Wealth Management
(New York)
There was a great deal of anxiety over the fiduciary rule, and now there is mounting consternation about the SEC’s Regulation Best Interest. But within that story, there is a lost narrative—the fate of the US’ small broker-dealers. Mounting regulatory pressure continues to dwindle their ranks. The number of Finra-registered broker-dealers has fallen 10% since 2013, and last year the number fell to a total of 3,726, down 109 from 2016. One industry commentator summarizes that “It is getting to the point that the many firms under 10 advisors dread Finra audits and are positioning themselves to be under a larger broker-dealer in order to simplify their life”. “This used to be a fun business, but not anymore”, says the commentator, citing a B-D owner.
FINSUM: We can personally testify to the difficulties that smaller B-Ds face, and not just in terms of direct regulatory costs. Additionally, factors like limits to markups constrain revenue, so there is pressure on both sides.
(New York)
Be careful of sketchy deal solicitations that are floating around the market right now. Apparently there are fake securities firms, either posing as real ones or using aliases, who are soliciting deal interest in the advisor market. Many times the fake deals will cite endorsement from the SEC or other regulators, often fictitious ones (e.g. The Bureau of Financial & Protection Services). The SEC itself issued the warning to investors about the phony deals.
FINSUM: Any advisor will know these are fake and that the SEC does not endorse deals, but many clients could fall for these scams.
(New York)
We became concerned for our advisor readers today when we read an article in the FT warning that many trading platforms are at serious risk of hacking. The article says that many trading platforms, such Charles Schwab, TD Ameritrade, and Interactive Brokers, secure data in an unencrypted or partially unencrypted format, leaving them highly vulnerable to hacking. If a hacker got your password, they would be able to do anything you could on the platform. Generally speaking larger brokers had safer platforms than smaller ones, and both Schwab and TD Ameritrade emphasize that they are making progress on the issue.
FINSUM: This seems like a major risk that has gone ignored. We wanted to make sure to warn our readers as we are aware that many of you use Charles Schwab and TD Ameritrade.
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(Washington)
Okay, here is an honest question for our readers that we are debating internally. Did the DOL rule face more criticism, or is the SEC’s Best Interest rule taking more heat? While it initially seemed that only investor protection groups disliked the SEC’s Regulation BI, coalitions of brokers are now railing against it too. Amazingly, both brokers and investor protection groups agree—the SEC’s rule is too vague and confusing. Brokers say the rule is so vague they don’t even know how to comply, while investor groups say it is so weak it won’t change current practices (these are effectively the same argument!). “This will only serve to harm the brokerage model and limit choice for those investors who prefer the brokerage advice model”, says a broker group.
FINSUM: Honestly, we think the current iteration of the SEC rule is all but dead. The comment window closed yesterday, and we expect a serious redraft.
(New York)
If you are a strong advisor looking for a change, Deutsche Bank may be interested in speaking with you. At least that is what Deutsche Bank is saying. The US wealth management arm of the German bank says it wants to growth the ranks of its wealth advisors by 25% this year. According to the head of Americas wealth management there, the orders from the top are to “grow, grow, grow”, adding that “We’re getting dollar investment going into the unit for headcount . . . there’s great access to the management board.”
FINSUM: This is a big initiative considering that the only European brand to have any foothold in US wealth management is UBS. The other big names are all American.
(New York)
Everyone knows mutual funds have been on the decline and ETFs on the rise as active management gives way to the rise of passives. However, new data throws a wrench into that narrative—hedge funds are surging in popularity. Hedge funds now account for 28% of all alternative asset demands among investors, just one point shy of private equity, and way up from 12% a year ago. The catch is that hedge funds don’t really look like themselves anymore, with new fund structures, such as separately managed accounts and lower fees, that make them more useful for investors. Co-investing is another big growth area, where major investors invest alongside hedge funds in specific deals.
FINSUM: So hedge funds have surged in popularity, but they are not hedge funds, in the same sense, as before. Further, fees are down, with the average being a management fee of 1.45% and a performance fee of 17%.