Archive for December, 2009
Predictions for 2010
Posted by Jerry Cooper in News on December 28, 2009
Look for lower unemployment, higher taxes and more debt. Despite the predictions of skeptics investors will regain confidence and markets will hit new highs in 2010.
Time magazine made Federal Reserve Chairman Ben Bernanke its person of the year. The economy appears to be taking shape, his work will likely become one of the most remarkable transitions from rags to riches in American history. Bernanke’s achievement was not necessarily what he didn’t do but more of what he did do to subdue an economy that could have collapsed in a way that the markets melted before the Great Depression.
This month marks the Trust Advisor Blog’s sixth month of publishing. It marks an achievement that required me to wear two hats — relationship manager by day and writer by night.
Although I would have preferred to have basked on the beach in the Bahamas this weekend, instead I dug my heels into delicate research to come up with these predictions of what, in my opinion, will likely take place next year.
1. Expect unemployment to head down, perhaps to as low as 8 percent. As investor confidence continues to take hold, markets again will rise. This will inspire confidence in businesses to rehire and expand. This will in turn have a significant effect on employment.
2. The U.S. dollar will likely improve as short-term rates climb next year.
3. Interest rates will begin to rise in the second quarter of 2010 as inflation fears begin to mount and the economy continues to grow.
4. Corporate profits will increase to the upside beginning in the first quarter of 2010.
5. Small cap stocks which have been badly beaten in the downturn will rise dramatically making them one of the best performing equity vehicles.
6. Financial regulation will attempt to begin in Congress but the mission and purpose will have been forgotten as most politicians have short-term memories for what took place in the last quarter of 2008.
7. Anti–Madoff/anti-Stanford measures will take a backseat position as new issues emerge.
8. ETFs will become the hottest financial vehicles for investors. Innovators will package commodities, real estate and every conceivable asset class into an ETF so investors can consume them and reunite markets.
9. Apple Computer will announce a large size iPhone – the size of a small book. It will have screen features like the iPhone and its apps will serve as a full computer. It will be called the iTablet or something like that. iPhone applications will appear on its screen. It will have a Bose style sound system and give sound enthusiasts a walking, boom-box entertainment system. iPhone’s competitors such as Palm and Blackberry will copy the concept. Amazon.com will likely partner with one of these firms to make its Kindle on-line books available for instant access.
10. Americans earning more than $200,000 a year will be prime targets for high taxes. Expect tax rates for up to 50 percent or more at those income levels without effective planning. Trusts and other special purpose vehicles will be standard requirements for most high net worth investors and earners in this bracket.
11. Healthcare stocks will boom despite gloom predictions that conservatives had during the healthcare debate. The largest filled by the new entrance to the healthcare system will fund new technologies and be a boom for pharma stocks.
12. A new rich will emerge again beginning a new seven-year cycle that will culminate a smarter rich that will harvest new technologies and exploit the weaknesses of the old.
13. Offshore banks such as UBS and others will head to China to make tax avoidance and bank secrecy a mainstay for China’s new rich. The government will begin to crack down and instead of handing out five-year prison terms for promoting tax avoidance they will begin executions.
14. Mortality rates will increase by five years according to existing mortality tables due to genetic engineering and anti-aging drugs.
15. Cybercrime will outpace every other type of known crime including violent crimes such as murder, assault and rape as a result of the continued expansion of the Web.
16. Baby boomers will continue to require the services of trust intermediaries, as estate planning options will close as a result of tightened regulation.
For those of you who are around this week please enjoy your holidays, if you are driving drive carefully and hopefully we’ll see you all in the New Year.
Jerry Cooper, senior editor, The Trust Advisor Blog.
M&As: A Successful Trust Business Can Sweeten the Deal
Posted by Jerry Cooper in News on December 18, 2009
Banks are eager to acquire registered investment advisors again, firms offering trust services are more attractive.
Pershing’s New Report “Real Deals 2009″ suggests 2010 will be a good year.
This week the news services were filled with stories about mergers and acquisitions once again. One reason was the December 9 release of the Pershing Advisor Solutions (PAS) and FA Insight study – “Real Deals 2009: Definitive Information on Mergers and Acquisitions for Advisors.” It’s now available for download at www.pershing.com.
This morning, The Trust Advisor interviewed Mark Tibergien, Pershing Advisor Solutions’ CEO, at his office. We wanted to know what M&A activity has meant to the advisor community this year. In addition to discussing the current state of M&A 101, we explored what edge an advisory firm might have for acquisition with a solid trust business under its belt.
