July 2016 NAAIM Active Manager Newsletter

Bimonthly Journal of the National Association of Active Investment Managers
Vol. 13 Issue 2, July 2016
President’s Letter
National
Co-Sponsors
TRADING STRATEGIES
A Case Study — Dividend Growers During Market Reversals....................8
What’s Next for the Market..................................................................14
PRACTICE MANAGEMENT
Who says bigger is better? Small RIA practitioners can thrive
in spite of predictions to the contrary.................................................1
Excerpts from “Department Of Labor (DOL) Publishes
Final Fiduciary Rule”...........................................................................9
Tricks of the Trade................................................................................13
NAAIM NEWS
Looking back at Uncommon Knowledge 2016.......................................2
Meet the NAAIM 2016-2017 Officers and Board of Directors..................3
David Bush Captures NAAIM Shark Tank Top Ranking.............................4
Golf Classic and Fishing Expedition Highlights.........................................5
Thank You to the 2016 Uncommon Knowledge Sponsors.......................6
Who says bigger is better?
Small RIA practitioners can
thrive in spite of predictions to
the contrary
Joshua Pace
F
or years, there’s been industry and media
speculation as to whether smaller financial advisory
firms can survive and how the future of financial
services will ultimately be dominated by only the big players.
The pundits have predicted that cost pressures and competitive influences will compel small RIA practitioners into being
acquired by larger firms or eventually be forced out of the
market altogether.
This, however, is proving to be a myth. Perhaps, if you
think more darkly, these could even be scare tactics propagated by larger firms, intent on acquisitions.
Enabled by technology, lower fixed costs and an ability to
achieve efficiencies, smaller firms can not only survive – but
continued on page 12
The views and opinions of the authors are not necessarily
those of NAAIM, its officers or Board of Directors.
6732 W. Coal Mine Ave., #446
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888-261-0787
[email protected]
www.naaim.org
I
t seems the poem written
by poet Bob Dylan 50 years ago
this year and known to most of us
in a song format is as apropos today as
it was the day it was penned. Though
Dylan wrote this to the people of the
day to help them understand life could
not be static, it is a great reminder in
our contemporary world.
Ken Graves
Life seems to be constantly
changing for most or all of us. By
choice or by providence, the changes do come. Recently, my
own Mom turned 88 and yet as I watch my 9-month-old
grandson being raised, the raising of a child today vs the world
I was raised in emphasizes how the times have changed and
continue to. Mom is on Facebook, she uses Instagram, and
of course she has a smart phone! I nicknamed her “Dot Com
Mom” many years ago. The times are a changin’ and she is
changing right along with the times.
In his 1995 book, “The Road Ahead”, Bill Gates said,
“today we use technology to change the way we carry out
certain tasks, jobs. One day technology will fully change the
way we live.” That day is likely soon coming and Dylan’s poem
will be ever more fitting then.
The times are changing in our industry as well. As I
approach the beginning of my 30th year in the financial
services business, I find it interesting to look at the changes in
our business and in the evolving world of investments. When
I first started in the business almost 30 years ago, everyone I
knew in the investment business was a “broker,” and I did not
know anyone who was an investment advisor. Back then if
one wanted to know the price of a stock, you could call “your
broker” (on a phone with a cord which was attached to your
desk) and ask the price. Otherwise, a client could just read the
price in tomorrow’s paper. Yes, a newspaper-a large, gangly,
noisy, ink ridden, really thin-papered daily periodical you
could also use to train a dog not to “go in the house.” Today
you can find any stock price at any time on your smart phone,
and the dog… well, puppies still like to “go in the house” but
for most of us, the times they are a changin’ nonetheless.
The great thing with the world changing the focus of our
industry away from answering client calls to get a price on this
or that is that it allows/forces us to focus on things of much
greater cranial demand and work toward delivering much
more value to clients than a stock quote over a phone line.
Our culture seems to be changing a great deal too, and that
is beginning to impact the investment world. The “big box”
retail stores seem to be slowly dying and going away. This is
continued on page 10
2016 Conference Featured Exceptional Speakers,
On-Target Topics
U
ncommon Knowledge 2016 brought over
130 attendees, sponsors and speakers to the Westin
Fort Lauderdale Beach Resort, May 1-4. The presenters
did an excellent job playing off the conference’s theme - Staying
ahead of change: Actions to take today for building success.
