Bad Investments

Pandemic likely to reshape adviser-client communications, survey finds

Changes that are occurring in how investors and financial advisers communicate and collaborate during the pandemic are likely to become standard practices after normalcy returns, according to a survey of investors by Broadridge Financial Solutions.

Sixty-two percent of those who reported a change in the mode of communication as a result of the pandemic said they would entirely or partially maintain their new methods after the pandemic ends. Fifty-eight percent cited phone calls and 46% cited emails as new ways that they communicated with their adviser during the pandemic, with 36% having used video chat, even though only 9% prefer video above all others. Millennial investors were most likely to use video chat with their adviser, at 59%.
Over half (57%) of those surveyed said communications with their adviser had changed in some way in light of new stay-at-home mandates.
[More: Clients appreciate phone calls now more than ever: Survey]
“We are seeing an accelerated adoption of digitalization and personalization from investors, financial advisers, and wealth firms as a result of the pandemic,” Michael Alexander, president of wealth management at Broadridge, said in a statement. “The use of video conferencing, more personalized emails, and more frequent phone calls has broadened, deepened and changed the client-adviser relationship. As a result, investors don’t want a return to the past. They largely prefer this new normal.”
The survey of 1,000 individuals who currently use a financial adviser in the United States and Canada was fielded in June 2020.

[More: Improving client satisfaction with successful communication]

Tough week for Raymond James after tech outage

Raymond James Financial Inc. on Friday morning confirmed its advisers had been grappling with data feed problems, including snafus that blocked advisers from client contact and account information, although its client data is secure and up to date.

The company, which earlier this week announced the layoff of 500 employees, is working with Oracle to restore applications to normal and expects to resolve those problems soon.
“We have nearly completed resolving a data feed issue with our Oracle database hardware impacting some adviser-facing applications,” wrote spokesperson Steve Hollister in an email. “Back-up protocols and systems to support adviser and client services remain in place. All trades and money movement orders continue to be processed.”
Hollister declined to comment about how many of Raymond James’ 8,000 financial advisers and registered reps were feeling the impact of the data problems.
Financial adviser and broker-dealer news website AdvisorHub yesterday reported the issue of the Raymond James’ data problems, which began before the market opened on Thursday.
Large broker-dealers like Raymond James periodically have problems with technology platforms, causing headaches for advisers and annoyance for customers. Such issues often arise when firms are changing or upgrading technology.

New Schlichter lawsuit targets MEP

Pentegra Retirement Services is being sued over its multiple-employer plan, court documents filed Tuesday show.

The case is the latest brought by law firm Schlichter Bogard & Denton, which for more than a decade has led the way amid a massive amount of class-action litigation against retirement plan sponsors.
The law firm, seeking to represent a proposed class of more than 25,000 people, alleges that Pentegra breached its fiduciary duty by letting record-keeping and investment costs skyrocket and by engaging in self-dealing.
Administrative costs were several times higher for participants than those in comparably sized plans that bargained for lower rates, the lawsuit alleges. The investment fees of the mutual funds and collective investment trusts on the plan menu were also as much as 9,000% higher than rates available for lower-cost share classes of the same products, the complaint stated.
Pentegra’s Defined Contribution Plan for Financial Institutions represented more than $2.1 billion in assets among nearly 30,000 participants at about 250 employers, mostly small banks and credit unions, as of the end of 2018, data from the Department of Labor show.
“To date we’ve not been served, but obviously we’re aware of the complaint,” Pentegra general counsel Robert Alin said. “We reject the claims and intend to mount a vigorous defense against them. In fact, Pentegra is looking forward to strongly defending [against] this lawsuit and standing up for the valuable services we provide to participating employers and their employees.”

The lawsuit tries to paint a picture of conflicts of interest as the plan’s board, which included Pentegra employees, agreed to contracts with the company, including the use of its own CITs.
In 2018, participants paid about $390 per year in record-keeping and administrative fees, while a more reasonable rate for a plan that size was about $65, according to the complaint.

