DON'T COUNT ON A RECESSION THIS YEAR - SECURE ACT: HOW THE NEW LAW WILL AFFECT RETIREMENT ADVICE PAGE 5 - InvestmentNews
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SECURE ACT: HOW THE NEW LAW WILL AFFECT RETIREMENT ADVICE PAGE 5
JANUARY 6-10, 2020
THE LEADING INFORMATION SOURCE FOR FINANCIAL ADVISERS INVESTMENTNEWS.COM
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DON’T
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PAGE 10
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Page 20
JAN. 6-10, 2020 Cover photo: Brad Trent Page 14
EDITOR’S NOTE Dennis Nolte, vice president of Seacoast
Investment Services.
At IN, lots in store INEVITABLE MOVE
Kashif Ahmed, president of American Pri-
vate Wealth, said the move by Vanguard is
for coming year a way of not being “left behind.”
“Anyone who thought that this was not
inevitable was being naïve,” he said. “Even
W elcome to 2020, a year that
will bring you a lot of new
features from InvestmentNews.
though Vanguard vacuums up the lion’s
share of new investors, this was pretty
much expected.”
Let’s begin with the product. As Todd Rosenbluth, director of mutual
you’ve surely noticed, we have re- fund and ETF research at CFRA, agrees
duced the size of your weekly print that Vanguard simply “leveled the play-
Vanguard joins free-trading crowd
edition. We hope you find this cos- ing field” and that it often leads when it
metic change easy to adapt to, and comes to low fees.
we expect that it will only improve “The recent commission-free war and
your reader experience. But that’s the dominos that fell were partially a re-
not all that will be changing. Over sponse to what Vanguard originally did,”
the course of the year, you will BY JEFF BENJAMIN Vanguard ETFs since 2010. Mr. Rosenbluth said.
see us launch a new, easier-to-use Even though Vanguard’s brokerage Mr. Kadjeski declined to comment on
website, introduce THE VANGUARD GROUP, which was platform has offered commission-free how much trading revenue the change will
new multimedia ahead of the curve in 2018 when it elim- trading of Vanguard mutual funds since likely cost Vanguard but said history has
features, and create inated trading commissions on most ex- 1977, the expansion last week to include shown that clients don’t typically alter their
new tools and change-traded funds, kicked off the new stocks and options brings the low-cost trading activity when such fees are cut.
reports that will year last week by extending commis- asset manager up to speed with the likes Mr. Kadjeski also said the latest com-
enhance the value sion-free online trading for stocks and op- of Charles Schwab Corp., TD Ameritrade, mission cuts are not a response to rivals.
we bring to you and tions for all Vanguard brokerage clients. Fidelity Investments, and Etrade Finan- “We’ve been thinking about a move like
your practice. The change, effective last Thursday, cial Corp., all of which announced free this since 2018,” he said. “We were mindful
In addition, was described as “just another day at online trading commissions for ETFs, of a change in trading activity after 2018
GEORGE B. InvestmentNews Vanguard,” by Andrew Kadjeski, head of stocks and options last fall. and the trading activity didn’t change, be-
MORIARTY has a new chief retail trading. The market has essentially come to ex- cause we’re a firm built on buy-and-hold.”
content officer: me. I joined the “We’ve been doing this on the broker- pect free trades.
company in mid-November and I age side for the past decade,” he added, “This is just a continuation of the inev- jbenjamin@investmentnews
cannot overstate my enthusiasm at referencing commission-free trading of itable race to zero for transactions,” said Twitter: @benjiwriter
the opportunity. The Investment-
News brand and reputation stand
out in the field, and I look forward
to continuing the great work that’s
been done. I’m amazed at the
knowlege of our readers, reporters
and authors who engage across
the magazine, its website, videos,
SEC moves to open up private markets
and events, and I look forward to BLOOMBERG NEWS party-line vote, would permit
finding new ways to share their people with some profession-
collective wisdom. U.S. REGULATORS ARE poised to add al financial certifications,
Most important, I want to hear new criteria for who’s considered a so- such as Series 7, 65 and 82
from you. So if you have sugges- phisticated investor in an effort to allow licenses, to qualify.
tions, comments or criticisms, more people to invest in hedge funds or It would also allow
please reach out to me. hot startups that have become known “knowledgeable” employees
Finally, rest assured the quality for raising billions of dollars outside of at money management com-
and insight of our content will public markets. panies to invest in their firms’
remain the same. The changes The changes proposed by the Securities offerings.
we have made, and will continue and Exchange Commission Dec. 18 would The revamp is part of an
to make, reflect the opportunity revise rules that determine who is an “ac- effort by SEC Chairman Jay Clayton to ly regulated and have a higher potential
that lies ahead for the industry, for credited investor,” which qualifies them to open up private markets to more retail for fraud, the agency has long required
us, and for you. I look forward to buy into riskier, but potentially more lucra- investors, many of whom have been un- they be set aside for more savvy individ-
the ride. tive, deals. Currently individuals must have able to profit off of technology or bio- uals.
a net worth of $1 million to be eligible for tech startups that raise money from the The issue has gotten more attention in
gmoriarty@investmentnews.com those investments. rich long before an initial public offer- recent years with the rise of so-called Sil-
Twitter: @geomoriarty The new SEC plan, adopted on a 3-2 ing. Because those investments are light- CONTINUED ON PAGE 22
Contents © Copyright 2020 by InvestmentNews LLC. All rights reserved. Vol. 24, No. 1, January 6, 2020. InvestmentNews (ISSN 1098-1837) is published weekly, except bi-monthly in July, August and the last week of December by InvestmentNews
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4 | INVESTMENTNEWS January 6, 2020 INVESTMENTNEWS.COM
SECURE ACT BRINGS MAJOR CHANGES
More business Stretch IRA era
for plan advisers comes to an end
BY MARK SCHOEFF JR.
