Wealth Management
(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.
(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.
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(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.
(New York)
It actually took longer than we expected. Last week there was a big splash in markets and media when Schwab, TDA, and E*Trade all cut their commissions in response to a first move by Schwab. Now, unsurprisingly—except for how long it took—Fidelity has followed suit. The unique part about Fidelity’s move is that in addition to free trades, it is also offering free money market funds for any cash left in accounts. Those are currently 1.58%, and way ahead of the near zero yield you get on cash at Schwab, TDA, and E*Trade.
FINSUM: The whole market has gone to zero on trading commissions. One wonders if the same is going to happen on large ETFs.
(New York)
Have you ever thought to yourself “I would love if they could put the downside protection of structured products into an ETF”? Probably not, but someone did, as there is a new category of ETFs, called Buffer ETFs, which are seeing big capital inflows. The ETFs work by guaranteeing only a certain level of losses in exchange for limiting potential gains. The ETFs have a year-long term, and their details change constantly. But a good example would be one with a 9% “buffer”. This means that if the ETF loses 12% in the year, the holder would only see a 3% loss and the product provider would absorb the rest. The first and only provider of these ETFs is called Innovator and has partnered with MSCI, Nasdaq and more to create a handful of exchange traded funds. Check out KOCT, NOCT, EJUL, and IJUL.
FINSUM: These are very tricky ETFs, just like the structured products from which they drew their inspiration. That said, they seem like they have some utility if they are executed properly.