Wealth Management
(New York)
Warren and Sanders’ tax plans have been scaring those on the right for several months, especially as Warren has risen to become the dominant candidate for the Democratic bid. But how much of a negative effect might her plans have on the market? The answer is probably not much, and if anything, it will be bullish for risk assets. Firstly, Warren’s plan will only touch the top 75,000 households in the country, so it is a niche focus. But secondly, because of the taxes imposed, ultra high net-worth families will need to be more aggressive in their asset allocation in order to continue to grow their wealth, meaning they will likely put more capital into risk-on investments.
FINSUM: This was quite a useful insight. It is hard to imagine Warren’s wealth tax being good for the market, but the logic of this argument (from Barron’s) seems sound.
(New York)
One of the biggest changes in the advisor-oriented ETF market in recent years has been the sharp rise in broker-owned ETFs, such as those from Schwab and Fidelity. Both have jumped to be major players in the ETF market thanks to their ability to sell these funds on their own platforms. One of the important things advisors need to understand is that a lot of new funds are seeded by the provider itself. Some ETFs have hundreds of millions put into them by their sponsors, which means they are not as liquid, or in-demand as they appear. Hartford and John Hancock are examples of this approach.
FINSUM: Brokers deposit huge sums in new ETFs to make them look established and in-demand. The best way to actually double-check that AUM figures are representative of reality is to look at the volume of shares traded, which is much less likely to be misleading and gives a true picture of liquidity.
(New York)
There are many big concerns surrounding the new Reg BI. It is considered an industry-friendly regulation, but questions abound: can we call ourselves advisors, how should we conduct rollover advice etc. The truth is that the pain and anxiety has not even really begun. Being a principals-based rule, Reg BI really won’t be understood until enforcement has begun. Therefore, it is very hard to plan for how to deal with certain questions until one feels how the SEC is behaving in practice.
FINSUM: There is a lot of uncertainty regarding this rule. In some ways, it could turn out to be very light touch, or it could be very onerous. It all depends on how it is enforced.
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(New York)
Fixed index annuities had a really rough time in the year or so leading up to the debut of the first Fiduciary Rule. The DOL’s changes all but made the product extinct. However, since the rule was struck down, fixed index annuities have made a resurgence, posting their biggest ever quarter for sales with $20 bn in Q2 this year. The good news for brokers is that changes in the government’s regulatory approach means that fixed index annuities will now be treated like an equity product, which means they will be under the SEC’s purview. Additionally, a new kind of FIA has been developed—fee-based—which means brokers and advisors have a choice between a fee-based product or a commission-based one.
FINSUM: The big question for FIAs is how to do a best interest comparison between the fee-based and commission-based versions, as the cost changes depending on time and other factors.
(New York)
The SEC’s new Regulation Best Interest (Reg BI) is causing a lot of headaches and anxiety for brokers. Particularly, brokers are worried that the new rules governing rollovers are going to end up being a trap. Reg BI does address rollovers, even laying out some (but not all) of the factors that one should be considering when recommending them. But brokers feel the rules are too vague, which could lead to big trouble. In particular, there are fears that of all the factors, cost will have by far the most weight, which could lead to heavy penalties when recommendations are viewed in hindsight.
FINSUM: In addition to the Reg BI anxiety about rollovers, there is also growing tension because everyone is expecting the new DOL Fiduciary Rule to try to grab some power in the rollover area, which means there will be new complications to deal with.
(New York)
Investors and advisors—don’t get too excited about the zero fee shift among the big brokers, it is not all that it appeared to be. In particular, mutual funds seem to have been entirely left behind in the zero fee shift. Essentially, none of the big brokers has scrapped fees on mutual fund trades. While ETFs are now free to trade, mutual funds in some cases have transaction fees as high as $75.
FINSUM: This is going to wound the mutual fund market further, as not only do mutual funds have higher fees, but trading them will now be commensurately more difficult than ETFs too.