to up and running, will collect data from COLLECTING found in regulatory hands, outside help efficient resource allocation, which brokers across the country and aggre- can be beneficial. is key to economic growth, which is gate it in a data pool in which the SEC DATA, IT IS I have been a critic of post-finan- key to improving people’s lives. The and other regulators can fish. The data cial crisis regulation that looks to greatest beneficiaries of free financial pool will contain all transactions in our HARD TO REIN regulators alone to identify and solve markets are people whose lives are equity and options markets. As you can problems; no offense to any govern- difficult. Sustainable morality is not imagine, regulators and enforcement OURSELVES IN.” ment economists in the audience, but morality dictated by a few powerful staff love such a rich reservoir, but it is lots of people working independently financial regulators, but morality that not cheap — the exchanges and brokers are better at identifying problems and reflects the decisions and preferences have already incurred huge expenses to generating solutions than a small group of individuals throughout society. Free get the CAT almost ready to launch and of regulators holed up in musty regu- markets give expression to those deci- will continue to incur costs throughout latory agencies in Washington, D.C. An sions and preferences. My question for the CAT’s life; if cyberthieves break important question for both lawyers you is how can economists (and those in, there will be additional costs to the and economists working in regulatory of us who love them) do a better job of investors’ whose data are compromised; agencies is: How can we enlist the help explaining the role that a free economy and, not least, there is the cost of eroded poem, we ought to think carefully about of people outside of government in reg- can play in improving people’s lives, liberty, as the government monitors how much data is enough. ulating the activities we are responsible particularly the people who face the Americans’ financial transactions. My second question is somewhat re- for overseeing? greatest deprivation and despair? In lated and is perhaps the flip side of the short, how can we best explain that SLIPPERY SLOPE last: Given that better data are easier SUSTAINABILITY sustainable morality does not require Once we start down the road of collect- to come by, are there ways that we can My third question relates to the adver- more government control of economic ing data, it is hard to rein ourselves in. look to academics and market partici- tised title of this talk, “Sustainable Mo- decision-making, but less? So, Form PF marches along unchanged, pants to assist us in regulating markets? rality.” One of the big topics of conver- Thank you all for listening to my and the CAT wobbles to life without There already are natural incentives sation in the financial regulatory world questions. Now, I am interested in much change, aside from the potential for market participants to monitor one these days is the role that regulators hearing your answers to the questions elimination of some personally identi- another’s actions. Think of the role that should play in fostering “sustainable I have asked or ones you think I ought fiable information. In the Rime of the short sellers and other activist investors finance.” The motivating force behind to have asked. Economists are essential Ancient Mariner, the poet Samuel Taylor can play. One way we can enlist the help this trend seems to be that finance has partners to lawyers not only in an- Coleridge writes of the sea surrounding of others is to do a better job at making been too focused on raw dollars, and swering specific questions about rules a ship full of thirsty sailors, “Water, water, data available for people outside the insufficiently focused on building a and enforcement actions, but in asking everywhere, nor any drop to drink.” In agency to analyze. Whether it is improv- financial system that fosters a better, and answering the big questions about our world of data-hungry economists, ing the data about municipal issuers, more sustainable society. Regulators how government should work. You can this phrase becomes “Data, data every- increasing transparency about trans- are thinking about how they can force throw in a few jokes, too. where, Nor any stops to think.” Lest our actions in the fixed income markets, financial firms to take into account envi- quest for data haunt us as the hunt of the giving investors greater insight into ronmental and social considerations as Editor’s note: This reprint has been albatross did the mariner in Coleridge’s financial institutions’ balance sheets, or they allocate capital. I share the desire lightly edited for length.