RETIREMENT PLAN advisers could
see an uptick in demand for their ser-
vices as the SECURE Act becomes law.
The SECURE Act represents the
biggest change to retirement policy in
more than a decade. One of its major
provisions would allow businesses of
differing sizes, sectors and locations col-
lectively to offer retirement programs to
their workers under so-called open mul-
tiple employer plans.
“WE THINK THIS
T
he SECURE Act is the law for
WILL BE TRANS- 2020 and beyond. Advisers are
already scurrying to explain the
FORMATIONAL retirement rule changes to clients,
especially those with large IRAs who
FOR EMPLOYER- had planned on a stretch IRA for their
heirs. We are receiving an avalanche
SPONSORED
New year, new law
of questions on exactly how and when
this major change will be applied.
RETIREMENT
PLANS.” IRAALERT
DEPENDING ON YOUR POINT OF VIEW, Congress delivered retirees and ED SLOTT
RICK JONES,
SENIOR PARTNER, AON advisers either an early Christmas gift or a lump of coal last month in the
form of the SECURE Act. The law provides legal protections for employ-
The SECURE Act ends the stretch
The bill also increases tax credits
ers that include annuities in retirement plans, makes it easier for small IRA. All of those plans have to be re-
to $5,000 from $500 annually for three businesses to band together to offer such plans, and increases the age viewed and probably revised. Under
years for small businesses that launch to 72 from 70 1/2 to take minimum distributions from the now “old rules” (before 2020), an in-
new retirement plans. retirement accounts. The law also requires most dividual designated beneficiary could
The changes are designed to in- MORE non-spouse beneficiaries of inherited individual extend post-death “stretch IRA” required
crease the number of employers — es- Advisers weigh in minimum distributions over his lifetime.
retirement accounts to take distributions over a 10-
pecially small businesses — that pro- on legislation. A young grandchild might have a 70-
year period instead of over their lifetimes. The law
vide retirement savings options for year payout period. But no more. The
their workers. The idea is that small
PAGE 6 creates winners and losers, and advisers will need SECURE Act eliminates the stretch IRA
firms that don’t sponsor plans are more to familiarize themselves with its provisions. and replaces it with a 10-year payout for
CONTINUED ON PAGE 22 CONTINUED ON PAGE 22
Annuity providers emerge as big winners
T
he SECURE Act will impact an- gift to the annuity world, this is a big win individual retirement ac-
nuities in a number of ways, but I for annuity providers and those who be- counts and defined-con-
want to focus on two, starting with lieve retirees need more lifetime income tribution plans over
a provision that changes how annuities options in their retirement plans. their life expectancy —
would be treated, which can be found in Fiduciaries won’t be required to se- excluding spouses, who
Section 204 of the act. lect the lowest-cost product for their can still take advantage
plans. The provision would allow them to of stretch strategies.
meet their fiduciary requirements if they
GUESTBLOG choose an annuity provider who’s in good 10-YEAR DISTRIBUTION
JAMIE HOPKINS standing with state regulators. They’re no As stretch distributions
longer pressured to do a full due diligence are removed, any annui-
review on the products and provider, al- ty contract held within a defined-contribu- However, a provision in Title IV, Section
The provision’s goal is to help relieve though I still suggest fiduciaries do so. tion plan or individual retirement account 401(a)(4) of the act provides an exception
fiduciaries’ responsibilities in selecting The other annuity provision I want to would fall into the 10-year distribution for certain existing annuity contracts. The
and reviewing annuity providers and an- discuss circles back to stretch distribu- period for non-spouse beneficiaries. This law states that certain qualified annuity
nuities to ease the burdens of getting an- tions. The law eliminates most beneficia- will be a big problem for IRAs and 401(k)s contracts meet the exception. To meet the
nuities into 401(k) plans. Seen as a huge ries’ ability to stretch distributions from holding certain types of annuity contracts. CONTINUED ON PAGE 22
INVESTMENTNEWS.COM JANUARY 6, 2020 INVESTMENTNEWS | 5
INVOICES InvestmentNews readers react to top stories
“From an adviser standpoint, I’m
more than happy to trade off
the loss of the stretch IRA to
postpone the RMD age a bit
longer. When it comes to IRA
benefits, I am philosophically far
more concerned about how it
treats the original owner (or their
spousal beneficiary) than I am
the children/grandchildren. And
let’s keep in mind that a decade
of spreading out the income is
still awfully favorable.”