“In light of the excessive fees and increasing amounts paid while services remained constant, it is evident that defendants did not engage an independent fiduciary to review and approve the arrangement between Pentegra and the plan,” the complaint read.
The lawsuit also points to other costs absorbed by the plan, citing hotel fees as an example.
“In 2010, plan assets were used to make a $7,370 payment to the Ritz Carlton Naples and $5,015 payment to the New York Palace Hotel, presumably for defendants’ personal benefit,” the complaint read.
The complaint was filed in U.S. District Court for the Southern District of New York.

It named two plaintiffs but is seeking class certification for many more.
The plaintiffs are seeking restitution for the alleged losses and attorneys’ fees. They are also asking for the removal of plan fiduciaries who allegedly breached their duties to participants and to reform the plan with lower-cost investments and cheaper administrative services.
[More: The SECURE Act and open MEPs: Opportunities and threats for advisers]

Oppenheimer’s tech stack gets a makeover with InvestCloud

Wealth management broker-dealer Oppenheimer is undergoing a technology makeover to help its network of more than 1,000 advisers better serve its high-net-worth clients. 

To facilitate the firm’s new digital-driven strategy, Oppenheimer tapped global fintech InvestCloud to develop technology addressing three key challenges for advisers including recruiting and transitioning prospects, client onboarding and retention and business growth, according to the announcement. 
Oppenheimer, which has approximately $18.9 billion assets under management, tapped InvestCloud because of the fintech’s wide toolkit of applications that allow the broker-dealer to pick and choose which apps are most appropriate for their clients, according to Oppenheimer’s head of private client division Ed Harrington. 
“Put another way, [InvestCloud] is not a canned solution, it’s a malleable open source solution that allows us to collaborate,” Harrington said.
As a result, collaborating and blending tech tools with a high-touch service model is the strategy Oppenheimer sees for its future, Harrington said. To start, InvestCloud will spearhead the creation of a new digital adviser-client web-based portal, which is expected to launch during the first half of 2021. 
Other firms, like Merrill Lynch Wealth Management, have recently rolled out web-based portals that allow advisers to better collaborate with their clients. Merrill introduced their new tech-driven workstation, Client Engagement Workstation, in June. 

For Oppenheimer, the partnership with InvestCloud is key to quickly driving the firm’s tech strategy as InvestCloud has a porpsect portal and digital client onboarding apps that can be customized to fit Oppenheimer’s needs, according to InvestCloud CEO John Wise.
One of InvestCloud’s unique approaches to developing tech for wealth management firms is applying game theory to these web-based portals, Wise said. “What gaming theory does is it gets people more engaged with the actual digital experience,” he said. 

The gamification trend brings game dynamics into advisers’ practices to encourage desired client behavior.
Adding gaming theory to something as simple as a client onboarding app means having a “progression dynamic” in a similar way any video game would have the user continuously leveling up, Wise said.
“Advisers have to take clients through an experience, and we can do a lot of things in the financial services space using our behavioral science data,” he said.  
InvestCloud’s Prospect Portal, which Oppenheimer will be using, leverages game theory by first providing a hub for clients to learn more and engage with an Oppenheimer adviser prior to becoming a client. 

Next, prospects are sent to InvestCloud’s digital client onboarding app, allowing them to open new accounts.
InvestCloud integrates prospect data with information gathered through a multi-question multi-answer system, which allows the firm to automatically create intuitive proposals and provide an onboarding experience that is tailored to the individual.
The announcement comes on the heels of the firm’s recent implementation of AdvisorWorks, a proprietary CRM and desktop dashboard that serves as the landing site for all adviser applications.
Other upgrades include Passport, the firm’s portfolio management platform for advisers, as well as a cloud-based electronic signature and document management platform.

Q&A: NYU sustainable business expert on U.S. election outcome

American businesses will continue to address environmental, social and governance concerns of their own operations no matter who becomes the next U.S. president, said Professor Tensie Whelan, director of the New York University Stern School of Business Center for Sustainable Business.

