Displaying items by tag: clients

Over the last couple of months, there has been an increase in the enforcement of Regulation Best Interest (Reg BI). Over the last year, the number of actions taken by the SEC and FINRA have substantially increased. It’s consistent with warnings from regulators that there would be a ‘more substantive’ period of enforcement and that Reg BI will be enforced ‘to the letter’.

Regulators want to see a more robust process to ensure supervision of brokers. The ultimate goal of Reg BI is to ensure that all recommendations are made in the clients’ best interests.  So far this year, there have been 22 FINRA enforcement actions after just 8 in 2022. Penalties are also growing in size as evidenced by an SEC settlement with Laidlaw and Company for $800,000.

Recent enforcement has also seen advisors having to pay back a portion of customers’ losses. This is a departure from precedent when firms were typically on the hook for compensation and indicates a serious commitment to deterring misconduct. 

In 2024, even more enforcement is expected given public comments from SEC and FINRA officials. They see enforcement expanding across all 4 pillars of Reg BI which include disclosures, care obligation, conflicts of interest, and compliance. 

Finsum: The SEC and FINRA are increasing enforcement of Reg BI. They are also looking to fine individual advisors and brokers for misconduct.

High net-worth clients may be facing a major issue due to the upcoming expiration of the 2017 tax cuts after 2025. This will mean the expiration of higher federal gift and estate tax exemptions. The exemptions, which encompass tax-free caps on gifts during life or at death, will be $13.6 million per individual or $27.2 million for spouses in 2024 but will be cut by 50% in 2026. 

This will mean that many more high net-worth clients will be impacted by the estate tax. And, this is the time to begin planning around this new reality given that many estate tax planning strategies take months or even more than a year to implement. 

Some married couples can take advantage of the current higher levels of exemption by removing assets from their estate via lifetime gifts. According to Robert Dietz, the national director of tax research at Bernstein Private Wealth Management in Minneapolis,“The reality is you have to give away more than half to see any benefit from the gift in terms of the exclusion going away.” And for clients uncomfortable making these gifts now, they can keep control of their assets by opening a trust. 

Finsum: The expiration of the 2017 tax bill means that high net-worth clients will have to grapple with much lower exemptions on tax-free giving. 

There is increasing signs of a turnaround in the bond market given compelling valuations, attractive yields, and indications that the Fed is done hiking rates. While many investors will instinctively look to move into passive fixed income funds, active fixed income offers some specific advantages. 

Over the last decade, active fixed income managers have outperformed their benchmark more than 75% of the time even after taking all fees into account. According to Joseph Graham, the Senior Managing Director, and Head of the Investment Strategist Group at Lord Abbett, this is due to several unique factors which make the fixed income market inefficient.

The primary reason is that institutional fixed income investors such as banks, insurance companies, and central banks make decisions based on non-economic factors such as regulations or market stability. This can distort pricing and create opportunities for savvy managers. 

Another inefficiency is that benchmarks are weighted by the amount of debt outstanding. This means that borrowers with considerable amounts of debt are overrepresented. Similarly, indices often have constraints around size and maturity, creating opportunities for alpha around these under-owned securities. Asset managers with teams that specialize in a particular niche are particularly well-suited to discovering such pricing discrepancies.

Finsum: Active fixed income has outperformed passive fixed income funds. Some of the reasons that the fixed income market is inefficient are because many market participants have non-economic incentives and indices are skewed to overrepresent borrowers with considerable amounts of debt. 

UBS Wealth Management Americas posted a small increase in advisor headcount and added $300 million in new assets during the third quarter. Both are the first gains after two quarters of declines. Last quarter, UBS had outflows of $3.4 billion. 

The unit posted profits of $307 million, which was $231 million less than last year’s Q3. The bank attributed this to lower commissions as more clients shift towards a fee-based planning model. Another factor is that UBS CEO Sergio Ermotti noted that it doesn’t include interest and dividends when calculating asset growth unlike US competitors. In future quarters, the company will be calculating asset growth in this manner. 

In the quarter, advisor headcount increased from 6,071 to 6,142. However, headcount is still down 2% on a year-over-year basis. The company said in part this is due to its recruitment efforts focusing on a small group of high-producing advisors. Ermotti added that the company is resuming growth bonuses for any advisors who add million-dollar clients. 

Overall, US brokers managed $1.76 trillion in client assets which was up 16% compared to last year primarily due to asset price appreciation. UBS’ Americas unit is a laggard relative to other geographies within the company and its US-based competitors when it comes to asset growth. 

Finsum: UBS posted a small increase in net new assets and advisor headcount. The company is focused on boosting asset growth through the recruitment of high-earning brokers. 

Blackrock is the leading company in the $7 trillion ETF market in terms of assets and new issues. According to Dominik Rohe, the head of BlackRock’s Americas ETF and Index Investments business, active ETFs are a category with significant growth potential.

He notes that the boundary between active and passive ETFs is becoming ambiguous as all types of strategies are now being offered with an ETF wrapper. This is leading to more complex and innovative offerings. In 2023, the firm launched 18 active ETFs with more planned for 2024. According to Rohe, active ETFs currently make up 38% of all US-based ETFs with a total of $101 billion in assets under management. And, they are changing the concept of what an ETF can be from a passive vehicle to a ‘technology that will generate active return’ for investors. To that end, it’s launched active ETFs for alpha, specific goals, and strategies.

Another boost for active ETFs is due to the increase in fee-based financial planning and fiduciary wealth management which is leading to the ascendance of model portfolios. These are typically constructed with ETFs with the category growing at a 15% annual rate. Blackrock is forecasting that total assets in model portfolios will exceed $10 trillion by 2027, more than doubling its current level of $4.5 trillion, leading to more demand for these types of products. 

Finsum: Blackrock had an eventful 2023 with a bevy of active ETF launches. It sees continued growth for the category with the continued adoption of model portfolios as a key factor.