— No one of Consequence
PROS AND
CONS OF THE “Maybe if you don’t have any
serious money. But if you do,
SECURE ACT
postponing your distribution
for 1.5 years is like rearranging
“The elimination of the the deck chairs on the Titanic.”
stretch provision for non- — Sixshooter
spouse beneficiaries will
increase taxes for the
THE SECURE ACT, which government but will push
Congress passed at the end some beneficiaries into
of last month, will bring a much higher tax brack-
about the biggest changes et and will reduce their
in retirement policy in a de- inheritance. This effect “The Supreme Court indicated
is only compounded by a few years ago that inherited
cade. While advisers gen-
increasing RMD to 72.” IRAs are not retirement plans. The
erally like most parts of the — TOM_PEMBERTON stretch IRA was good, but it also
law, such as increasing the benefited the wealthy at the ex-
age for required minimum pense of paying the deferred taxes
distributions to 72 from to Caesar. You cannot really have a
70½, they dislike other program ‘save for your retirement’
and yet at the same time, expect
provisions. One they espe-
that money to last for generations
cially don’t like is the loss “I asked my senator about the IRA change past your death.”
of the stretch IRA, which and the explanation was that it offset the — 80504
allows beneficiaries to tax loss of delaying RMDs.”
withdraw money from an —_
inherited individual retire-
ment account over a life-
time. Under the new law,
beneficiaries would have
to withdraw money within
“An annuity is more of an
10 years. Read the full story income stream set up for the
at InvestmentNews.com/ insurance salesman at the
SECURE. expense of unknowing vulner-
able clients.”
— Joseph_Julien
6 | INVESTMENTNEWS JANUARY 6, 2020 INVESTMENTNEWS.COM
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OPINION
EDITORIAL / LETTERS / OP-ED / GUEST BLOGS
The Leading Information Source for Financial Advisers
InvestmentNews.com
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Christine Shaw, cshaw@investmentnews.com
EDITORIAL
Chief Content Officer: George B. Moriarty
gmoriarty@investmentnews.com
Deputy Editor: Robert Hordt
Managing Editor: Paul Curcio
Assistant Managing Editor: Susan Kelly
Special Projects Editor: Liz Skinner
Copy Editor: Anne Marie D. Lee
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Senior Columnists: Jeff Benjamin, Bruce Kelly
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Reporter: Ryan W. Neal
Time to end mandatory arbitration
Director of Multimedia: Matt Ackermann
Senior Multimedia Manager: Stephen Lamb
Multimedia Project Manager: Audrey Rose Joseph
Special Projects Coordinator: Brittney Grimes
ART DEPARTMENT
Executive Art Director: Scott Valenzano
Associate Art Director: Pablo Turcios
Senior Graphic Designer: Kyung Yoo-Pursell
F
DIGITAL, CUSTOM AND RESEARCH
OR YEARS, LAWMAKERS HAVE been trying to elim-
Senior Research Analyst: James Gallardo
arbitration has over time been widely adopted by bro- Research Analyst: Devin McGinley
Digital Campaign Manager: Erin Huot
inate mandatory arbitration clauses in legal agree- kers and investment advisers. The latest bill, the Inves- Digital Operations Manager: Gillian Albert
ments covering consumer, employment, antitrust and tor Choice Act, would prohibit them from strong-arm- Digital Operations Specialist: Carla Flores
Custom Content Producer: Jay Cooper
civil rights claims, as well as agreements between ing clients to pursue claims in a private forum.
investment professionals and their clients. The reasoning behind the arbitration clause, as ADVERTISING
Chief Revenue Officer:
Legislation introduced this year in both the House it pertains to brokers and financial advisers, is that Scott Miller, smiller@investmentnews.com
and Senate once again seeks to ban forced arbitration it spares firms and their customers the cost and 212-210-0717
Business Solutions Manager:
clauses in a wide range of legal documents — from content inconvenience of a lengthy court battle in the event of Kevin Reardon, kreardon@investmentnews.com
licenses to employment contracts. The practice of mandatory a dispute. 212-210-0476
Business Solutions Manager:
That’s admirable. There’s nothing inherently Lauren DeRiggi, lderiggi@investmentnews.com
212-210-0154
wrong with an arbitration system to resolve disputes. Business Solutions Manager:
In some cases, such a system can offer quicker relief Judith Kelly, jkelly@investmentnews.com
LETTERS
212-210-0167
than the courts. Business Solutions Manager:
But the crux of the issue is about more than con- John Shaughnessy, jshaughnessy@investmentnews.com
212-210-0112
venience, speed or cost. It’s about preserving a right Business Solutions Manager:
guaranteed by the U.S. Constitution — the right to Jason Anciulis, janciulis@investmentnews.com
312-280-3115
have one’s day in court. By forcing arbitration, cus-
Let individuals direct retirement assets
Account Executive: Michelle Richard
tomers are precluded from creating or joining class mrichard@investmentnews.com, 212-210-0238
Manager US Event Sales:
actions to address disputes. This denies claimants Dan Rubinetti, drubinetti@investmentnews.com
with limited resources their right to band together 212-210-0432
Business Solutions Manager & U.S. Events:
and fight on a more level playing field.
I
Sabrina Straub, sstraub@investmentnews.com
n your recent editorial (Stop coming up with ideas to raid Aggrieved customers also forego the benefit of 646-437-7956
Reprint Manager: Laura Picariello,
retirement savings, Dec. 9), you argue that using retirement judicial oversight and authority. The bench has the lpicariello@investmentnews.com 732-723-0569
plans to repay student debt or to fund long-term care is a full weight of Sales Operations Manager: Letitia Y. Buchan,
lbuchan@investmentnews.com 212-210-0451
poor way to utilize retirement funds. I would propose that the U.S. gov-
looking beneath the surface may reveal something different. ernment behind ADVERTISING OPERATIONS
Head of Digital Advertising Operations:
If someone is saving for retirement and what they can save is
limited due to the student loan debt payments, why not consider
it to enforce
judgments. That
REQUIRING Berta Franco, Berta.franco@bonhillplc.com
Sr. Digital Advertising Operations Manager:
Valdimir Severe, vsevere@investmentnews.com
an alternative?