“Companies have continued to make substantial commitments to climate change targets, despite the Trump administration’s climate denialism,” said Whelan in answers to questions from readers of InvestmentNews’ ESG Clarity that were posted on Twitter on Friday.
Management of ESG issues is “mission critical” for businesses and will continue to be whether President Donald Trump or Democratic nominee Joe Biden secures the White House in November, she said.
Her center has created a methodology to help companies recognize how they are making money on their sustainability investments. The goal is for CFOs and investors to use its Return on Sustainability Investment (ROSI) tools to develop metrics that allow companies to better integrate, track, and report on corporate financial performance that comes from embedding ESG into business practices.
[More: JP Morgan, Morgan Stanley and others call for carbon pricing]
Whelan previously was president of the Rainforest Alliance and executive director of the New York League of Conservation Voters. She joined the Stern School of Business five years ago.  

Can you define or describe what makes a business’ practices sustainable or not?
Tensie Whelan: Sustainability is a journey—no one is there yet! But, sustainability should be core to business strategy (rather than siloed), focused on material ESG issues, set meaningful, time-bound targets, report externally,  and align internal systems and incentives.

What do sustainable best practices look like? Any examples?
TW: Best practice is different depending on industry.  Some key elements: focus on material ESG issues, use third party standards (SASB/GRI) to report on progress, robust stakeholder engagement, sustainability is part of the business strategy, board level engagement
What can businesses do ensure sustainable practices within supply chains?
TW: First, assess supplier sustainability thru surveys and inspections. Second, focus on high risk (environmental and social) suppliers with requirements to meet your standards or third party certification.  Provide incentives for improvements.  Should be a partnership not a transaction.

Do investors give up yield when investing in green bonds?
TW: Generally, the yield on green bonds is equivalent to conventional bonds, though can be lower due to high demand and low supply.  Preliminary data during COVID-19 points toward more resiliency for green bonds.  For corporate issuers, a reduction in cost of capital is possible.
Will the upcoming U.S. elections impact whether businesses continue to embrace sustainability?
TW: Companies have continued to make substantial commitments to climate change targets, despite the Trump Administration’s climate denialism.  Business will continue tackling ESG issues as their management is mission critical.
When will ESG funds become more common on 401(k) plan menus?
TW: Current scarcity is due to ESG funds having short track records and thus fiduciaries don’t feel comfortable including them. Some past funds focused solely on negative screens and did not always perform well.  Performance has become at par or better than other funds. 
What improvements would you like to see on business’ sustainable data?
TW: Lots! Consistent metrics focused on material ESG issues. Full value chain. Reporting to one standard.  Performance vs process oriented. Integrated reporting on the financial impact of ESG efforts.  Third party assurance of the reporting.
 Can sustainability strategies drive higher profitability? 
TW: Yes, our ROSI (Return on Sustainability Investment) research demonstrates significant returns. An auto company had a $285 million benefit from waste reduction strategies.   An apparel company had $34 million in improved productivity/retention due to their sustainability approach.
Are there particular third party certifications that consumers should look for if they want to support sustainable businesses?
TW: There are third party certifications for most consumer products that have multi-stakeholder developed standards and auditing. Credible ones are members of ISEAL, such as Fair Trade, Rainforest Alliance, FSC (Forest Stewardship Council).
Also, @Bcorporation is a great new business model and more big brands such as Dannon and Athleta are signing on.  This certification supports companies managing to the triple bottom line.
How does society benefit from corporations focusing on sustainability? 
TW: Potentially, companies produce value for all stakeholders, including workers, customers and the environment, rather than just extracting value for senior leadership and shareholders, and help solve societal problems like climate change.
Will the economic impact of COVID-19 have an impact, positive or negative, on Americans’ willingness to buy/invest green?
TW: Our research (Sustainable Market Share Index) finds that sustainability-marketed  products are responsible for 55% of growth in the last five years in food/personal care. Demand continues to grow during the pandemic. Most demographics are buying, not only millennials.
Why has Europe embraced ESG and responsible investing more thoroughly than in the U.S. and do you anticipate we’ll catch up at some point?
TW: The US has $1/$4 under some type of ESG filter or engagement. Major asset managers (BlackRock, Goldman Sachs, State Street) and banks and funds are building ESG practices.  Europe is ahead of us due to historical governmental and citizen support of sustainability.
What benefits can a firm expect if it does the work to embed sustainability into its practices?
TW: A wide range from operational efficiencies from reduced resource use, to increased employee productivity and retention, to innovation in products, processes or services, to reduced risk, such as from climate change, human rights abuses, etc.
Can’t speak to a professor and not ask about books! Do you recommend any particular books for someone looking to get better informed on ESG strategies?
TW: Embedded Sustainability by Chris Lazlo – old but great; Doughnut Economics; THE NEW GRAND STRATEGY: Restoring America’s Prosperity, Security and Sustainability in the 21st Century; The Big Pivot; and Green Giants.