Keynote speakers Helene Meisler and Marcus Sheridan
represented two aspects of success for active managers –
market awareness and marketing smarts. Their presentations
were complemented by :
• Morningstar’s Hal Ratner with a new perspective on robo
advisers;
• Mebane Faber, Cambria Investment Management, with
Last Man Standing: Trading Systems that Work in
Today’s Market;
• Benchmarking for Sustainable Success with Joe
Lukacs, International Performance Group, Inc.
• Marketing by Building Trust and Authority with Millennials presented by marketing consultant Kali Hawlk
• Multivariate Regression Analysis: Considering the
Relevance of Past Performance – which won Spencer
2
•
•
•
Seggebruch, Investment Analyst with R.T. Jones, 1st place
in the annual NAAIM Wagner Award
John Conrath’s, Portfolio Medics, look at Index Annuities: Are They Too Good to Be True?
Building Success Into Your Investment Strategies with
Paul Montgomery, Scotia Partners, Ltd.
And NAAIM’s ever popular Round Table Sessions.
Add in excellent sponsor breakout sessions, an evening on
the river wandering Fort Lauderdale’s more monied shorelines,
networking opportunities to build friendships and resources
and it all added up to a conference full of value and fun. The
NAAIM Shark Tank added icing to the cake for those more
technically minded attendees with six firms presenting their
investment strategies and results.
Next year’s conference moves to the West Coast April
30 through May 3, 2017 at the Hilton San Diego Resort
and Spa. Mark your calendars now for more Uncommon
Knowledge insights.
July 2016
Luxury Riverboat Cruise a Highlight of Monday’s Activities
M
onday night featured
a riverboat cruise along Ft.
Lauderdale’s inland waterways,
passing Ft. Lauderdale’s Venice with multimillion-dollar riverfront homes, business
complexes and harbor views. Co-sponsored
by Guggenheim and ProFunds, the evening
offered excellent networking time along
with great food and an open bar. The
weather cooperated and a good time was
had by all.
Meet the NAAIM 2016-2017 Officers and Board of Directors
T
he 2016 Uncommon Knowledge Conference
also saw a “changing of the guard” with the 2016-2017
Board of Directors and Officers composed of (back
row, left to right) Michael Price, Price Capital Management;
Jason Erickson, Alternative Strategies Group, Inc.; Mike Dean,
DFG Advisory, LLC; Jason Wilder, CMG Capital Management
Group Inc.; NAAIM Treasurer Paul Schatz, Heritage Capital;
Patrick Beaudan, Belvedere Advisors, LLC; Steve Williamson,
Legacy Investment Group LLC; NAAIM Secretary Jim
Applegate, Financial Services Advisory. (front row, left to right)
NAAIM Vice President Emily Frazier, Spectrum Financial Inc.;
NAAIM President Ken Graves, Capital Research Advisors, LLC,
and NAAIM Chairman Ted Lundgren, Hg Capital Advisors,
LLC. Not pictured are Board Members Brian Boughner,
Parallel Financial; Andrew Quinn, Quinn Stauffer Financial,
and Brenda Wenning, Wenning Investments, LLC.
www.naaim.org
3
David Bush Captures NAAIM Shark Tank Top Ranking
D
avid Bush, Founder
and Managing Member
of Alphatative LLC in the
greater Cincinnati, Ohio area was
the first-place winner of the 2016
NAAIM Shark Tank Competition
for his investment strategy:
STRATVERSIFY®. Find out
more about NAAIM Shark Tank
ALPHATATIVE LLC develops
and manages several quantitative equity and ETF strategies logically driven with the goal
of delivering superior absolute returns. Entered in the “Established” category, David presented information on his tactical
strategy Stratversify®, a long-short equity program. The
strategy is a low beta strategy of
nine proprietary systems which
dynamically allocate capital to
mega-cap e­ quities – all without
leverage. Developed over a
survivorship bias-free dataset,
Stratversify® applies capital
exclusively when history shows
a statistically defined positive
expectation at a portfolio level. In addition to its original long/
short version, Stratversify® will soon be offered as a long-only
strategy and available as stand-alone signals.