While I agree in principle that retirement plans should not be
matters. The
Financial Indus-
INVESTORS Digital Campaign Manager:
Jess Friedman, jfriedman@investmentnews.com
Digital Ad Operations Campaign Manager:
“tapped” foolishly, it is also true in any retirement plan the entire
picture of a client’s assets and liabilities should be factored into
try Regulation
Authority Inc.
TO RELINQUISH Kimberly Hall, khall@investmentnews.com
AUDIENCE, MARKETING AND EVENTS
the equation.
Would repaying a student debt with pre-tax dollars and
has been wres-
tling for some
THEIR LEGAL Director of Audience and Analytics:
George Ortiz, gortiz@investmentnews.com
Email Marketing Specialist: Nicole Chantharaj
then taking the monthly debt payment and increasing the
retirement savings not be a strategy some people would need
time over the
question of how
RIGHTS IS Audience Data Specialist: Julie Vanderperre
Marketing Director, Brand and Products: Katie Downey
Director of Events and Integrated Solutions:
to consider?
Allowing people to decide for “themselves” how to use
to ensure that
investors who
FUNDAMENT- Josh Brous, jbrous@investmentnews.com
Marketing Director: Sasha Burgansky
Senior Operations Manager: Tara Means
existing assets is something we should applaud because they
are addressing the issue instead of expecting government to
win arbitration
cases actually
ALLY WRONG. Events and Operations Manager: Natalie Taylor
Marketing Manager: Kate Arends
Social Media Manager: Scott Kleinberg
fix it for them. get paid. Too Content Producer: Letitia Bow
The same is true when looking at long-term care coverage. often, firms that Executive Assistant to the CEO:
Allowing people to use retirement assets is one solution. Why lose their case Irma Rodriguez, irodriguez@investmentnews.com
212-210-0430
not allow them to fully tax deduct (even if they do not itemize) simply go out of business, leaving investors out of
premiums for long-term care coverage. As baby boomers age, luck. PRODUCTION
Prepress/Production Director: Simone Pryce
the potential strain on Medicaid is going to be overwhelming. Removing the yoke of mandatory arbitration Production Manager: Paul Vaccari
Plus, if Medicaid is used, they lose control of their investment wouldn’t mean that claimants couldn’t use arbitration INVESTMENTNEWS OFFICES
assets. if they so chose. In some cases, claimants might opt to Headquarters: 685 Third Avenue, New York, NY 10017-4024
Bureau office: Washington: 601 13th Street, N.W. Suite
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personal decisions on very personal matters. We cannot expect But requiring investors to relinquish their legal
Advertising main number: 212-210-045 Fax: 212-210-0117
or accept that government should be the end-all to end all! rights in advance of any future dispute is fundamen-
tally wrong. It removes choice. It should always be up BONHILL GROUP, PLC
Chief Executive Officer: Simon Stilwell
Frank R. Owen III to investors to decide how, when and where they want Chief Operating Officer: James Robson
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BRAD TRENT 10 | INVESTMENTNEWS January 6, 2020 INVESTMENTNEWS.COM
HOW
LONG
CAN MOHAMED
EL-ERIAN DOES
NOT SEE A
THE
RECESSION
COMING THIS
YEAR, BUT HE’S
MOVING MORE
GOOD
OF HIS PERSONAL
PORTFOLIO
INTO CASH
TIMES M
ohamed El-Erian, chief
economic adviser at
Allianz and former chief
executive at Pimco, be-
lieves the United States
is riding a “liquidity wave” that can’t
LAST?
last forever.
With that in mind, he recommends
advisers embrace a combination of
“resilience, optionality and agility” to
navigate several unprecedented reali-
ties of the current global economy.
We sat down with Mr. El-Erian in
December for a candid conversation
about everything from global mon-
etary policy and what’s driving the
BY JEFF BENJAMIN
stock market’s historic run to how he’s
allocating his personal portfolio and
which team he thinks could win the
Super Bowl. CONTINUED ON PAGE 12
INVESTMENTNEWS.COM January 6, 2020 INVESTMENTNEWS | 11CONTINUED FROM PAGE 11 zombie companies and therefore retard
Jeff Benjamin: What factors continue to the process of rejuvenating a capitalist
hold up this historic stock market? economy.
Mohamed El-Erian: There are three And fourth, they encourage econo-
things keeping it so strong. One is mywide misallocation of resources.
massive liquidity support from central I think even within the [European
banks, which has been turbocharged by Central Bank] today, which has been the
strong corporate balance sheets that have main proponent of the negative rates
allowed for significant M&A activity. policy, they are starting to question the
Two is the hope of a handoff to more equation of benefits and costs and risks.
comprehensive pro-growth policies, I believe the benefits of negative
particularly in Europe. rates have become overwhelmed by the
And three is the fact that it has been costs and risks, and I believe that we are
the most unloved rally, which means it going to look back on this period of neg-
has had technical support throughout its ative rates as being problematic to the
duration. functioning of a market-based economy.
JB: Is the U.S. economy heading into JB: Could we see negative bond yields
recession anytime soon? in the U.S.?
