Wealth Management
(New York)
The current plan for a new New Jersey fiduciary rule is of a new breed. The proposal goes to lengths never seen in the fiduciary regulation world, far exceeding both the SEC best interest rule and the defunct DOL fiduciary rule. The proposal is officially called the “Fiduciary Duty of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives” and includes an expansive definition of a “recommendation”, imposes a uniform duty on both advisors and brokers, and importantly, “creates presumptive breaches if brokers and advisors do not recommend the best reasonably available option and fee arrangement”. Unlike Maryland, the state doesn’t need an internal Senate vote to enact the rule.
FINSUM: This is a very strong rule that would set an alarming, and in our view, misguided precedent for other states, or even the DOL’s update of its own rule. A presumptive breach based on single recommendations sounds ludicrous to us. Almost all decisions can be made to look poor in hindsight. Further, defining what the “best” investment selection is at one point is nearly impossible.
(New York)
Life insurance and annuities have always been a strange grey area for RIAs. They tend to be quite high commission products, a fact which obviously does not blend well with the no-commission, fiduciary mandate. This has left RIAs in an odd position. However, a new and quick growing company, DPL Financial, is now offering a solution. The company serves as an insurance network helping RIAs utilize products from the space. It works with providers of insurance products to help them tailor their offering for RIAs, such as making products commission-free. DPL has already signed up 200 RIAs to use its service. In an example of what they do, DPL’s founder and CEO, David Lau, commented on signing up Jackson National Life Insurance recently, saying “Jackson has long been a market leader in variable annuities, and we are excited to be their partner in launching their fee-based products to the independent RIA market”.
FINSUM: This seems like a very smart and useful approach and the utility for RIAs appears clear. It is obvious they are solving a big problem given their pace of growth.
(New York)
The last year has seen a steady and encouraging rise of alternative fee structures in mutual funds. In particular, a number of managers have adopted so-called fulcrum structures to their mutual funds. All of these funds charge a low or zero base fee, and then a performance fee for outperformance of their relevant benchmark. The idea is that customers only have to pay up for services that actually outperform benchmarks. Some providers that now offer these funds include AllianceBernstein, Fidelity, Allianz, and Fred Alger. The main criticism of the funds that is that they can skew incentives and push managers to take outsized risk in order to produce upside.
FINSUM: These funds are not without their imperfections, but they are a useful and thoughtful response by mutual fund managers who are realizing they need to do more to justify their raison d’etre versus ETFs. We think they are a good deal for investors because if the results aren’t good, you pay very little, if they are great, you pay for it. Compare that to an ETF, where you are never going to outperform, but will likely pay more than 10 bp.
More...
(Washington)
The lone wolf financial advisor is steadily becoming a rarity in the wealth management industry (Edward Jones advisors aside!). For instance, 77% of Merrill Lynch advisors now report that they work in teams, up from 48% in 2013. Whether you work solo or in a team, one thing many might not know is that FA teams tend to grow their AUM and client base much faster than solo advisors. The advantage seems to be derived from two key aspects. The first is that a team has a wider variety of skill sets to help deliver comprehensive services to clients. The other is that having a team in place makes clients worry less about the impact of losing a single advisor via illness, death, or leaving the firm.
FINSUM: The team approach seems to be working across the industry, with clients liking the change. That said, forming teams comes with its own set of significant risks and considerations.
(Washington)
The anti-fiduciary rule crusaders have been more successful than anyone could have imagined. Back in 2017, the slew of industry groups fighting the DOL’s rule looked woefully outgunned. But in time, they completely succeeded. They are coming off another fresh victory as well—in Maryland—but the next battle looks to be even bigger. That battle will be in New Jersey, a state that seems to have taken the stage as a leader in the state-level fiduciary rule push growing across the US. Unlike Maryland, New Jersey is committed to a rule, which makes this fight more substantial. The new rule in NJ also has the support of some advisors there, giving the proposal more traction.
FINSUM: In our view, it will likely be harder to stop the spread of these state level fiduciary rules than it was at the national level, if only because it is harder to concentrate opposing resources across the whole US. Also, if a state truly has conviction about the rule, it seems more likely to come to fruition.
(Washington)
The Trump administration has slowly but surely exerted its influence on the SEC. After two and half years, the changes are reaching their zenith. The last Democrat at the SEC is set to step down later this year. He is technically entitled to stay through June 2020, but is likely to leave before the autumn, when he is set head back to academia. The departure will open the door to a more conservative appointment. It would also mean there are only three commissioners left at the SEC, two of whom are Republicans, giving them an advantage in SEC matters.
FINSUM: This could have all sorts of ramifications for policy, including the best interest rule. We expect this may have some significant impacts on the the BI rule plays out.