The competition judges included (left to right) John Hill
of Epix Capital, Paul Montgomery of Scotia Partners, Patrick
Beaudan of Belvedere Advisors, LLC, and 2015 NAAIM Shark
Tank Winner John McClure of ProfitScore Capital Management.
David is a seasoned trader with over 20 years experience
in financial markets. He is the First Place Winner of BattleFin’s
“Sharpe Ratio Shootout” international quant finance tournament out of over 3200 applicants from 41 countries. Wellversed in multiple trading platforms and languages, he brings
years of discretionary knowledge, creative arts background,
and risk management experience to his quantitative research,
systems, and portfolio strategy Stratversify®. An accomplished
musician who spent his early years performing with Grammywinning and nominated artists, David credits the discipline of
music for his affinity and passion for financial market patterns,
as both fields manifest emotion in rhythm. A student of
Manhattan’s New School and the Mannes Conservatory, David
is a graduate of the New School for Social Research with a
B.F.A. in Jazz and Contemporary Music.
For the 2016 investment strategies competition,
twelve presenters were chosen
to compete in the NAAIM
Shark Tank preliminaries on
November 3, 2015 during the
NAAIM 2015 Outlook Conference. Six finalists were chosen
to present during the final
session of this year’s 2016 NAAIM Uncommon Knowledge
national conference. “The NAAIM Shark Tank competition
has grown and taken on a life of its own,” said NAAIM
2015-2016 President Ted Lundgren, “attracting new members
to the NAAIM professional association and leading to new
business relationships for both asset gatherers and managers.”
Outlook Conference Returns to Dallas Fort Worth
N
AAIM’s 2016 Outlook Conference is
scheduled for November 14 & 15 at the Dallas/Fort
Worth Airport Marriott, 8440 Freeport Parkway
in Irving, Texas. The conference will focus on the impact of
technology on marketing and trading techniques within an
investment advisor’s practice. Agenda updates will be posted
at: NAAIM Outlook 2016.
2016 Outlook Sponsors include Co-National Sponsors:
ProFunds and Guggenheim, and Platinum Sponsors: Advisors Preferred/CEROS and Direxion.
To assure yourself an on-site hotel room at the NAAIM
room block price of $149 per night double/single, make
your reservations now at DFW Airport Marriott.
4
July 2016
Winners of the 2016 NAAIM Golf Classic
For the second year, Dave
Taucher (shown with Jeannie
Davis) added color and class to
the tournament with his pink
shark shorts.
From left to right – First place team Erik Ambrose, Marty Kerns, Jerry Jacobs and David
Shaw, with Will Hepburn adding bunny ears.
C
ongratulations to the following teams
and individuals for their play at the 2016 NAAIM Golf
Classic.
1st placeWallach Beth group—(left to right) Erik Ambrose,
Marty Kerns, David Shaw and Jerry Jacobs - 57.8
2nd placeSkip Santori, Will Hepburn, Bo Bills and Kent
Behnken -59.4
3rd placePaul Schatz, Emily Collins, Michael Kieffer and
Ted Lundgren -59.9
Longest drive for men sponsored by Guggenheim winner David Shaw
Longest drive for women sponsored by NAAIM winner Janet McMillian
Closest to the pin for sponsors, sponsored by NAAIM winner Kristine Warner
Closest to the pin sponsored by Profunds winner Mike Jones
Closest to the pin sponsored by Wallach Beth winner Ed Kushma
Closest to the pin sponsored by Advisors Preferred/CEROS winner Marty Kerns.
Fishing Excursion Has Another Successful Year
F
or several
years now, NAAIM
member Steve
Landis has organized a
group of NAAIM members to head out to the
open water (or lake or
river) to try for “the one
that got away.” At this
year’s fishing outing,
the group headed out
to the Everglades with
guide Thadeus Ragan of
Gladesbassin. According
to Steve, the group was off
to fish for “Largemouth
Bass, Peacock Bass and Panfish (and the occasional ‘gator). No
gators were caught this go around but it looks like plenty of
fish were caught.