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Law Group, said it’s difficult to predict tion to consumers in their terms and TEACHERS RETIREMENT how many other states will follow the ENVESTNET YODLEE conditions or privacy policy. That is not CONTINUED FROM PAGE 2 lead of the SEC and New York. But mo- CONTINUED FROM PAGE 2 sufficient protection for users.” ing whether they receive compensation mentum may be generated by the fact “Importantly, Envestnet Yodlee never for referring retirement plans to certain that there is bipartisan concern about sells data that identifies consumers,” the ‘DATA STEWARD’ vendors or service providers — and how the lack of retirement savings. statement reads. The company said it is not an informa- they deal with conflicts of interest,” Ms. “Excessive fees charged to partici- The company acknowledges that it tion broker, but rather a “data steward” Avakian said at a conference in London. pants in school district 403(b) plans make does provide de-identified data analyt- that adheres to privacy standards and all The market is big, with $1.1 trillion it more difficult for them to obtain an ap- ics and insights to institutional inves- applicable laws. In August, former En- being held in 403(b) plans at the end of propriate level of retirement income, even tors and investment research providers vestnet CEO Judson Bergman, who was the third quarter of 2019, according to if they contribute diligently to the 403(b) to “better manage investments on behalf killed in a car crash in October, wrote a Investment Company Institute. plan,” Ms. Wagner wrote in an email. of their customers.” column for InvestmentNews defining The SEC is likely to find a lot of Financial advisers who work with “Envestnet Yodlee does not offer raw what it means to be a data steward. problems with 403(b)s, said Tony Isola, 403(b) plans should beware of the reg- data that includes personally identifi- “As a financial technology platform, head of the 403(b) practice at Ritholtz ulatory scrutiny, Mr. Lundy said. able transaction information,” the com- Envestnet has a responsibility to ensure Wealth Management. “Firms should take a good look at pany said in the statement. the highest levels of safety and security the financial incentives and revise dis- for anyone sharing information on our ‘ACTING WITH IMPUNITY’ closures as needed,” he said. NOT ENOUGH platform,” Mr. Bergman wrote. A data “I would say the majority of holdings Mr. Isola recommends straight talk to But the senators’ concern is that Envest- steward, he added, is held to the same of [teacher retirement plans] wouldn’t teachers about complex plans. net is not doing enough to notify con- standard as fiduciary advisers to work pass the litmus test to say, ‘This is ap- “I would make sure the teachers un- sumers that their data is being sold to in the best interests of their clients. propriate,’” Mr. Isola said. “Hopefully, derstand the product fully before they third parties, even if it is anonymized. “Data stewards also treat consumers the bad actors will see they’re on the sign on the dotted line,” he said. This could be in violation of the FTC and their information with the utmost radar of various regulators. Before, Act’s prohibitions against unfair and respect. They are held to a more rigor- they were acting with impunity.” [email protected] deceptive practices. ous and higher standard than data bro- Marcia Wagner, owner of Wagner Twitter: @markschoeff “Consumers generally have no idea kers, who exist to gather and sell per- of the risks to their privacy that Envest- sonally identifying information that can net is imposing on them,” the legislators be used to target individual consumers.” said in the letter. “Envestnet does not in- A spokeswoman for the FTC said the form consumers that it is collecting and agency has no comment on the letter. for its Merrill Lynch division were re- selling their personal financial data. In- MERRILL LYNCH cord net new households — a big, recent stead, Envestnet only asks its partners, [email protected] CONTINUED FROM PAGE 3 strategic push for the firm — of more such as banks, to disclose this informa- Twitter: @ryanwneal creasing opportunities for registered sup- than 40,000 last year — up more than port staff and workers, known as client 25% compared to 2018 — and record associates, to become financial advisers, pretax margins of 26.5% for 2019. said one Merrill Lynch executive on a call And the firm’s head count for finan- last Wednesday with reporters. cial advisers across its traditional wealth clearing business, which was formal- “Merrill is putting no focus on shift- management and digital platforms was WELLS FARGO ly First Clearing and is now branded ing back in the direction of traditional flat year-over-year, ending 2019 with CONTINUED FROM PAGE 3 Wells Fargo Clearing Services. adviser recruiting,” the executive said, 17,458. That total includes trainees at its recently hired CEO of Wells Fargo & More than three years after the ini- emphasizing training. traditional wealth management business. Co., Charles Scharf, said the bank must tial scandals, the bank’s image remains Merrill Lynch’s parent, Bank of act with “urgency” and has “a lot to fig- tarnished among financial advisers, America Corp., released its fourth-quar- [email protected] ure out” as it attempts to work through said Danny Sarch, an industry recruiter. ter earnings last