Tag Archives: outlook

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.

Bracketology – An Investing Lesson From The NCAA

“Bracketology,” a term coined by ESPN, is the study of the annual NCAA college basketball tournament. Interestingly the art or science of filling out an NCAA tournament bracket also provides insight into how investors select investment assets. Before explaining, we present you with a question: When filling out an NCAA bracket do you A) start by picking the expected national champion and work backward or B) analyze each matchup, and pick winners starting at the earliest rounds, working toward the championship game? In A, one has a pre-determined idea for which team is the best in the country and disregards the path that team must take to become champions. Those using B’s methodology look at each game and consider the participants, compare their respective records, their strengths of schedule, demonstrated strengths and weaknesses, record against common opponents and even how travel and geography could affect performance. In a methodical, rigorous evaluation, the result is a conclusion about which team can win 6 consecutive games and become the national champion. Outcome vs Process Outcome-based investors start with an expected outcome, typically based on prior results, and select assets accordingly. How many times do we hear the gurus of Wall Street preach that stocks return 7% on average and therefore a well-diversified portfolio should expect the same thing this year? Many investors take the bait and few question the rather simple approach that drives the expected outcome and ultimately the investment selection process. Process-based investing, on the other hand, is a tactic to better determine how assets should perform. The method may be based on macroeconomic expectations, technical analysis or a bottom-up assessment of individual companies to name a few. Process investors do not just assume that yesterday’s winners will be tomorrow’s winners nor do they diversify just for the sake of diversification. They create a procedure to help them forecast which assets are likely to provide the best risk/reward prospects and deploy capital opportunistically. “The past is no guarantee of future results” is a common investment disclaimer. However, it is this same outcome-based methodology that many investment managers use to allocate their assets. Process driven investors employ thoughtful analysis to determine what investments should perform the best. Potential outcomes are the ending point of their analysis not the starting point of their work. A or B? So, why would people use a less rigorous process in investing than the one they use in filling out their NCAA tournament brackets? Starting at the final game and selecting a national champion, is similar to identifying a return goal of, for example, 10%. How that goal is achieved is subordinated to the idea that one will achieve it. In such an outcome based approach, decision making is predicated on an expected result. Considering each of the 67 possible match-ups in the NCAA tournament to ultimately determine the winner applies a process-oriented approach. Each decision is based on the evaluation of comparative strengths and weaknesses between teams. The expected outcome is a result of the analysis of factors required to achieve the outcome. Summary Very few filling out brackets this year will pick Duke solely because they won the tournament last year. Many investors, however, will select investments based on what performed well last year. The following table (courtesy invest-assist.blogspot.com and Koch Capital) is a great reminder that building a portfolio based on last year’s performance is a surefire way to ensure you are not making the most out of your portfolio. Click to enlarge Winning or losing a basketball pool has benefits like bragging rights and potentially winning some money. Managing a client’s investments deserves much more thoughtfulness. Those who apply a well thought out process-oriented approach provide their clients a much more rigorous, durable and time-tested method to consistent performance. 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.

NOBL: An ETF For Dividend Growth And The Quest For Yield

By Max Chen and Tom Lydon Investors seeking a steady yield-generating exchange traded fund to help diversify their portfolios in a volatile year can look to the ProShares S&P 500 Aristocrats ETF ( NOBL ) for quality stock market exposure and sustainable dividends. “By investing in dividend growth strategies, you not only get high-quality companies that have delivered strong total returns, you also get the potential for attractive yield,” according to ProShares . “If you look at effective yield, you’ll see dividend growth strategies have significantly outperformed the broader market.” NOBL, which has accumulated $1.39 billion in assets under management, shows a 2.03% 12-month yield and a 0.35% expense ratio. The dividend ETF has been outperforming the broader equities market. Year-to-date, NOBL rose 5.5% while the S&P 500 index was only 0.9% higher. Over the past year, NOBL increased 4.3% as the S&P 500 dipped 0.6%. NOBL’s 17.2% tilt toward industrials and 10.4% position in materials helped the ETF capitalize on the recent rally in more undervalued sectors of the market. Additionally, the fund holds large positions in more conservative or defensive sectors, including 12.9% in health care and 25.5% in consumer staples. The recent selling pressure in the equities market has also made dividend stock plays more attractive , especially as the Federal Reserve projects only two interest rate hikes this year, compared to previous expectations for four rate hikes. As the S&P 500 index experiences its worst start to a new year since 2009, yield spread between the benchmark and 10-year Treasuries widened to their largest spread in a year. The difference between U.S. equity dividend yields and government bonds can be used as a proxy for valuation comparison between the two assets. On average over the past year, the yield on 10-year Treasuries exceeded that of the S&P 500 dividends by 7.7 basis points. However, the recent volatility helped push yields on 10-year Treasury notes below 2%. NOBL, which tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers as opposed to more high-yield focused funds that may contain companies on more precarious financial positions. High-yield equity funds can be enticing to income-seeking investors, but the higher yields come with higher the risks and are often unstable, writes Kevin McDevitt, a senior analyst for Morningstar . Alternatively, McDevitt argues that dividend growth is a more important factor for long-term dividend investors. “Dividend growth plays a big role in determining total income over the life of an investment,” McDevitt said. “As a general guideline, the higher a company’s, and by extension a fund’s, yield, the less quickly it will grow over time. Over the short run, this initial yield matters more than dividend growth. But as the time horizon grows, dividend growth has a greater impact on the overall payout.” ProShares S&P 500 Aristocrats ETF Click to enlarge 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.