Steve is working on plans for next year’s fishing trip in
early 2017. He would love to get a big group going and maybe
www.naaim.org
even a sponsor or two. Keep in mind that if you go fishing,
you are back in plenty of time for the Solo Advisor meeting
that is typically held late Sunday afternoon and of course,
the Welcome Reception that evening. Call Steve Landis if you
have any suggestions on where to go in the San Diego area or
guides to use.
5
Thank You to the 2016 Uncommon Knowledge Sponsors
NATIONAL CO SPONSORS
Guggenheim
Investors seeking
to include specific
market exposures in their portfolios can access dozens
of Guggenheim’s Rydex strategies. Each follows a specific
benchmark, and our proven expertise in benchmark replication includes sector and pure style strategies, as well as broad
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ProFunds
Founded in 1997, ProFunds
offers more than 100 broad
index, sector and geared
mutual funds. ProFunds and ProShares combine to serve
investors as one of the country’s leading providers of mutual
funds and ETFs, and we are the world’s largest provider of
geared (leveraged and inverse) exchange traded products.
ProFunds and ProShares provide a broad spectrum of strategic
and tactical strategies that can help you go beyond the
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PLATINUM SPONSORS
Direxion Investments
Direxion Investments is a
powerful ally for both strategic
and tactical investors seeking to
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exposure, and long-term rules-based strategies.
Advisors Preferred/CEROS
Ceros Financial Services, Inc. is a
full-service brokerage platform and
outsourced trading desk to investment management firms. Ceros
takes an active, consultative
approach to helping advisors grow
their businesses, offering direct
access to trade stocks, bonds, options, ETFs, equity, commodities and futures trading. A sister company to Ceros Financial
Services – Advisors Preferred, LLC acts as the named advisor
6
for mutual funds. Between Ceros and Advisors Preferred, we
can help all types of advisors who manage mutual funds.
GOLD SPONSORS
Arrow Funds
Arrow Funds, including the
exchange traded product line
ArrowShares, is a mutual fund
company with a passion and energy
for helping investors meet their financial goals. We believe in
offering targeted portfolio solutions for the ever-changing capital
markets. Arrow Funds and ArrowShares seek to provide mutual
fund and exchange traded investment solutions for individuals
and businesses, nonprofits and endowments, as well as qualified
and non-qualified retirement plans.
The Gemini Companies
The Gemini Companies have over 30 years
of experience in providing comprehensive
pooled investment solutions to independent
advisors and the investment community. Our
services include helping clients bring their
own investment vehicles to market and
providing full-servicing of mutual funds,
hedge funds, exchange-traded funds and
other pooled investment products, including distribution
services. The Gemini Companies also offer a Managed Account
Platform and are a structured product platform sponsor.
Putnam Investments
Founded in 1937, Putnam
Investments is a leading global
money management firm. Putnam
offers investors a world of equity, fixed-income, multi-asset,
and absolute-return portfolios to suit a range of financial goals.
Our portfolio managers seek superior results over time,
backed by original, fundamental research on a global scale. We
believe in the value of experienced financial advice, in
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Security Benefit
Security Benefit is a 123-year-old,
Kansas-based retirement
company which in recent years
has become one of the fastest growing retirement savings and
income companies in the industry. Through a combination of
innovative products, exceptional investment management and a
unique distribution strategy, Security Benefit has become a leader
in the full range of retirement markets and wealth segments.
July 2016
Thank You to the 2016 Uncommon Knowledge Sponsors
Trust Company of America
ProShares
Trust Company of America is the only
independent RIA custodian offering
fully integrated, real-time technology
and personalized back-office services
designed exclusively for RIAs. Trust’s
unified technology, custody, and
service platform gives advisors the
freedom to seamlessly optimize their clients’ portfolios while
building smarter, more efficient businesses.
ProShares helps investors to go
beyond the limitations of conventional investing and face today’s market challenges. We help
investors build better portfolios by providing access to
specialized strategies delivered with the liquidity and cost
effectiveness of ETFs. Our funds cover the spectrum from
equity strategies, like dividend growth and long/short, to fixed
income strategies, like interest rate hedged bond funds. We
also offer tactical options, including geared, credit, and
volatility strategies. Our wide array of ETFs is designed to help
you reduce volatility, manage risk and enhance returns.
