(Washington)

The SEC is about to crackdown on dually-registered advisors. The regulator seems to be upset with how some firms represent themselves and their services to clients. Because of Reg BI, firms are now required to explain their business model in Form CRS. According to industry lawyers like Issa Hanna of Eversheds Sutherland, this made “distinguishing between broker-dealer and advisor services" a “hot regulatory topic”. According to Hanna, “There's an interest in the regulatory community in ensuring that dual registrants are properly distinguishing how they describe their broker-dealer advisor services and not confusing retail customers about the service delivery models and which standards of conduct, etc., apply to the types of services they're providing”. Firms need to set up good firewalls between their businesses so that if they get investigated, they have a defensible position.

FINSUM: This feels like just one of many areas the SEC is going to start to crack down on under the Biden administration.

(New York)

Most people don’t think about annuities much when rates tumble, but those who are in the market for them sure see a difference. For example, when rates plunged at the start of the pandemic many annuities providers had to significantly scale back the payouts they were offering. Since annuities payouts are highly dependent on rates, insurers need to adjust their offers as yields move. With that in mind, if you are thinking about annuities, it might be a good time to buy. For example, Prudential just announced it was eliminating all its variable annuities with guaranteed income benefits because of super-low rates and volatility. Other major insurers are likely to follow suit as the market environment makes offering these products difficult.

FINSUM: Despite the fact that yields are rising, it is starting to feel like annuities providers are throwing in the towel on some products because of the ultra-low income they can provide and the potential volatility in yields.

(New York)

Here is a confusing idea: workers are headed back to the office after a year away, but this is exactly the time to stay away from office REITs. One line of reasoning is that buying office REITs now, while prices are depressed, means there will be plenty of upside. However, the issue is that many companies are planning on keeping workers remote indefinitely, as remote work has gone much better than expected, according to many surveys. Office REIT bulls admit that may be the case, but counter than because of the pandemic, employers will want more square footage of office space to allow for more space between workers, helping offset the loss of total workers in the office. Critics say vaccines are working well so extra space will not be needed.

FINSUM: Buying into office REITs now is highly risky strategy, but one that could have major upside if the office market returns strongly.

(New York)

The market has been doing great. So great in fact, that many are nervous about a swift correction. Despite this, the market continues to push for new all-time highs each week. Credit Suisse weighed in on the market in a big way this week. To be clear, the bank is not exactly bearish on the market. Their overall position is “We have remained overweight equities on the back of highly supportive policy, a high ERP [equity risk premium], the start of a bond-for-equity switch and huge excess liquidity, while tactical indicators are not yet sending a sell signal”. That said, the bank warned that there was one very “high” risk to the market: the Fed. Credit Suisse thinks there is a good chance that the Fed suddenly gets less dovish in the second half of the year after some good growth in 1H. This would be a dramatic turn for investors and could risk a sharp reversal.

FINSUM: We have to agree with this risk. The huge stimulus and excess liquidity which are flooding the market are major tailwinds, so if they reversed, it would be a shock. The whole set up reminds of us what occurred in Q4 2018.

(New York)

A combination of factors have thrust annuities into the spotlight recently. These include super low interest rates, market volatility, and a major demographic trend of retirees. With that in mind, instead of talking about annuities’ benefits, we thought it would be worth some time to focus on their downsides. Given the audience of this article (advisors), we will leave out some of the ways annuities have been mis-sold and focus on the underlying products. In terms of their core drawbacks, there are essentially three: limited upside, surrender fees, and fixed payments. Limited upside should be fairly obvious, but most annuities limit the potential upside buyers can earn in exchange for principal protection and/or fixed payments. Surrender fees are another issue, as buyers can be hit with 7-10% “surrender” fees if they try to get out of the contract and receive their principal back. And finally, fixed payments lose value quickly, especially over a long-time horizon, because of inflation.

FINSUM: Annuities are as useful as the client you are selling them to. They definitely have a role in a portfolio, but their risks and benefits need to be well understood—which has not always been the case! One key issue is that many times the same reason people need annuities—retirement cash flow security—means they are at risk of exercising one of annuities biggest downside: surrender fees.