ME: I’ve repeatedly dismissed the no- ME: I think that’s very unlikely because
tion that the U.S. will fall into recession the Fed fully understands the risks and
in 2020. In fact, given the strength of the costs. And secondly, it’s very unlike-
the household sector, it’s hard to get the ly because I do not believe we’re going
numbers to show a recession unless you to go into recession.
assume a massive policy mistake or a I do think one of the reasons why
very big market accident. U.S. yields have been so low is because
Without that, the U.S. will continue they have been depressed by what is
in a 1.5% to 2.25% growth range. I’m happening in Europe.
much more concerned about recession
when it comes to Europe. JB: How concerned are you about the
I think there’s a general complacen- nearly $4 trillion balance sheet the
cy around the economic risks facing Federal Reserve built up through several
Europe. And I think that there’s a high rounds of quantitative easing in the im-
probability that Europe will hit stall mediate wake of the financial crisis?
speed, which means show growth rates ME: The Fed has a very large balance
of around 1%, but that won’t be fast sheet, and after a period of attempted
enough to overcome headwinds. That normalization, it has reversed again and
will be followed by a recession. Name: Mohamed El-Erian 2007; managing director, Salomon is now increasing that balance sheet. It
Age: 61 Smith Barney, 1998 to 1999; various is not calling it [quantitative easing], but
JB: President Trump’s tax cuts: good or Birthplace: New York City positions, International Monetary the markets have behaved as if it is QE.
bad? Education: B.A., Cambridge Univer- Fund, 1983 to 1997 The reality is, there was an attempt
ME: The combination of deregulation sity; Master’s and Ph.D. degrees, Book author: “The Only Game in at normalization. But it turned out that
and tax cuts is one of the reasons why Oxford University Town,” 2016; “When Markets Col- the markets did not want normaliza-
the U.S. has economically outper- Career: chief economic advisor, lide,” 2008 tion, and they forced the Fed into a very
formed other advanced economies. Allianz, 2014-present; managing Columnist: Bloomberg View dramatic U-turn at the end of 2018, and
Economists disagree on two things director, CEO and co-CIO, PIMCO, Contributing Editor: The Financial now we’re seeing an expansion again,
regarding the tax cuts: Were they effi- 1999-2014; president and CEO, Times not just in the Fed balance sheet, but
cient and were they fair. There should Harvard endowment fund, 2006 to also in the ECB balance sheet, which is
be a lot of disagreements on these a contributor to how well equities did
issues. in 2019.
What they don’t disagree on is that
tax cuts have given a short-term boost JB: Is that a big part of the risk in the policy rates in much of Europe. The JB: You were recently quoted saying
to economic growth in the U.S. financial markets right now? fact that the U.S. has gone from being you are building up cash reserves in
The longer-term boost has come ME: I view it as one of the major uncer- the champion of free trade and glo- your personal portfolio. Does that sug-
from the deregulation measures. And tainties. What we have in the finan- balization to be the most protectionist gest you’re feeling risk-averse?
the hope, which remains a hope rather cial markets is short-term supportive advanced economy is among other ME: Like many other investors, I have
than a reality, is that the third leg of dynamics and major long-term uncer- unthinkables. benefited from a very unusual trifecta,
this pro-growth policy effort would be tainties. And these uncertainties speak So far, we have dismissed as a mar- which is, one, significant returns; two,
infrastructure spending. not only to the globalization issue, they ketplace each of these as noise, and we correlations that have broken down in
also speak to the effectiveness of central have not taken the more valid interpre- favor of investors, in the sense that both
JB: How worried should we be about banks, they also speak to the collateral tation, in my opinion, which is that they risk assets and risk-free assets have
the threat of global trade wars? damage and unintended consequenc- are signals of underlying tensions in the gone up in price; and three, extremely
ME: One of the big uncertainties of es of all this liquidity that has been global economy. low volatility.
2020 and beyond is whether we have pumped into markets, and they speak As to the direct answer, a prolonged Having said that, the longer this
simply pressed a pause button on glo- to the political uncertainties, where we period of negative rates would break trifecta continues, the greater the risk
balization or whether we are pressing are seeing country after country move a market-based economy. And we are of a change. So what I have done is very
the rewind button on globalization. more toward inward-oriented policies already seeing concerns grow about the slowly and very gradually reduced my
If it’s just a pause, then the market that have less respect for the global rule unintended consequences of negative exposure to public markets, both equi-
is right to react short-term to every of law. rates. ties and fixed income, and allocated that
indication of where the discussions They start with the extent to which reduction to two alternatives.
between the U.S. and China stand. JB: What is your take on the roughly $13 they undermine the financial system One is cash, which provides two
If, however, this is a much bigger trillion worth of negative-yielding sover- — not just banks, but most importantly things in this environment: risk mitiga-
process, a secular process, then the eign debt outside the United States? the providers of long-term protection tion and the optionality to pick up good
market must ask the question that it ME: Negative-yielding bonds, an issue services, financial protection services to companies at depressed prices should
has not asked itself, which is how do that was dismissed in most textbooks households, including life insurance and we have a liquidity event.
you rewire the global economy for until it became a reality, are yet another retirement plans. These are very difficult Then, with a smaller portion of the
de-globalization? example of the unthinkable becoming to run at negative rates. reduction in exposure to public markets,
That is such a basic question, and fact. And this list of unthinkables is Secondly, they encourage excessive which has been very gradual and slow,
it’s one that the market has not dealt getting quite long. They include not just risk-taking by nonbanks. I’ve looked for two types of opportuni-
with yet. negative-yielding bonds, but negative Third, they support what I call ties. One is distressed situations where
12 | INVESTMENTNEWS January 6, 2020 INVESTMENTNEWS.COM“THE COMBINATION OF DEREGULATION
AND TAX CUTS IS ONE OF THE REASONS
the sell-off far exceeds the worsening for this year’s Super Bowl?
fundamentals, and second is what I call
market failures.