SILVER SPONSORS
Equity Advisor Solutions
Equity Advisor Solutions provides
custody and back-office solutions
to RIAs, Hybrids, TAMPs, BrokerDealers and more. Equity specializes in custody of all asset
types, including alternative assets, on one custodial platform;
back-office solutions that streamline your business and create
efficiencies; technology that includes portfolio rebalancing,
ability to run multiple models in the same account, customized
mobile app for your firm, reporting and analytics, and technology integration (portfolio management and CRM systems).
Orion Advisor Services
Orion Advisor Services, LLC is the
premier portfolio accounting service
provider for advisors. Our firm was
founded for investment advisors by an investment advisor in
1999. Orion provides the integrated and fully customizable
technology solutions that advisors need to help grow their
businesses over the long term. The firm’s technology solutions
empower more than 500 advisory firms with total assets under
administration in excess of $200 billion, from more than
780,000 individual accounts.
KCG
KCG is a leading independent securities
firm offering investors a range of services
designed to address trading needs across
asset classes, product types and time zones.
The firm combines advanced technology with exceptional
client service. KCG has multiple access points to trade global
equities, fixed income, currencies and commodities via voice
or automated execution. KCG ETF Trading provides clients
with access to industry-leading natural buy-and sell-side order
flow—supported by capital facilitation when needed—
through a full spectrum of trading solutions coupled with a
consultative approach.
www.naaim.org
Nationwide® Mutual Funds
With a rich heritage dating back over 80 years
to the early days of the mutual funds industry,
Nationwide® Mutual Funds is a diverse
investment company with $60.5 billion in
assets under management. We provide
high-quality investments by working with over
30 subadvisers to offer a broad range of solutions supporting
retirement plans, annuities, variable life contracts and individual
investment portfolios. That diversity is our strength.
INNOVATION SPONSORS
Stark & Stark
Since 1933, Stark & Stark has
developed innovative legal
solutions to meet our clients’
needs. More than 105 attorneys, 27 practice areas, and a
philosophy of putting the law to work for our clients is the
basis from which we build and maintain our practice. The
Securities Practice Group’s Investment Adviser Regulation
practice represents investment advisers throughout the United
States including before the SEC, CFTC and the Department of
Labor. We have experience in obtaining exemptive, no-action
and interpretive relief, assisting clients in regulatory examinations and representing them in enforcement actions.
Theta Research
Theta Research serves the
investment management community by gathering and verifying actual performance data on
Investment Managers who employ active management
techniques. In addition to meeting the needs of investment
managers, Theta also offers subscriptions available to
investors interested in active portfolio strategies. At Theta,
we believe there is no substitute for performance numbers
reflecting actual, real-time trading.
7
A Case Study —
Dividend Growers During Market Reversals
How Have Your Defensive Strategies
Performed During Market Rebounds?
Steep market declines can send investors running for the
cover of defensive strategies. But since defensive strategies
typically perform best when markets are falling, they can miss
out on potential gains when markets rebound and rise again.
But Dividend Growth Companies
Tell a Different Story
S&P 500® Dividend Aristocrats® are companies in the
S&P 500 that have grown their dividends for at least 25
consecutive years. They tend to be quality companies with
strong growth histories. Because of this combination, funds
that focus on them, like ProShares S&P 500 Dividend Aristocrats ETF (ticker: NOBL), have the potential to serve well both
defensively and in rising markets.
Strong first quarter 2016 performance
in a market reversal…
As you can see, if you compare NOBL with the S&P
500 during the first quarter of 2016, dividend growth stocks
performed well both defensively during the rout and by
rallying with the recovery.
Source: Bloomberg, January 1, 2016–March 31, 2016. For illustrative
purposes only. Click here for most recent fund performance.
Dividend Aristocrats and strong risk-adjusted
returns over time
If we look back on the longer-term performance of the
S&P 500 Dividend Aristocrats Index, which was created over
ten years ago, we can see that dividend growth companies, as
a group, have delivered strong risk-adjusted returns over time.
8
The S&P 500 Dividend Aristocrats
Index has delivered over 90% of the
S&P 500 returns when the market
was rising and only suffered about
70% of the decline when the market
was falling.