Wednesday. Highlights Twitter: @bdnewsguy a number of problems that have dogged “Rebranding First Clearing to Wells the company since 2016. Fargo Clearing doesn’t look like the That’s when Wells Fargo & Co., the smartest thing in the world right now,” parent of Wells Fargo Advisors, report- he said. ed that bank employees had secret- Ms. Leordeanu said that the firm on Switzerland’s SIX stock exchange. ly created millions of unauthorized lost a client “who decided to use clear- WISDOMTREE “I used to walk into a crowded room accounts in the names of customers ing services elsewhere” but declined CONTINUED FROM PAGE 4 and I would say the ETF is to the mutual without their consent. The bank was to state the total net outflows of that with existing regulations; however, fund what the internet is to the news- fined $185 million and then-CEO John client. Total client assets in the Wealth there are numerous elements of block- paper," Mr. Steinberg told Investment- Stumpf resigned. Myriad bank-related and Investment Group at the end of chain technology that, when correctly News. "Customers demanded a better scandals followed. 2019 were $1.9 trillion, an increase of applied, will bring benefits to investors.” experience … but when the ETF first In its earnings report, the bank’s 10% year-over-year. When asked what blockchain can launched, nobody cared. Nobody knew Wealth and Investment Man- The S&P 500 posted a specifically improve about ETFs, William what it was.” agement group, which in- yearly gain of more than 31% Peck, director of corporate strategy for The next big evolution will be toward cludes the adviser business, in 2019, including dividends. WisdomTree Asset Management, men- digital assets and securities, and Mr. reported net income of $435 By contrast, Wells Fargo’s tioned things like settlement times and Steinberg said WisdomTree will play a million for the final quarter of 17.7% share price rose 17.7% last the addition of smart contracts and glob- role in educating financial advisers and 2019, a decline of 63% when year, opening 2019 at $45.53 al trading. Digitizing traditional assets other intermediaries on the importance compared with the same peri- INCREASE IN and closing the year at $53.60. can streamline the experience and make of these new technologies. od a year earlier. WELLS FARGO Ms. Leordeanu said that trading more efficient, Mr. Peck said in a “The world of financial services SHARE PRICE BY 2019 was the firm’s best year telephone interview. and investors themselves are going to NONINTEREST EXPENSES in recruiting financial advisers But just as important, Securrency’s be interested in digital assets,” he said. Noninterest expenses were END OF 2019 since 2016 but gave no infor- technology can bring the experience dig- “Advisers will be forced to become pro- up $685 million, or 23%, pri- mation about the exact num- itally native investors are accustomed to ficient in the conversation if they want marily driven by higher employee ben- ber of advisers who joined last year. with cryptocurrencies to the ETF market. to hold on to their clients.” efits expense from increased deferred However, she did note that advisers Other participants in the round of compensation plan costs, higher oper- joining the firm had 40% more in an- EARLY LEADER funding include the Abu Dhabi Invest- ating losses and higher equipment ex- nual fees and commissions than Wells Just as WisdomTree was an early leader ment Office (ADIO), Japanese financial pense related to the strategic reassess- had anticipated. in the shift from mutual funds to ETFs, services giant Monex Group Inc., and ment of technology projects. The average annual fees and com- Mr. Steinberg said the investment in venture capital firms RRE Ventures, The company reported “$166 mil- missions for new hires in 2019 was Securrency positions the asset manag- Strawberry Creek Ventures and Pan- lion of expenses related to the stra- $719,000, compared to an average a er to be a future leader in the shift to thera Capital Investments. tegic reassessment of technology year earlier of $565,000, she added. digital assets. In a separate announce- projects in Wealth and Investment ment, WisdomTree launched its own [email protected] Management, predominantly equip- [email protected] bitcoin exchange-traded product (ETP) Twitter: @ryanwneal ment expense,” and “net outflows” in its Twitter: @bdnewsguy
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IN012192.indd 1 1/17/20 1:04 PM Relying on an old strategy isn’t that reliable.
COLUMBIA THREADNEEDLE EQUITY INCOME SOLUTIONS Columbia Dividend Columbia Flexible Columbia Convertible Columbia Dividend Income Fund Capital Income Fund Securities Fund Opportunity Fund Large Value Category | GSFTX Allocation 30% to 50% Convertibles Category | NCIAX Large Value Category | CDOZX The Overall Morningstar Rating™ is Equity Category | CFIZX The Overall Morningstar Rating™ is The 10-Year MorningstarTM Rating is for Institutional shares out of 1,091 The Overall Morningstar Rating™ is for Institutional shares out of 74 for Institutional shares out of 690 Large Value funds. for Institutional shares out of 506 Convertibles funds. Large Value funds. Allocation—30% to 50% Equity funds. All data as of 12/31/19. Morningstar Ratings are based on a Morningstar Risk-Adjusted Return measure.
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IN012185.indd 1 1/15/20 2:56 PM