Tag Archives: industry

Are Robos Fiduciaries When They Provide Financial Advice And Services For Fees?

Very few investors, individual or institutional, know there are two ethical standards for financial advisors and firms . The higher ethical standard is known as “fiduciary.” Financial advisors, who are registered investment advisors (RIAs) or investment advisor representatives (IARs), are held to this higher ethical standard. It requires advisors and firms to place the financial interests of their clients ahead of their personal interests (make more money). The lower ethical standard is known as “suitability.” Salesmen, for example stockbrokers, are held to this lower standard. They are supposed to make suitable recommendations based on their knowledge of the investors’ circumstances and goals. However, this lower standard is subject to interpretation. For example, three salesmen could have access to the same investor information and make three totally different recommendations. Wall Street prefers a vague ethical standard that is difficult to enforce. Investors are better off with a clear ethical standard that is easy to enforce. Securities and Exchange Commission The SEC is questioning whether robos are financial fiduciaries. This should be a relatively simple decision. The SEC is responsible for regulating financial service firms (RIAs) that provide advice and services for fees. Consider the following: Robos are registered investment advisors (RIAs) Robos provide advice in the form of model portfolios Robo algorithms manage the portfolios Robos have discretionary relationships with their clients Robos are compensated with fees Based on SEC regulations, RIAs are classified as financial fiduciaries. It does not matter if the RIA is a traditional, brick and mortar firm or a robo that delivers advice and services over the Internet. The Robo Exemption Should robos be exempt from fiduciary standards? Absolutely not! They invest client assets in exchange traded funds and other types of pooled investments. In this capacity a robo is acting as a virtual financial advisor; the ETF is the money manager. Financial advisors, who may be RIAs or IARs, are fiduciaries. Therefore, robos are financial fiduciaries. Department of Labor The DOL also has some skin in the fiduciary game. It wants fiduciary status for all advisors who provide investment advice and services to 401(k) plans and IRAs. The DOL believes this requirement will protect American investors from unscrupulous business practices that jeopardize their chances for comfortable, secure retirements. Robos are beginning to provide investment services for 401k plan assets. They also provide robo services for assets in IRAs. Therefore, this DOL mandated ethical standard would apply to robos. Computer Programs Robos did not invent model portfolios. Most financial advisors have used model portfolios to manage their clients’ assets for decades. In fact, the models of robos and advisors are strikingly similar — based on age, risk tolerance, investment horizon, and return objective. What is new is the sophistication of the computer models that run the robos’ model portfolios. Computers are more efficient than humans. Conflicts of Interest Robos will have to act in their clients’ best interests . Models cannot be programmed to buy more expensive, under-performing products Turnover (buys and sells) have to benefit the investor and not the robo There cannot be any hidden or unnecessary expenses The use of proprietary products must be fully disclosed to investors Robo portfolios should not be used as loss leaders Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Eurekahedge: From Latin America To Middle Earth

The latest report from Eurekahedge tells us that hedge funds worldwide are down year-to-date through February, -1.27 percent. Dividing the industry by geographic mandates, Latin America is the only region to post YTD gains, +1.9%, due to a rally in oil and commodities. Table 1, adapted from the report below, gives a more detailed breakdown by region in February specifically. In that month Latin America was flat in performance-based growth, but that still looks favorable compared to negative numbers everywhere else. Slicing the data, instead, by strategy, CTA/managed futures are the best performers and long/short equity hedge funds are the worst, which is very different from the state of their respective fortunes in 2015. Click to enlarge On a YTD basis, CTA/managed futures funds recorded a net inflow of $0.5 billion, posting impressive performance-based gains: $6.8 billion. Such funds were assisted by the fact that gold was a profitable trade in February. The shiny stuff, a traditional safe-harbor, benefited from jitters on the global economic outlook. Sovereign bonds, likewise, benefited from a safe-harbor effect in February, “as the anticipation that Mario Draghi will deliver a stronger stimulus come March mounted.” Stepping outside the four corners of the Eurekahedge report for a moment, I can’t help but observe that Draghi did deliver something in March, but the market was underwhelmed. Getting back into those four corners: Slicing the data now by fund size, Eurekahedge finds that the first two months of 2016 make the case for the proposition that the bigger they are, the harder they fall. The largest funds have the largest negative number regarding performance-based growth. They also have the largest net outflows and accordingly are 1.09% smaller in assets under management than they were at the beginning of the year. Click to enlarge The report mentions that “indications of an oil production freeze provided some brief support for oil prices during the month [of February],” helping to account for the relatively good Latin American numbers mentioned above, but “talks were ineffective as OPEC members remain largely unwilling for the plan to fall through.” Middle Earthen Tongues Latin America also led the fixed-income table, with gains of 2.06% in February, “while all other regional mandates languished into negative territory during the month.” YTD, Latin America’s fixed income managers have gains of 2.57%, which contrasts with their cousins to the North, who posted a 2.93% decline during the same period. Meanwhile, in the macro world, hedge funds that were long the pound lost, as talks on the British exit from the European Union, the “Brexit,” lead the pound downward against the US dollar. Tense talks on this subject in mid-February ended on a positive note, with EU leaders’ agreeing to special status for Britain in return for its continued presence amongst them. But Prime Minister Cameron made some concessions in the course of those talks that are controversial with his countrymen, such as an agreement that Britain would pay safety net benefits to migrant workers from other EU countries. The outcome of the referendum scheduled for June 23 is not at all predictable. The politics of it is so fraught that the tweets of members of the European Parliament regarding the Brexit show they’ve been arguing with each other on the subject in languages invented by fantasy author J.R.R. Tolkien. Let those who understand elvish interpret this sample tweet: “Ne minuial toll u ir tirich er-il delair awarthannen.” In this climate, European macro managers did particularly poorly in February.