The Takeaway
Dividend growth companies, and funds that focus on
them, can provide evergreen investing potential—historically
performing well both defensively as markets fall and outperforming when markets rise.
NOBL’s gross expense ratio is 0.58% / net expense ratio is
0.35%; expenses have a contractual waiver through 9/30/2016.
Performance quoted represents past performance and does not
guarantee future results. Investment return and principal value
of an investment will fluctuate so that an investor’s shares, when
sold or redeemed, may be worth more or less than the original
cost. Shares are bought and sold at market price (not NAV) and
are not individually redeemed from the fund. Brokerage commissions will reduce returns. Current performance may be lower or
higher than the performance quoted. For standardized returns
and performance data current to the most recent month end, see
Performance. Index information does not reflect any ­management
fees, transaction costs or expenses. Indexes are unmanaged and
one cannot invest directly in an index.
This information is not meant to be investment advice. There
is no guarantee dividends will be paid. Companies may reduce or
eliminate dividends at any time, and those that do will be dropped
from the indexes at reconstitution. Index performance returns do not
reflect any management fees, transaction costs or expenses. Indexes
are unmanaged and one cannot invest in an index.
Investing involves risk, including the possible loss of
principal. This ProShares ETF is diversified and entails certain
risks, including imperfect benchmark correlation and market price
variance, that may decrease performance. Please see summary and
full prospectuses for a more complete description of risks. There
is no guarantee any ProShares ETF will achieve its investment
objective.
Carefully consider the investment objectives, risks, charges
and expenses of ProShares before investing. This and other
information can be found in their summary and full ­prospectuses.
Read them carefully before investing. Obtain them from
ProShares.com.
continued on page 11
July 2016
Excerpts from…
Department of Labor (DOL) Publishes Final Fiduciary Rule
Stark & Stark’s Securities Compliance Group
Among the materials provided by Tom Giachetti with Stark & Stark
during his presentation at Uncommon Knowledge 2016 was a sixpage newsletter of the DOL’s final fiduciary rule. The piece is too long
to reproduce verbatim in the Active Manager, so key points have been
extracted here. The full newsletter is available on the NAAIM Community Resources Board and is a highly recommended read.
T
he Fiduciary Rule effectively treats all
people who provide investment advice for compensation with respect to assets of a retirement plan or
IRA as fiduciaries subject to ERISA’s various protections. This
should not be confused with an investment adviser’s fiduciary
status under the Investment Advisers Act of 1940 (“Advisers
Act”). Although the two have certain overlapping commonalities, ERISA contains certain transactions that are per se
illegal, whereas most conflicts can be disclosed away under the
Advisers Act.
Prohibited Transactions
ERISA requires plan fiduciaries to comply with certain
fiduciary principles stemming from the law of trusts. These
trust principles require that plan fiduciaries act in a prudent
manner and with an undivided loyalty to the plans, plan
participants and beneficiaries. In addition to these common
law trust principles, fiduciaries must avoid engaging in
“prohibited transactions.” Prohibited transactions are statutory prohibitions that fiduciaries cannot engage in without an
applicable statutory or administrative exemption.
ERISA and the Code generally prohibit fiduciaries from
receiving payments from third parties and from recommending certain products that increase their own compensation in connection with investment advice rendered to participants and beneficiaries of an ERISA plan, IRA owners, and
those individuals who act as fiduciaries for an IRA or ERISA
plans (each, a “Retirement Investor”).
There are only three enumerated prohibited transactions addressing fiduciaries, but the implications are plentiful
for investment advisers and investment managers. The three
specific types of prohibited transactions for fiduciaries are:
1. Dealing with the assets of the plan in the fiduciary’s own
interest or for the fiduciary’s own account (referred to as
“Self-Dealing Provision”),
2. In his or her individual or in any other capacity acting in
any transaction involving the plan on behalf of a party
(or represent a party) whose interests are adverse to the
interests of the plan or the interests of its participants or
beneficiaries, or,
3. Receiving any compensation for the fiduciary’s own
personal account from any party dealing with the plan in
connection with a transaction involving the assets of the
plan (“Anti-Kickback Provision”).
www.naaim.org
Implications for Investment Advisers
The Self-Dealing Provision and the Anti-Kickback Provision are the most problematic provisions for investment
advisers and investment managers. For example, an adviser
that provides investment advisory services to a retirement plan
on a discretionary basis who includes a proprietary mutual
fund in the plan’s lineup and who receives, directly or indirect,
additional compensation from this recommendation would be
in violation of the Self-Dealing provision and would also be
subject to certain excise taxes under the Code.
