An Unconstrained, Multi-Strategy, Smart Beta Approach To Ensuring The Realization Of 2 And 20

I found this in the February 18 issue of The Economist.  It is a most amazing and amusing satire of the euphemism and creative wordsmithing I see so often used to obscure the message to be delivered.  Resisting the urge to copy the entire column, I offer this excerpt:

Most importantly, Zilch Capital used to refer to itself as a “hedge fund” but 2008 made it embarrassingly clear we didn’t know how to hedge. At all. So like many others, we have embraced the title of “alternative asset manager”. It’s clunky but ambiguous enough to shield us from criticism next time around.

I encourage my readers to enjoy the whole thing.  You won't regret it.

ETF Trading 301

Financial Advisor magazine, via fa-mag.com, published a column by Stoyan Bojinov, a contributor to ETF database and etfdb.com.  In it he details three trading tips that ought to allow any advisor (or investor, for that matter) to improve trading results and lower trading costs.

1. When trading international funds, trade when the market for the underlying assets is open.  This increases the accuracy of the NAV quote, and improves the quality of the ETF quote in relation to the NAV.
2. Use limit orders to trade inside the spread.  the advice on ETFs has long been to trade only with limit orders.  This is suggested to avoid suffering severe haircuts that occur when electronic order systems encounter those moments when market makers are absent. Well, exchange traded funds also tend to have wider spreads than other securities with similar volume.  Placing a limit order inside the spread may entice a market maker to fill your order, and the with the cost being the potential for a few minutes delay and a few cents adverse movement in the price.
3. Inquire into upcoming distributions.  As Mr. Bokinov notes., ETFs are by their nature tax efficient.  However, some funds, notably leveraged and inverse ETFs, conduct a lot of trading in order to maintain the expected exposures.  This trading can lead to significant distributions.  As with traditional open-ended funds, it may make sense to defer a purchase or accelerate a sale in the face of an imminent dividend.

These tips are valuable reminders that a little bit of planning can create value for a client in even the most mundane task in the investment process.

The SEC Will Be Checking Your Due Diligence Homework

Last year, I noted an article about the Chairman of FINRA voicing the SRO's focus on ensuring that broker/dealers conducted adequate due diligence on investment products sod by their registered reps.  Now, Investment News is reporting on a talk by an SEC official whose job is broker/dealer examination.  His message: "We're looking at due diligence."

The due diligence obligation has many facets.  A broker/dealer must make an inquiry into the material aspects of an investment in order to satisfy itself of the reasonableness of profitability.  The inquiry must include validation of the significant information disclosed in offering and collateral documentation.  The inquiry must be sufficiently detailed as to reasonably uncover any undisclosed facts that a reasonable investor would consider material.  The broker/dealer must be able to demonstrated that the person who conducted the investigation on its behalf has the education and experience to perform the analysis in a way that is likely to achieve these goals.  Finally, the broker/dealer has to be able to communicate the findings to its registered reps in such a way that the rep is knowledgeable about the product, but is also communicating only the approved information to a prospective investor.

A broker/dealer can outsource a lot of the work involved.  However, it remains responsible for ensuring the thoroughness of the inquiry, understanding of the product by management, and proper sales practices by the field force.  As FINRA has said repeatedly over the past few years, the B/D can not outsource its responsibilities.

(Disclosure: Clarity Finance, the sponsor of this blog, provides due diligence services on a consulting basis to broker-dealers and financial advisors)

Guaranteed Retirement Income Without The Variable Annuity

Recently, fa-mag.com published a story about a new product which is an alternative to annuities for guaranteed income.  Named RetireOne, it is from Aria Retirement Solutions (ARS), and it uses insurance contracts to provide a guaranteed income wrapper around a client's investment portfolio.  It will cost between 100 and 175 basis points, and provide an income of 4% to 8% of the capital wrapped by the contracts.  There are some limitations on the composition of the portfolio, but beyond that, the portfolio remains under the control of the RIA and his client.  Aegon is currently the only insurance company involved, but ARS is recruiting others.

This is potentially the biggest development in the retirement income area over the past 25 years.  Given the exit of some of the bigger players in the VA business, this can't come at a better time.  I am anxious to see more.

Longevity Annuities In An IRA?

Financial Planning magazine has an article on the recent decision to provide guidance for IRA holders to use IRA assets to purchase longevity annuities.  While the guidelines have not been written, the decision is important, because it signals that the IRS will allow these annuities to be excluded from the asset base from which minimum distributions must be made, as long as the annuity meets the guidelines.  The two limitations mentioned in the article are that the annuity payments must start by the first day of the month following the IRA owners' 85th birthday, and the total purchase price of all longevity annuities can not exceed the lesser of $100,000 an 25% of the total assets in all IRAs (except Roth IRAs).

The IRA market is an excellent market for longevity annuities.  Expect several of the premier fixed annuity forms to market IRS compliant annuities shortly after the guidelines become finalized.  Then, about three weeks after that, you can expect to see articles by practitioners, exploring creative means to maximize the tax efficiency of these transactions.

Longevity annuities address the biggest uncertainty in the retirement planning process: the planning horizon.  Allowing a retiree to use what is often his largest pool of capital to employ this tool will be a huge benefit for investors.

The Implications Of A Fiduciary Rule

Law firm Davis & Harman conducted a study on the effect of a strict fiduciary standard applied to those who advise IRAs.  Investment News reports that the requirement will have a major negative impact on the holders of small accounts.  The firm found that almost half of the 22 million brokerage IRAs would have insufficient assets to justify migrating to a fee-based platform.  All accounts would face a steep increase in the account fees charged.  What is not clear is how much savings an investor would realize in the elimination of commissions, marketing and shareholder servicing costs.

The notion that an additional liability can be imposed on an industry without increasing the costs to the consumer is spurious.  By and large, investors are able to determine for themselves the appropriate cost effective means for accessing advice.  Mandating a fiduciary responsibility is imposing an unnecessary cost.

Do Not Pass Go, Do Not Collect $200

Investment News is reporting that Joseph J. Lampariello has plead guilty to one count of wire fraud and one count of failure to file a tax return.  Lampariello was sentenced to up to 21 years in prison and ordered to repay $49 million.

Lampariello was the president of Medical Capital, and headed what a court appointed receiver called a "Ponzi-like scheme" which resulted in investors losing $1 billion.  Several broker-dealers shut down as a result of arbitration awards related to the Medical Capital and other private placement scandals.

By no means will this restore the savings of duped investors, nor will it restore the reputations of victimized advisors and broker-dealers.  But sometimes, it is nice to know that the bad guys do get their comeuppance.