Even Fidelity’s star manager frets about Robinhood

Will Danoff has been wondering why billions of dollars keep flowing out of the Contrafund, the giant mutual fund he manages at Fidelity Investments. Performance isn’t the problem. He’s up 21% this year, trouncing the S&P 500’s 6.2% return. His conclusion: Today’s kids want something sexier.

“There’s a demographic issue,” said Danoff, who has beaten the benchmark by an average of more than 3 percentage points annually over three decades. “We need to appeal to the Gen Zers and the younger generation as well, and luckily I think our app is quite good. But you know, a typical Gen Zer may not be as interested in owning a mutual fund.”
That assessment, from one of Fidelity’s biggest stars, captures the angst of an entire industry. For years, traditional mutual funds have been losing favor. Many investors were turned off by chronically poor performance, and others objected to paying commissions or annual fees that often approach 1%.
There’s now less money in actively managed U.S. equity funds than in low-cost alternatives such as index funds and exchange-traded funds that track the market instead of trying to beat it. More recently, young investors have flocked to Robinhood Markets, making commission-free trades with a few taps on their smartphones.
Next to the social media antics of celebrity speculator Dave Portnoy, Danoff’s world of buy-and-hold discipline seems antique by comparison.
“When I started in 1990, there were 261 equity funds, and now there are thousands,” said Danoff, who manages $230 billion. “There are thousands of hedge funds. There are thousands or millions of Robinhood investors. There’s sovereign wealth funds, etc. So there’s no question that it’s become much, much more competitive.”

VAST RESOURCES
Closely held Fidelity remains one of the titans of asset management, running some $3.3 trillion, and unlike most competitors the company has embraced ETFs, runs a discount brokerage and even developed expertise in cryptocurrencies. Danoff said access to Fidelity’s vast resources is one of the reasons he’s been able to outperform the S&P 500 for so long.
Yet he also recognizes the appeal of index products, whose growth in the 2010s eroded the economics of mutual funds and bookended the era when managers such as Peter Lynch, Bill Miller and Ken Heebner were household names. Last year, 71% of U.S. large-cap managers failed to beat the benchmark, according to S&P Global.

“One issue with investing in any actively managed fund is what happens when the fund manager retires or what happens if the fund manager loses his fastball,” said Danoff, 60. “And then, secondly, do I still trust my fund manager?”
Managers also make mistakes. In Danoff’s case, he unloaded most of the Contrafund’s position in Tesla Inc. in 2017 and 2018, missing out on more than $10 billion of gains. Now he’s stuck in limbo, confident that electric vehicles have a bright future, that Tesla is a great company and that Elon Musk is a “remarkable executive.” But he’s apprehensive about buying into a capital-intensive business, not to mention the stock’s $411.6 billion valuation.
BUFFETT’S BERKSHIRE
At the same time, Danoff has stuck with Berkshire Hathaway Inc., even though its returns have lagged behind the S&P 500 over the past decade.
“The more I’ve spent time with Warren Buffett and, you know, attending annual meetings in Omaha, the more I like it,” he said. “With all my tech holdings, this is a very good counterbalance and some ballast for the big fund.”

Size is something Danoff has to wrestle with, especially in the $139 billion Contrafund. As a manager who focuses on earnings growth, he built some of his top holdings in Amazon.com Inc., Facebook Inc., Apple Inc. and Alphabet Inc. — companies so powerful they’ve become targets for antitrust regulators.
“I do worry about that,” he said.
For now, the COVID-19 pandemic has been a boon to Danoff’s portfolio, validating his long-term bets on software, social media, cloud computing and digital payments. The times also have forced him to reckon with the role corporate America — and the investors who back it — plays in issues such as climate change, economic inequality and systemic racism.
“Speaking up for civil rights or equal rights attracts a better-caliber employee,” Danoff said. “The great companies that I’m invested in care deeply about our country. They care deeply about the environment and they realize making all stakeholders happy is good for business and good for the shareholders.”