Tibergien said that having a trust operation as part of an advisory business “does potentially help.” He added that a trust operation gives the advisor “access to the will vault.” This translates into two distinct benefits for the RIA practice. First, accounts are likely to remain loyal because once trust relationships are created with a family they usually hold firm.
Second, advisors with a trust operation possess a blueprint on the direction of future generations. Knowing that future in advance via the trust instrument will give the advisor a clear picture of what’s to come after the client passes away.
Advisors without trust services who manage family money have an 8 out of 10 chance of being fired by heirs after their client dies. The Trust Advisor Blog reported on this phenomenon last September in: Does a Client Have a Life After Death?
Our article presented compelling evidence that providing trust services along with investment advice greatly reduces the likelihood of an advisor being fired by the new generation.
Fiduciary expert Stephen C. Winks said this week that the advantage of trust powers for an RIA are extraordinary. But he cautioned that it wouldn’t make sense for an RIA to buy a trust company. “It would be cheaper,” he said, “to create their own trust company.”
Middle Market Merger Mania
Pershing Advisor Solutions’ Tibergien reported in his third annual study on M&A activity that, while the volume of transactions in the RIA sector is down this year, a new trend of mergers among RIA firms and a decline in financial buyers has emerged. The study showed that In the first nine months of this year, 31 transactions were recorded–a pace similar to the 44 in 2008. But this is still well off the 67 that took place in 2007.
Transactions between RIA firms became the most common form of deal in 2009, accounting for more than 45% of all transactions year to date. In 2008, RIA-to-RIA deals were less than 29% of all deals, and in 2007 they were below 24%.
“The key takeaways [from the study] are that there still is a lot of interest in transactions, but the volume has come down a lot. Most of the activity is tilting toward an RIA-to-RIA transaction and away from serial, or financial, buyers,” Tibergien said. “Most people who are looking at deals are focused on the compatibility of the organization and not just on the financials.”
Tibergien explained that the market disruption over the past 18 months froze capital and forced firm financial buyers sit on the side lines. In his opinion, the financial crisis also opened RIA firm owners’ eyes to the fact that they could achieve economies of scale, meet staffing needs, and establish a better market presence by merging with another RIA firm. He also noted that clients’ concerns about succession following aging owners could be eased through merger.
“I think, however,” he predicted, “there are a lot of pressures in the marketplace today that probably suggest that RIA-to-RIA consolidation will continue unabated for the next five years.” He added that most of the activity would be in the middle market: firms with $200 million to $2 billion in assets under management.
Banks are Buyers Again
Paul Lally, a mergers and acquisitions consultant based in Pennsylvania, says banks are looking for differentiators in the marketplace – to bring a certain cache to their wealth management business. The banks his staff has worked with have retail groups and are successful with the affluent customer. But they are looking to expand their high net worth business. Lally has found that the banks typically don’t have a high net worth platform, offering financial planning, tax planning, and investment advisory services.
The firm Lally was working with was a wealth management firm acting in high net worth space, with average customer investable assets of $1 million. Lally said “banks have come back to the table once again but in a different way. Several years ago banks would come to a wealth management company and just buy it with no questions asked.”
But that all changed since banks have been branded as “wasteful spenders” in the media this year. They have an appetite, but there is no longer a panic to buy. There is no longer a “Las Vegas marriage” where you get married one day and divorced the next. This time, deals are carefully scrutinized and must be approved by both one or multiple parties in the bank and several committees. They take longer and are more careful. But when a bank sees a strategic fit, the bank will likely acquire the firm.
Conclusion
The future looks bright. The New Year will likely be a promising period for RIA to RIA mergers with firm seeking both synergy and compatibility. There will be a courtship period and then a marriage planned to last, not divorce Vegas style. To ensure longevity, as Tibergien put it, the seller must have “his skin in a deal.” There will be no more quick and easy deals where the seller can simply take the money and run.
Jerry Cooper, senior editor, The Trust Advisor Blog.
Collective Investment Funds Re-emerge as Mainstream Investment Option
Posted by Jerry Cooper in Practice Management on December 11, 2009
Why the comeback? A demand for lower expenses and more flexibility make qualified plans a major market
Collective investment funds, sometimes referred to as common trust funds, are not a new investment structure in the U.S. market. In fact, they have been available in the market for decades, to both defined-benefit and defined-contribution plans.
