Wealth Management
(New York)
Over the last couple of years there has been a movement on the fringes of the active management space. That movement was towards funds that only charge investors full and/or rising fees if they outperform a given benchmark. If they underperform, their fees would fall back to ETF levels. Well, that idea has taken a big step recently as major fund provider AllianceBernstein has a handful of so-called “fulcrum funds”. The largest is the AB FlexFee Large Cap Growth Advisor Fund, with $106m under management. A top figure at AB put the goals most clearly, saying “The big impact of this will be if we can take money from passive, or money that would’ve gone there … That’s the ultimate goal here”.
FINSUM: Fulcrum funds make a lot of sense for active managers and clients. If the fund managers do their job and seriously outperform a benchmark, then higher fees make sense. If they don’t, then fees stay low.
(Washington)
One of the big questions financial advisors may have about the midterms has not been discussed much. That question is how the midterm outcome may affect regulation, specifically regarding the SEC rule or forthcoming fiduciary rule 2.0. The answer is that in the most likely scenario—Democrats taking the House and Republicans holding onto the Senate—regulations would get tougher for the wealth management industry. Staunch fiduciary advocate Rep Maxine Waters (D-Calif.) would become the chair of the House Financial Services Committee, and would likely push for much tougher regulation. She has already railed against the new SEC rule for what she sees as a lack of strength.
FINSUM: Democrats taking the house could change the regulatory picture considerably. This seems likely to be one of the biggest risks to a Democrat victory for advisors.
(New York)
It is no secret, but new data is out showing just how much advisors don’t like the SEC’s new best interest rule. While there has been strong pushback about aspects of the rule, including its governance of the use of titles, there hadn’t been concrete data about how advisors felt about it. Well, now there is. A new survey from Fidelity shows that two-thirds of advisors say that the rule will either have a negative impact or won’t help. Only one third think it will have a positive impact. Interestingly, only 73% were actually aware of the SEC proposals in the first place.
FINSUM: The SEC rule is confusing and not well conceived. And when you combine with the updated DOL rule that is coming out in 2019, the new regulations could turn into a real headache.
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(New York)
Financial advisors appear to not give a hoot about the forthcoming SEC Best Interest rule. Fatigue from the endless on-again-off-again DOL saga seems to have taken hold of the industry. A new survey by Fidelity found that 40% of advisors says that even though they are aware of the proposals, they are currently taking no action. A further 78% of advisors say they will need help in assessing and evaluating the proposals.
FINSUM: While there is definitely some fatigue, the reality is that most advisors did a lot of preparation for the fiduciary rule, and thus they think they are in a good position for the forthcoming SEC rule.
(Washington)
Just when it finally felt like it was gone, the fiduciary rule appears to be back from the dead. Not only is the DOL working on a new version to be debuted in 2019, but it is reportedly enforcing the current version intensely. According to ThinkAdvisor, “attorneys with Drinker, Biddle and Reath report that both the Labor Department and Securities and Exchange Commission are leveraging enforcement initiatives at a historic level of tenacity”. Fred Reish, top industry lawyer concurred, saying “Now that the fiduciary rule has been terminated, I think the focus at DOL is more on enforcement”. In terms of how the DOL is opening up investigations, a partner at Drinker, Biddle & Reath says that “They start with ‘hello, we are the DOL, show us how you do ERISA,’ and from there take a very broad based approach”.
FINSUM: We are confused by what is going on at the DOL. Following Trump’s appointment of the new chief at the DOL there seemed to be a hands-off approach being adopted (e.g. not pushing the rule further in court). Now everything seems to have reversed. Stay tuned.
(Washington)
In what we think might be the worst case scenario for the industry, it is looking like the DOL and SEC are in a full scale partnership to regulate the wealth management industry. With the DOL’s announcement that it is taking another crack at the fiduciary rule, and its guidance that it would issue a new rule in September 2019 (the same month the SEC says it will debut an updated best interest rule), many insiders now expect that the DOL and SEC are working together to craft a comprehensive package of fiduciary regulations. According to Fred Reish, a top industry lawyer, “It appears that DOL and the SEC have coordinated their agendas so that the SEC's rules can be incorporated into a new exemption for prohibited transactions resulting from non-discretionary fiduciary advice”.
FINSUM: Some think this is a good sign, but more partnership between the regulators means a more diverse set of rules to adhere to. Further, there will inevitably be significant gaps between the different agency rules, leaving a lot of doubt and grey area, which causes headaches for anyone trying to play by the rules.