Court orders asset manager to return $1 million to investors

Acting on a complaint by the Securities and Exchange Commission, a federal court in New York has entered a final judgment against Miami-based asset manager John Geraci for misappropriating approximately $1 million from clients through his Meridian Matrix Long Short Equity Fund.

The judgment orders Geraci to pay disgorgement of $1,098,971, plus prejudgment interest of $229,740, which the court deemed satisfied by a restitution and forfeiture order in a parallel criminal action.
The judgment also bars Geraci from acting as an officer or director in a securities firm. Geraci also agreed to a lifetime bar from the securities industry in a parallel SEC administrative proceeding.
The SEC’s complaint, filed in July 2018, alleged that Geraci formed the Meridian Matrix Long Short Equity Fund in 2015, and hired Nicholas Mitsakos and his company, Matrix Capital Markets, as the fund’s portfolio manager. According to the complaint, Mitsakos had no assets under management, but falsely claimed that he managed millions of dollars and had generated returns of up to 66% in preceding years.
Rather than verifying these claims, Geraci allegedly used Mitsakos’ false and unsubstantiated claims to market his fund, and eventually obtained $2 million from investors. The complaint alleged that Geraci later learned of Mitsakos’ deception and his misappropriation of nearly $800,000 of investors’ funds, but continued to market the fund and let Mitsakos trade the clients’ assets.
The complaint also alleges that, after Mitsakos returned approximately $1 million of the funds, Geraci misappropriated those funds for his own use, telling his clients that Mitsakos had lost all of it.

[More: Phony Philly adviser latest snagged for unregistered securities]

Small RIAs delay succession planning during pandemic: DeVoe survey

Smaller registered investment advisory firms are more likely to have halted internal succession plans due to the coronavirus pandemic, according to a new study.

A survey conducted by DeVoe & Co., an RIA consultant and investment bank, shows that 7% of firms plan to delay the handover of their operation to the next generation of leaders. Almost all of the firms had less than $500 million in assets under management.
Small advisers have had the most difficulty in coping with the COVID-19 outbreak because their owners are spread thinly, the study said. They focused on helping clients during the pandemic rather than tending to longer-term business plans.
“The reality is that strategic decisions — like succession planning — simply have to take a back seat for firms that are run by owners wearing several hats,” the study states.
But small firms also are among the few (1%) that are speeding up succession plans due to the pandemic.
“These owners are taking action — moving with conviction to shore up this risk,” the study states. “All of the respondents who said they are accelerating their internal plans are at firms between $100 million and $500 million in size — firms that are most exposed to the COVID threat.”

The vast majority of firms (92%) are staying the course on their succession plans.
DeVoe RIA M&A Outlook Study is based on a survey of 128 firm owners, principals and executives taken between late May and late June. Firms ranged in size from $100 million to more than $5 billion in AUM.

The study found that the number of advisers open to an external sale of their firm has declined to about 32% this year from 50% last year. That change in sentiment comes while the confidence that the next generation has the ability to purchase firms rose to 39% this year from 34% last year.
“This significant shift in such a short period of time seems to be directly or indirectly related to COVID,” the study states. “The uptick in the expectations that [the next generation] can afford to buy out founders, the perception that valuations will decline, and this decrease in interest to sell externally are correlated with one another. This is good news for junior advisors who have invested years in their firms, in anticipation of investing their personal capital in the business.”
About 90% of advisers surveyed said the lack of succession planning is a major problem for the sector. The study asserted the pandemic is adding urgency to the situation.
“COVID was a shot across the bow for any advisory firm that is operating without a succession plan,” the study states. “We now live in a world where going into the office can be a life or death decision. The increasing realization of the magnitude of this succession problem is good for the future of the industry.

“A silver lining is that COVID will likely drive more RIAs to take action.”