Wealth Management
(New York)
Investors and advisors—don’t get too excited about the zero fee shift among the big brokers, it is not all that it appeared to be. In particular, mutual funds seem to have been entirely left behind in the zero fee shift. Essentially, none of the big brokers has scrapped fees on mutual fund trades. While ETFs are now free to trade, mutual funds in some cases have transaction fees as high as $75.
FINSUM: This is going to wound the mutual fund market further, as not only do mutual funds have higher fees, but trading them will now be commensurately more difficult than ETFs too.
(New York)
It actually took longer than we expected. Last week there was a big splash in markets and media when Schwab, TDA, and E*Trade all cut their commissions in response to a first move by Schwab. Now, unsurprisingly—except for how long it took—Fidelity has followed suit. The unique part about Fidelity’s move is that in addition to free trades, it is also offering free money market funds for any cash left in accounts. Those are currently 1.58%, and way ahead of the near zero yield you get on cash at Schwab, TDA, and E*Trade.
FINSUM: The whole market has gone to zero on trading commissions. One wonders if the same is going to happen on large ETFs.
(New York)
Have you ever thought to yourself “I would love if they could put the downside protection of structured products into an ETF”? Probably not, but someone did, as there is a new category of ETFs, called Buffer ETFs, which are seeing big capital inflows. The ETFs work by guaranteeing only a certain level of losses in exchange for limiting potential gains. The ETFs have a year-long term, and their details change constantly. But a good example would be one with a 9% “buffer”. This means that if the ETF loses 12% in the year, the holder would only see a 3% loss and the product provider would absorb the rest. The first and only provider of these ETFs is called Innovator and has partnered with MSCI, Nasdaq and more to create a handful of exchange traded funds. Check out KOCT, NOCT, EJUL, and IJUL.
FINSUM: These are very tricky ETFs, just like the structured products from which they drew their inspiration. That said, they seem like they have some utility if they are executed properly.
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(New York)
Charles Schwab may have just changed market access forever. The giant custodian and broker-dealer just announced that it was eliminating all trading commission on stocks, ETFs, and options. It is unclear if it is doing the same for advisors on its platform, but it said it would extend the offer to clients of RIAs who trade on its platforms. TD Ameritrade immediately matched Schwab’s offer within just a few hours. Following the announcements, brokerage stocks plunged. TDA fell about 26% and E*Trade fell 16% to new 52-week lows. Estimates are that the change in fees will depress both TDA and E*Trade’s earnings by 22%.
FINSUM: This is a game-changing move. Hopefully they will extend this to all trades for advisors. This is a brutally competitive landscape and retail investors and advisors are seeing the benefits.
(Washington)
It had seemed somewhat of a formality to this point, but it is now official: Eugene Scalia has been confirmed by the Senate as the head of the Department of Labor. Scalia has long been a legal crusader against both financial regulations and worker’s rights, and will now take the helm of what is likely to be a very different Department of Justice. This has made opponents of the the fiduciary rule 2.0 cheer. However, Scalia announced recently he may have to recuse himself from being involved in that regulation given government ethics guidelines. Still, many argue that his influence will mean the DOL moves in a much more conservative direction on all fronts.
FINSUM: The fiduciary rule seems like the biggest thing the DOL has going at the moment (at least it seems that way if you are in wealth management). This seems to be backed up by how much political attention it is getting. It is hard to see him not being involved, or at least heavily influencing the approach, even if he is not directly taking part.
(New York)
The world’s biggest family offices are feeling very bearish. A new study by UBS found that over half of them are expecting a recession and over 40% of them are increasing their cash reserves. 45% are taking steps to mitigate risk. Family offices have struggled in the last year, averaging only a ~5% return; much lower than the 9-13% returns they typically target.
FINSUM: Normally speaking we might think this is a good counter-indicator, but family offices represent so much AUM that they could have a real impact on the market.