WHY THE U.S. HAS ... OUTPERFORMED ME: My fear is that it will be the
Patriots again. As much as I respect
OTHER ADVANCED ECONOMIES.”
What it looks like from the outside the coach and the quarterback, they
world is a gradual move to a more bar- appear recurrently in my nightmares. If
reled approach. The middle of the curve you are a beaten-down Jets fan, you’ll
is slowly coming down. One side is the understand why.
true risk-free asset, which is cash, and Resilience to navigate a potential And agility to act quickly when My hope is one of the NFC teams
that’s going up. The other side is the less liquidity shock without having to sell opportunities arise, which will be — whether it’s the 49ers or the Saints
liquid, more opportunistic exposure, and things you don’t want to sell. name-specific to begin with and then or the Green Bay Packers — one of the
that’s slowly going up. Optionality to keep your mind open asset-class-specific thereafter. NFC teams will ultimately prevail.
as to the timing of the transition from
JB: What is your general outlook on this supportive short-term dynamics to more JB: Setting aside your loyalty to the jbenjamin@investmentnews.com
year’s presidential election? uncertain medium-term issues. New York Jets, what’s your prediction Twitter: @benjiwriter
ME: I’m not a political scientist and I
don’t have views on how the election
will play out, because I think there’s lots
of uncertainties. t h i ngs p e op l e s ay to t hei r f i n a nc i a l a dv isor s
What these elections represent is
what we have seen play out over the last
few years and is also playing out in Eu-
rope, which is the difficulty of the politi-
“i want to go big,
cal center to gain traction and a greater
attractiveness to political positions that
are on either side of the political center.
We see this in terms of the lack of
traction so far for a centrist candidate,
and we see that in terms of the support
that President Trump, and Elizabeth
Warren and Bernie Sanders combined,
attract. That speaks of a more general
phenomenon, which is, years of growth
— that has been too low and insufficient-
ly inclusive — has been hollowing out the
middle distributions politically, economi-
cally, socially and institutionally.
That is a phenomenon that will
continue to play out until we get a pivot
to higher and more inclusive economic
growth.
i just don’t want
JB: What do you view as the biggest
areas of concern going into 2020?
ME: Whether they apply only to 2020
or 2021 is hard to say because timing
is really difficult in technically driven
markets, and we are in technically
driven markets that are underpinned
by liquidity.
to go broke.”
But I worry about a few things. One
is the big medium-term uncertainties we
talked about earlier: globalization, policy
effectiveness, political support for rule
of law, weaponization of economic tools.
There’s a lot of uncertainties.
Second, I worry about the big val-
uation gap that has appeared between
high market prices and struggling fun-
damentals. And I worry that the gap is
getting bigger and bigger. I worry that
the system has overpromised market
liquidity to the end users, that we have
seen a proliferation of less liquid prod-
ucts that are liquid for now.
And what we have seen in the past
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INVESTMENTNEWS.COM January 6, 2020 INVESTMENTNEWS | 13REGULATION/LEGISLATION
SEC / FINRA / STATE REGULATORS / CONGRESS / FIDUCIARY / COMPLIANCE
E&O insurance could help with unpaid claims
BY MARK SCHOEFF JR. Inc. statistics. Finra runs the arbitration In 2018, Finra released a report out-
system for brokers. lining several steps that could be taken
STATE SECURITIES REGULATORS are to address unpaid arbitration, including
encouraging brokerages to use insurance POLICIES HAVE PAID UP legislation or regulations requiring firms
to fund arbitration payouts to customers “The survey results reveal that the major- to carry insurance to cover unpaid arbi-
who win disputes, saying it would help re- ity of the responding firms had E&O in- tration awards. The report said unpaid ar-
duce the number of unpaid awards. surance and that their policies bitration is a problem requiring
77%
The North American Securities Admin- have paid claims,” the NASAA a response from Congress and
istrators Association released a survey last report states. “Further, the re- several regulators.
month of 64 firms that showed that 77% sults of the survey contradict “We look forward to reading
of them carried errors & omissions insur- the blanket assertion that E&O NASAA’s report,” Finra spokes-
ance, while 23% did not. Of the firms par- insurance is too expensive or woman Michelle Ong wrote in “We appreciate that this issue is com-
ticipating in the survey, 23% reported pay- too difficult for smaller firms to
PORTION OF an email. plicated and are pleased that Finra and
ing at least one E&O claim over the past obtain.” FIRMS IN SUR- One critic of the Finra arbi- others are studying it,” Christopher Ger-
year, and 17% reported that an arbitration The NASAA report ac- tration system praised NASAA old, chief of the New Jersey Securities
claim was paid by insurance. knowledged that E&O insur-
VEY THAT HAVE for holding Finra’s feet to the Bureau and NASAA president said in a
Most of the firms in the study were ance often excludes claims that E&O INSURANCE fire. statement. “But this problem is not fixing
small, according to NASAA. The survey are made in arbitration cases, itself.”
showed that at least 28 insurance carriers such as fraud, sales of alternative prod- ‘A CRITICAL ISSUE’ Mr. Stoltmann said the NASAA insur-
offered E&O policies. ucts and selling away by a registered rep- “Finra was hoping the unpaid arbitration ance suggestion is helpful.