Should I Sell My First Energy Stock?

Oddly, this isn’t the first time this thought has popped in to my mind. Last year I wrote a piece titled ” 3 Reasons I Would Sell a Stock .” The listing was created to help me identify holdings that have fallen out of favor in my portfolio or have not performed. After elaborating on the 3 reasons I would sell, I reviewed my portfolio for any stocks that met the criteria. Any takers on guessing which one of the stocks that was discussed in the article? First Energy! Shocker, right? After one heck of a run by the stock that has brought me close to break even, I now find myself asking the question again. Is it finally time to sell my stake in First Energy? First Energy (NYSE: FE ) has been a problem child for me from the beginning. Unfortunately, it sometimes works out like that. Historically, FE has been a stock that pays a high stagnant dividend yield. It is an electric utility after all. Despite the fact that the company’s recent dividend growth rate was non-existent, I was willing to overlook this fact due to the high yield (Which was above 5% at the if I recall). First big mistake right there; I was caught chasing yield and boy did I learn the hard way. Months after I purchased the stock, FE slashed their quarterly dividend from $.55/share to $.36/share. Ugh! That decrease caused a massive sell-off and my position turned red really fast. Isn’t the phrase dividend cut becoming too common on this website? Especially after what happened with KMI and then BBL over the last few months? Finally, after over two long, painful years, my position is at the breakeven point due to dividend re-investment and I have the opportunity to potentially re-coup my initial investment. To determine if I should sell the stock, I want to be able to answer one simple question. If I did not own a stake in the company and had extra capital lying around, would I purchase stock and initiate a position in First Energy? If FE does not pass our stock screener and I would not purchase shares, then why on earth am I holding on to them? Especially considering the fact that I own a small stake in another electric utility that happens to be one of our 5 foundation dividend stocks . Outside of the fact that I am being really stubborn here and don’t want to realize a loss. To answer this question, I decided to run FE through the Dividend Diplomats Dividend Stock Screener to see if FE would pass this daunting test. Let’s see how FE performed. Price to Earnings Ratio Below the S&P 500 – Using FE’s forward EPS per TheStreet.com of $2.84, FE is currently trading at a forward PE multiple of 12.6X, which is well below the PE ratio of the S&P 500. For comparison sake, ED is trading at a multiple of 18.71X. So FE is trading at both a discount to the market and one of the major players in the industry. Payout Ratio below 60% – Using the forward EPS from the line above, FE’s payout ratio is 50% while ED has a payout ratio of 66%. Again, FE passes our metric and shows a better figure than ED. Paying an Increasing Dividend – As I already mentioned earlier, FE cut their dividend to $.36/share per quarter in 2013 and has not increased their dividend since. So this point represents a big negative as my stagnant dividend stream is losing purchasing power each year. For comparison sake, ED is a Dividend Aristocrat and has a 5 year average dividend growth rate of 1.9%. This really isn’t much better; however, at least their dividend is growing at a rate near inflation. Dividend Yield – This isn’t one of the metrics on our stock screener, but it is worth pointing out. FE’s current dividend yield is about 4% while ED has a current yield of about 3.56%. Debt to Equity Ratio – Again, this metric is not a part of our initial stock screener. I began focusing on the impact of debt on a company when my KMI dividend was slashed significantly. However, I really should have begun looking at a company’s debt burden when I purchased stock in First Energy. Per finviz.com, FE has a Debt to Equity Ratio of 1.78X and ED has a Debt to Equity ratio of 1.09X. I understand that debt is not always a necessarily a bad thing, but I am a little “debt averse” after my recent experiences. So much so that I even created a Top 5 list to identify Dividend Aristocrats with low debt to equity ratios. We all have flavors of the month and mine is currently LOW DEBT! Now that I have run some numbers, let’s get back to my original question. Would I purchase shares in First Energy today based on the information above. The answer is…..no. So why am I not logging into Capital One Investing now and selling my stock? Where is my hesitation and why am I struggling to make a decision here? What has me torn is that while the stock may not have passed all metrics in our screener, it didn’t fail all of the screeners. In fact, when compared to another company in its industry, the company appears to be trading at a significant discount while sporting a higher dividend yield. The fact the company is trading at a discount makes perfect sense to me when you consider some of the negative factors I mentioned above. Is the dividend growth rate terrible? Yes. Do they have a lot of debt? Yes. However, their payout ratio is well below our 60% threshold. So the answer isn’t as clear as I was hoping it would be by the time I reached the end of this article. So all of you, I am asking you for your help here. You offered Lanny some great advice about his internet package this week and I have loved reading your responses as they have come in. So I would love to get your take on my dilemma. If you were me, would you sell your stake in First Energy? If so, what other companies would you recommend? I am thinking I would go the ultra safe route and purchase a foundation stock or one of the stocks on my “Always Buy” list with the proceeds. Are there other utilities I should consider as well? Please everyone, help me out here! -Bert