In addition under the new Fiduciary Rule, a recommendation by an investment adviser to an owner of an IRA
or retirement plan account that he or she transition from a
commissionable account to a fee-based account is subject to
the Fiduciary Rule and the compensation received as a result
of that recommendation could be a prohibited transaction.
However, there are certain streamlined procedures under the
Best Interest Contract Exemption to comply with this prohibited transaction.
Lastly, and of most concern to even the most “plain
vanilla” investment adviser, the new Fiduciary Rule subjects
every rollover recommendation to ERISA and/or the
Code. This is the case even if the rollover recommendation
is not specifically accompanied by a recommendation by the
adviser on how to invest the assets after the rollover. This is
also the case if the assets will not be covered by ERISA or the
Code after the recommendation. Therefore, if the adviser can
increase his or her compensation as a result of the recommendation, such recommendation would be a prohibited transaction. However, Level Fee Fiduciaries (i.e., advisers that provide
services only on an “asset under management basis” or “fixed
fee” basis that does not vary based on an investment recommended in connection with advisory or management services
to the ERISA Plan or IRA) are able to comply with the Best
Interest Contract Exemption on a streamlined basis. (A more
detailed discussion of the Best Interest Contract Exemption
(BICE) is provided in the full newsletter.)
When fiduciaries violate ERISA’s fiduciary duties or the
prohibited transaction rules, they may be held personally
liable for any losses to the investor resulting from the breach.
In addition, prohibited transaction violations are subject to
excise taxes under the Code or civil penalties under ERISA.
Therefore, it is extremely important to identify these practices
and prevent them.
Rollovers
Advisers have been relying upon the DOL’s Advisory
Opinion 2005-23A (Dec. 7, 2005) when providing rollover
recommendations to plan participants. However, the new
continued on page 11
9
President’s Letter
continued from page 1
quite interesting due to the fact that online retailer Amazon has
now set its sights on retail sites! Yes, Amazon now will open real
brick and mortar stores! So the best of the old breed in the retail
world are slowly dying, but the new kid on the block, selling
the same thing everyone else is selling, is about to launch into
the big time and have “stores”! Times they are a changin’.
In the middle of June I was invited by written invitation
to a luxury car dealer as that brand name rolled out its all new
“flagship” car. Showroom packed with food, drink, small jazz
band and…………. While I took 4 of us to the launch, the
entire night the dealer had a total of 16 guests. Not exactly
blockbuster attendance. That brand needs to understand, “the
times they are a-changin’ or their flagship rollout might be
their last rollout. Now the latest….. new car showrooms which
have no cars! Imagine...
A driving force in the demise of the historical retailer is
the demographic shift in America. The Baby Boomer segment
of the population is now in or moving full force into retirement; the consumer market is in an odd transition. The
Boomers have in their possession the largest amount of financial wealth accumulated by any one segment of Americans in
the history of the world. However, the real issue here derives
itself from an apparently innate human trait. That trait is the
human tendency to hang on to what we have if we feel or
sense a possible loss in our future. Fear drives humans more
than greed does. Boomers will tend to hold on to the vast
wealth they possess because we are aging, and we will grow
more concerned as we age and therefore likely hang on tighter.
We will buy fewer houses in the next 30 years, fewer cars in
the next 30 years, less furniture in the next 30 years, and we
are basically done paying for formal education toward degrees
for the most part. Boomers will, for all practical purposes,
attempt to sit on their nest eggs and hold those assets through
till the (their own) end.
This change impacts the world today in a big way. The world
economy is struggling greatly, and the U.S. is basically the “fastest
moving tortoise in the economic race.” As Boomers retire, if they
sit on their assets-and they will do just that, the needed fuel for
the economic engine of the U.S. economy will remain largely in
the storage tanks (pockets of Boomers) where it is today. That fuel
will not be burned to advance the U.S. and/or global economic
engine at speeds needed to get things moving in the here and
now. Markets will continue to stagger forward and will anguish
when they attempt to climb the hill(s). Hopefully, each of us can
use organizations like NAAIM to find new and more effective
ways to bring more help to our clients as well.