State regulators see insurance cover- resentative. It also said E&O doesn’t solve issue would blow over and disappear,” said “It’s an important step, and one that
age as part of the answer to the growing some major causes of unpaid arbitration. Andrew Stoltmann, a Chicago securities will cure part of the unpaid arbitration
problem of unpaid arbitration awards. “Because E&O insurance may not nec- attorney and a board member of the Public problem,” Mr. Stoltmann said. “The best
From 2012 through 2016, the amount of essarily address awards against inactive Investors Arbitration Bar Association. “But solution remains an industry-funded un-
unpaid arbitration awards has ranged firms or claims involving fraud or other to NASAA’s credit, it remains a critical is- paid arbitration pot.”
from a high of $75 million in 2013 to a excluded conduct, it is not a complete sue for the organization.”
low of $14 million in 2016, according to solution to the problem of unpaid arbitra- State regulators are trying to spur ac- mschoeff@investmentnews.com
Financial Industry Regulatory Authority tion awards,” the report states. tion on unpaid arbitration awards. Twitter: @markschoeff
Finra took comments on the rogue bro- the Finra proposal.
ker proposal over the summer and has “I want to be careful not to prejudge,”
amended it, according to a statement by a Mr. Clayton told lawmakers.“I haven’t seen
board member. Finra has not released the the text of the rule. But I will say I have
revised proposal. long been supportive of the concepts that
are in [the Finra] rule. If you’re going to
REVISED PROPOSAL hire somebody who has a history, the reg-
The proposal “has been under discussion istration and other requirements that Finra
for two years, we received comments imposes should reflect that you’re taking
back from the first notice, and really the more risk than someone who doesn’t.”
regulatory policy committee went through
those comments,” Jack Ehnes, a Finra
board member and chief executive of “WILL YOU ENSURE
the California State Teachers’ Retirement
Finra seeks SEC approval for rule that System, said in a Finra video. “We made
adjustments to the regulation. [The board]
is now prepared to advance that on to the
THAT RULE IS CLEAR
THAT UNSCRUPU-
cracks down on firms hiring rogue brokers SEC.”
At a Senate Banking Committee hear-
ing in December, Sen. Catherine Cortez
Masto, D-Nev., highlighted the proposal
LOUS FINANCIAL
PROFESSIONALS
BY MARK SCHOEFF JR. they could not make withdrawals with- in her questioning of SEC Chairman Jay CANNOT CONTINUE
out Finra’s permission. Other conditions Clayton. She and some of her Democratic
THE FINRA BOARD has sent a rule pro- would also be placed on the firms. colleagues want Finra to add a provision TO OPERATE?”
posal to the Securities and Exchange During its Dec. 4-5 meeting, the Finra that would expel from the industry firms
Commission that would place higher cap- board agreed to forward the proposal to and financial advisers with many disci- SEN. CATHERINE CORTEZ MASTO, D-NEV.
ital standards on brokerages that hire an the SEC, which will publish it for com- plinary blemishes.
above-average number of registered rep- ment. The SEC must approve Finra rule “Will you ensure that rule is clear that The SEC also must review and approve
resentatives with disciplinary histories. proposals before they can go into effect. unscrupulous financial professionals the Finra proposals to amend the suitabili-
The Financial Industry Regulatory Au- The Finra board also sent the SEC cannot continue to operate?” Ms. Cortez ty rule and noncash compensation, which
thority Inc. released the proposal last May. proposals to amend the suitability rule Masto asked Mr. Clayton. are meant to clear up whether those rules
Under the measure, firms that are deemed and rules for noncash compensation to He responded by saying that it’s a priv- or Reg BI apply to recommendations to
“restricted” because they have a high per- conform with the SEC’s Regulation Best ilege to work in the securities market and retail customers.
centage of rogue brokers or a history of Interest. And it approved the organiza- that financial advisers can be kicked out if
misconduct would have to maintain a de- tion’s 2020 proposed budget, which has they “misbehave.” mschoeff@investmentnews.com
posit in a segregated account from which not been released. But Mr. Clayton did not tip his hand on Twitter: @markschoeff
14 | INVESTMENTNEWS JANUARY 6, 2020 INVESTMENTNEWS.COMA Flexible Complement
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© 2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be
accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is
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IN012170.indd 1 1/2/20 10:32 AMINDUSTRY $50T
THE POTENTIAL VALUE OF THE ETF
INDUSTRY IN THE NEXT DECADE,
ACCORDING TO BANK OF AMERICA
RIAs / INDEPENDENT BROKER-DEALERS / WIREHOUSES / M&A / CUSTODIANS / INDUSTRY GROUPS
Alt investment site YieldStreet targets
IRAs with WealthFlex acquisition
BY JEFF BENJAMIN
vestments through IRAs for advantages
DIGITAL ALTERNATIVE investments that include tax efficiency.
platform YieldStreet has acquired a digi- “We believe the $27.1 trillion retire-
tal IRA platform, WealthFlex, as part of a ment market is currently underutilized
strategy to bring the individual retirement and lacking diversification,” he said.
account market into the 21st century.