In the past, however, collective investment funds had also always been perceived as a bank product, and mutual fund companies were, for several decades, the growth leaders in the retirement plan arena. As 401(k) plans began to grow quickly in the 1980s, they found mutual funds an easy-to-use product, further slowing the development of collective investment funds.
Now, collective investment funds are making a very strong comeback for several reasons.
The primary factor in the last few years has been faster computers and better communication networks. These have allowed collective investment funds to be priced and traded on a daily basis.
Collective investment funds are remarkably similar to the mutual funds many of us are familiar with in the marketplace; they can invest in equities, fixed income, ETFs and even mutual funds.
Additionally, they can create custom asset allocation portfolios to meet the needs of a particular client. This feature has been extensively used by pension plans that desire the collective investment funds to be utilized as a life-cycle fund.
While many pension plan sponsors had shied away from including collective investment funds in their employees’ plans in the past, there are now more than 1000 collective investment funds available, and that number keeps growing.
Many of the collective investment funds available today are near mirror images of mutual funds that asset managers already offer to pension plans.
In fact, some of the stable value funds already available are so identical to the mutual funds they mirror that many plan participants are unaware of the transition from mutual fund to collective investment trust.
There are a few key differences, however, which make them remarkably well suited for use within 401(k) retirement plans.
The Market
There are several factors which make CIFs different from mutual funds. Nearly all of them are helping drive more and more business toward the collective investment trust market. While collective investment funds have been available to institutional investors and large pension funds for decades, they have gained increased popularity as of late for a number of reasons.
Long the domain of private equity and hedge funds, mainstream mandates are being increasingly found in non-registered products. Investment managers that have traditionally offered registered funds (mutual funds) are showing considerable interest in non-Securities Exchange Commission (SEC) registered vehicles as of late, such as collective investment funds. Investment managers are looking to commingle separately managed accounts to save on operational costs, and roll them into collective investment funds.
Investment managers have realized that the growing collective investment trust market can provide them with access to new markets, lessen their cost burdens related to increasingly complex regulations, give them a faster time to market, and decrease their costs. This has resulted in collective investment funds being found in most pension plans in the United States.
The ability of mutual funds to be offered to a wide variety of investors, from institutional to retail, means that they have assets coming in from a wide variety of distribution channels.
When compared to collective investment funds, this proves to be a disadvantage for the mutual funds, as the necessary record-keeping, tracking, trading and fee allocation add an enormous burden to the mutual fund firms and their custodians. Collective investment trusts, offered exclusively to institutional investors, are able to avoid this added burden.
Regulatory Changes
The Pension Protection Act (PPA) of 2006 created a big boost for CIFs. The PPA strongly encourages companies to set up automatic enrollment for their employees into default investment plans, referred to as “Qualified Default Investment Alternatives” (QDIA).
These can be balanced accounts, target-date (life-cycle) funds, or managed accounts. Many employers are scrambling to comply with the PPA, and are setting up new 401(k)s, or setting up automatic enrollment plans for their employees to contribute to their pre-existing 401(k) plans.
However, while one aspect of the PPA has driven employers to set up automatic enrollment plans (helping mutual funds, ETFs and collective investment funds), there is another aspect of the PPA that has driven business specifically toward collective investment funds: That is the requirement for plan sponsors to act in the interest of their participants and seek out low-cost options to be included within their 401(k)s.
This has spurred the trend toward low-cost investment solutions in order for employers to protect themselves from a fiduciary point of view.
• The Department of Labor (DOL) has also debated the possibility of including target-date and target-risk collective investment funds within its selection of acceptable default investments in pensions, under the PPA.
• The Government Accountability Office (GAO) has also conducted an investigation into the fees being charged in 401(k) plans, further driving plan sponsors away from mutual funds and toward lower cost alternatives.
• Collective investment funds are not regulated by the Securities and Exchange Commission, and are exempt from Section 3(c) (11) of the Investment Company Act of 1940 (more commonly referred to as the “40 Act”). While this may appear to be a minor difference between collective investment funds and mutual funds at the surface, this is a key factor, which affects the attractiveness of collective investment trusts to 401(k) plans greatly. The reason for this is that collective investment trusts, being exempt from oversight by the SEC, are not required to adhere to the strict regulations imposed by the 40 Act. These regulations stipulate, among other things, that mutual funds provide prospectuses to potential investors and provide regular written reports on the status of the fund.
