Wealth Management
(Washington)
The SEC’s Best Interest rule has been making its way through the regulatory machine without much attention lately. Everyone knows it is looming, but no one has been sure of the timing or what the newest iteration would look like. Well, it is becoming clearer now as the SEC has announced that it will vote on whether to adopt the new rule on June 5th. There are four different items the SEC commission will discuss. Some of them are remnants from the last version, but others like the “solely incidental” item, are not clear.
FINSUM: It looks like we will be able to see the new version of the rule within a few weeks. The SEC was facing a major uphill battle to make the BI rule amenable to all sides, and we shall soon see how much progress they made (and how it might fit with a forthcoming DOL rule 2.0).
(New York)
The dreaded moment is coming. The DOL has been hinting for some time that it would release a new version of its infamous fiduciary rule, but now we have a concrete timeline. The agency says the new rule will be released in December. It is unclear the extent to which this new rule will sync with the SEC’s best interest efforts, but most seem to think the two rules will dovetail nicely. This will be the third time the DOL has issued a fiduciary rule. The first time was in 2010, then again in 2015 (defeated last year).
FINSUM: No details on how this will look, so hard to speculate. However, given how expansive the rule was last time, we will not be surprised if there are some surprises here.
(Washington)
It has largely faded from the news, but Americans in high tax states are feeling the pinch from the SALT cap limits. States are currently mounting a last ditch attempt to stop the new limit through a highly creative legal argument that relies on court precedent from as far back as the Civil War. However, early indications are that the push will fail, finally sounding a death knell for any hopes the cap would be overturned.
FINSUM: As one of our esteemed readers pointed out to us, this SALT cap has much more significant implications than real estate prices or asset allocations. The bigger worry is that the tax-home migration of the wealthy could hollow out the public finances of already precarious state and local governments.
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(New York)
Wirehouse business may have gotten a boost from the demise of the fiduciary rule, but its decline has been uninterrupted for years. New data from 2018 is in and shows that wirehouses shed 5.7% of their client assets during the year. Advisor headcount also dropped by 403 advisors, brining the total to 54,030. According to the study, put out by Aite Group, “Wirehouses have steadily ceded market share from 2008 to 2018 … The segment has lost a total of 10 percentage points over that time period. As wirehouses continue to rationalize the size of clients they serve in advisory relationships, they also continue to see an outflow of advisors into other industry channels”.
FINSUM: RIAs and IBDs have been taking market share from wirehouses for years and the reasons why are obvious—better selling points for clients and better compensation. We think it is also a product of the demographics of the industry—as advisors get more senior and established the economics of going independent become more alluring.
(New York)
ETFs are obviously the biggest financial product of the decade, and have been very broadly adopted by advisors. However, how advisors actually use them varies greatly, partly due to the diversity of the asset class. There are around 2,200 ETFs covering a seemingly endless variety of niches. But within that cornucopia of offerings, which can be dizzying, lays the opportunity to personalize. Specifically, the large variety of highly specialized approaches allows advisors to be very tactical with portfolios without the need to buy specific stocks. Further, since ETFs are replicating a benchmark, they do not suffer from “style drift” like mutual funds do. In that way, the sectors/niches they track are more reliable and can be depended on for the role they play in a portfolio.
FINSUM: This might be obvious to some, but there are many out there who still only use ETFs are ultra-cheap trackers. Some of the new offerings provide really interesting exposure to specific areas—part of the reason they have been heavily adopted by hedge funds.
(New York)
One of the oldest tricks in the American tax book is seeing new life because of recent changes to the tax code. The process is referred to as upstream tax planning. Changes to the tax code mean that investors can take assets that have seen capital gains and transfer them to a trusted older relative with the understanding that they will be bequeathed. When that asset is re-inherited by the original donor it now has a new basis and can be sold into the market immediately with no taxes due despite the initial capital gains. One estate planner summarizes the changes, saying “People didn’t want to use up their estate tax exemption, but the whole paradigm has shifted because of this new high exemption amount … When they doubled the exemption, everyone thought they’d do away with the step-up in basis at death, but that didn’t happen. So this creates a huge opportunity for taxpayers”.
FINSUM: This is a very good loophole, but it does have a trust component where the donor needs to be confident the beneficiary will hold onto the asset!