“The IRA industry is stuck in the ’80s,” ALTERNATIVE REALITIES
Wells Fargo sweetens
said Milind Mehere, founder and chief Paul Platkin, co-head of investments for
executive of YieldStreet, a robo-advice RegentAtlantic, currently uses traditional
platform founded four years ago to offer IRA platforms to help his clients invest in
wealthy investors access to sophisticat- alternatives, and he agrees that certain
adviser succession plan
ed and mostly secured debt investments less-liquid investments are best held in-
across real estate, shipping, marine, legal, side qualified accounts.
art finance and commercial loans. Tax management is among the advan-
New York-based YieldStreet had until tages of owning certain alternatives in-
now been affiliated with seven external side a qualified account, said Mr. Platkin.
BY BRUCE KELLY net decrease of more than 1,300 bro- IRA platforms, including Bellevue, Wash.- “Inside an IRA there is no K-1 to deal
kers and advisers through the end of based WealthFlex, but decided that add- with and no tax filing,” he said. “If you can
AFTER WELLS FARGO Advisors the third quarter. Wells Fargo Advisors ing an internal IRA platform would make put it in an IRA and you’re younger, you
watched a steady stream of brokers now has about 13,700 advisers across the process of owning alternatives in didn’t have liquidity anyway.”
and advisers leave in the wake of its various business channels. qualified accounts easier to manage. Todd Rosenbluth, director of mutual
corporate banking scandals, execu- “The Summit Program has had “Our investors wanted a tax-efficient fund and ETF research at CFRA, con-
tives at the wirehouse said that more really good adoption by the advisers, method of investing on YieldStreet, and curred that alternatives often gain appeal
than 1,000 advisers have signed up for with over 1,000 advisers” signing up we listened,” Mr. Mehere said. “Anyone when markets get volatile or transition to
a new succession plan that ties them who has ever tried to move their 401(k) or new cycles, which might be the tipping
more closely to the firm. IRA understands that the process is not point YieldStreet needs.
Introduced earlier this year and “WE’RE GIVING consumer-friendly or designed for today’s “Advisers look to alternative invest-
dubbed the Summit Program, the plan world.” ments to provide diversification for cli-
offers a bonus to advisers who stay on A PATH TO LOYAL Joe DiDomenico, founder of Wealth- ents,” Mr. Rosenbluth said.
until retirement and also gives finan- Flex who will be joining YieldStreet as However, Paul Schatz, president of Her-
cial help to young advisers acquiring FINANCIAL director of retirement services, called the itage Capital, wonders if there’s enough of
the business of those advisers who are
retiring.
ADVISERS deal a “match made in heaven.”
“The playing field for individuals to be
an appetite for alternatives inside IRAs.
“This is a very small market in and of
“I think they got it right on this FOR THEIR able to invest for themselves has radically itself,” he said. “I don’t think many clients
one,” said one Wells Fargo adviser, improved as a result of this acquisition,” wake up and decide they want to invest
who asked not to be named. “It solves RETIREMENT.” he said. their IRA or 401(K) specifically in the alts
many issues. It facilitates the older ad- space. And alternatives remain fringe in-
visers to set up a transition plan, and RICH GETZOFF, HEAD OF WELLS GROWING THE PLATFORM vestments.”
locks the acquiring advisers to the FARGO’S ADVISER-LED BUSINESS WealthFlex, founded in 2014, has $250
firm, long-term.” million in client assets across 500 ac- jbenjamin@investmentnews.com
counts. Since its 2015 launch, the Yield- Twitter: @benjiwriter
ADDED INCENTIVE for the plan, said Rich Getzoff, head of Street platform claims to have funded 160
Under the new program, Wells Fargo Wells’ adviser-led business, in an inter- investments worth nearly $1.2 billion.
reps and advisers who are eligible view. “We’re giving a path to loyal fi- Mr. Mehere said about 200,000 inves-
and retiring can receive an addi- nancial advisers for their retirement,” tors have signed up on the platform.
tional deferred bonus of 25% of the he said. Most of the investment offerings are
adviser’s prior year’s fees and com- made up of senior secured debt with du-
missions, known as the “trailing 12” COMPENSATION PLAN rations of between one and four years.
in brokerage industry parlance. That Meanwhile, Wells Fargo Advisors in As the investments mature, the princi-
means a retiring adviser, who under December rolled out its 2020 com- pal and interest are paid to investors on
the existing succesion plan could pensation plan. According to a pre- the platform, and so far, nearly $550 mil-
have received up to 200% of his trail- sentation, the plan is similar to 2018’s lion has been paid to investors, he said.
ing 12, now could receive a total val- and keeps in place many of the same Despite the affiliations with IRA plat-
uation of 225% of his annual fees and hurdles for its wealth management forms, only about 10% of the investments
commissions. The new bonus has a advisers. on YieldStreet are held in IRA accounts,
five-year vesting period. The 2020 compensation plan of- which is something the WealthFlex deal is
In September 2016, Wells Fargo fers incentives to advisers who work designed to change.
& Co. reported that bank employees in Wells Fargo bank branches, now The deal also leverages the 2012 JOBS
had secretly created millions of un- called Community Banking Advisors, Act, expanding access to alternative in-
authorized accounts in the names of particularly for those who bring in vestments to more investors.
customers without their consent. The new clients without using the bank Mr. Mehere believes there is an
bank was fined $185 million and then- for a referral. untapped market of wealthy
CEO John Stumpf resigned. Other investors looking for
bank-related scandals followed. bkelly@investmentnews.com ways to allocate to
Partly as a result, Wells has seen a Twitter: @bdnewsguy alternative in- MILIND
MEHERE
16 | INVESTMENTNEWS JANUARY 6, 2020 INVESTMENTNEWS.COMYou can also read