Regulation of CIFs
Instead of being regulated by the SEC, collective investment funds fall under the auspices of the government’s Office of the Comptroller of the Currency, which is part of the U.S. Treasury Department. The ability of the collective investment trust not to be burdened by the cumbersome requirements imposed by the SEC — as well as by the enormous amount of expenses associated with the production and printing of prospectuses and reports — already helps to make collective investment funds more attractive to pension plans.
Yet, their not being regulated under the 1940 Act shuts collective investment funds out of the 403(b) plan market, as 403(b) plans stipulate that only funds which fall under the 1940 Act be included in their offerings. Unfortunately for collective investment funds, this has locked them out of many teacher and non-profit pension plans, and there does not seem to be any legislation on the horizon to remedy this.
Requirements For CIFs
Collective investment trusts are required to be valued at least once every three months (although, realistically, most collective investment funds are now valued at least monthly, and many much more frequently). There is an exception to this rule: collective investment funds which are primarily invested in real estate or other assets and which are not readily marketable (in these cases, the collective investment trust should be valued at least once a year).
Also, at least once during each 12-month period, a savings association administering the collective investment trust must arrange for an audit of the collective investment trust, and the collective investment trust must also provide a report summarizing security purchases (with their costs), a summary of sales (with profit and loss and any other investment changes), income and disbursements, and an appropriate notation of any investments in default.
Collective investment funds are not allowed to be sold directly to retail investors, as they are not regulated by the SEC. Instead, they are only saleable to institutional investors, and are generally sold into Defined Benefit and Defined Contribution plans.
Because they are not sold directly to retail investors, not only do collective investment funds avoid the costs of printing materials such as prospectuses, but they are not burdened by expensive administrative, advertising and marketing costs. Collective investment trusts also avoid the cost and rigmarole of supporting toll-free telephone service centers and dealing with retail investor inquiries.
In lieu of a prospectus, a collective investment fund is able to issue a much shorter and simpler “disclosure statement” to investors. Collective investment trusts must also file a trust document with the IRS for a determination letter, and also must file a form 5500 annually. Collective investment funds do not issue proxies, helping to further reduce their cost.
Another factor to bear in mind when dealing with collective investment funds is that they must be held and offered by a bank or trust company (generally a bank or custodian). Technically, it is the bank or custodian that is the trustee of the collective investment trust. If, in theory, the selected asset manager were to not perform their duties, they could be replaced by another manager.
CIF ETFs
There has also been a group of collective investment funds designed around holding only ETFs as the underlying portfolio. Not only does this provide a cost savings of approximately 60 to 80 basis points per collective investment trust, but it also provides a much greater diversification for the portfolio. The individual ETFs are combined to build an investment strategy in the same fashion that stocks or bonds would be in a traditional collective investment trust.
The difficulty is that the selection of ETFs is rather limited, with a much more finite number of ETFs than individual securities. Despite their limited number, ETFs have more than US$400 billion in assets under management in the United States alone. Even so, ETFs can present their own set of technological issues in regard to their pricing. The transaction costs associated with weekly automatic contributions or from active trading have the possibility of negating any cost savings to be gained from lower expense ratios.
Some custodians have had difficulties in addressing the needs of ETF managers who require much more rapid delivery of real-time or near-real-time information.
Also, many 401(k)s using ETFs are looking to bundle trades, in order to spread transaction costs across multiple users, which presents further technical issues (especially involving record-keeping). ETFs will still have a difficult time being fully accepted by 401(k)s, primarily due to technological issues.
But the reality is that investors are asking for ETFs, and plan providers will sooner or later have to develop or purchase the technology to cater to the growing number of ETFs investors are asking for.
Midsize investment management firms are rapidly developing new collective investment funds to cater to smaller pension plans present in the market, as well as offering niche products to the larger pension plans which are looking to provide diversified investments to their pension participants.
The collective investment funds’s attractiveness is driven by two key factors: low cost and ease of use. The primary driver for the inherently low cost for collective investment fund is the less rigorous regulatory burdens placed upon the investment managers and trustee. In order to attain the lowest possible cost, however, all parties involved need to seek the trustee able to offer the lowest servicing cost. In order for a trustee to accomplish this, their process must be as fully automated as possible, with as little manual intervention as possible.
Jerry Cooper, senior editor, The Trust Advisor Blog.
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