Sincerely,
Ken Graves
2016-2017 NAAIM President
Mark Your Calendars…
OUTLOOK 2016
November 14 - 15, 2016
Focusing on the Impact of Technology
on Marketing and Trading Techniques
within your Practice
Uncommon
Knowledge 2017
April 30 – May 3, 2017
Hilton San Diego Resort and Spa
Dallas-Fort Worth Airport Marriott Hotel
10
July 2016
DOL Publishes Final
Fiduciary Rule
NAAIM Welcomes
Five New Members
continued from page 9
Fiduciary Rule supersedes this opinion by identifying any
investment adviser who provides rollover recommendations
for compensation as a Fiduciary, and as such, they must avoid
engaging in prohibited transactions. Therefore, if the Adviser
can increase his or her compensation as a result of a rollover
recommendation, such recommendation would be a prohibited transaction absent an exemption.
As discussed above, the Best Interest Contract Exemption is the primary means of relief for Advisers who will be
providing rollover recommendations under the new Fiduciary
Rule. An Adviser relying upon the Best Interest Contract
Exemption must provide: 1.) a general statement of the Best
Interest Standard of Care (as defined above); and 2.) a disclosure relating to the Adviser’s material conflicts of interest and
related disclosures.
Model Allocation Services
For Level Fee Fiduciaries who provide model asset allocation services to plan sponsors and their participants, these
advisers will be subject to the new Fiduciary Rule. By analogy
to the DOL’s approach to rollover recommendations or recommendations to switch from a brokerage account to an advisory
account, the recommendation to a plan participant to use an
adviser’s model services may be a prohibited transaction when
the adviser recommends to a plan participant that he or she
should use the adviser’s allocation models, where such recommendation would increase the adviser’s compensation.
For these advisers, they are permitted to rely on the BICE.
Sections II (a), (d), (e), (f), (g), III, and V do not apply to
recommendations by Financial Institutions and Advisers that
are Level Fee Fiduciaries. However, these Level Fee Fiduciaries
will still need to state in writing that the firm and it’s adviser(s)
act as fiduciaries under ERISA or the Code, or both, with
respect to any investment advice provided by the firm or the
Adviser subject to the contract or, in the case of an ERISA plan,
with respect to any investment recommendations regarding
the Plan or participant or beneficiary account. In addition,
these Level Fee Advisers will have to affirmatively state that it
and its advisers will adhere to the Best Interest Standards, not
receive compensation that is unreasonable and not make any
misleading statements to the plan or participants.
A statutory prohibited transaction exemption at ERISA
section 408(b)(14) covers computer-generated investment advice
that is available for robo-advice by non-Level Fee Fiduciaries.
However, those topics are outside the scope of this article.
Regular Members
Kenneth Kiron
EdgeShares Advisors LLC
445 Park Avenue, 9th Floor
New York City, NY 10022
(212) 745-1125
Kenneth Golsan
Golsan Scruggs
10998 SW 68th Pkwy.
Portland, OR 97223
(503) 244-0297
Mark Minnella
Integrity Investors, LLC
12647 Olive Blvd., Ste. 105
Creve Coeur, MO 63141
(314) 212-1404
James Lee
StratFI
1201 N. Orange Street, Ste. 742
Wilmington, DE 19801
(302) 884-6742
Associate Member
John Kosar
Asbury Research
1901 N. Roselle Rd., Ste. 800
Schaumburg, IL 60195
(224) 569-4112
A Case Study
continued from page 8
The “S&P 500® Dividend Aristocrats®” Index is a product of S&P Dow
Jones Indices LLC and its affiliates and has been licensed for use by ProShares.
“S&P®” is a registered trademark of Standard & Poor’s Financial Services LLC
(“S&P”) and “Dow Jones®” is a registered trademark of Dow Jones Trademark
Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones
Indices LLC and its affiliates. ProShares have not been passed on by S&P Dow
Jones Indices LLC and its affiliates as to their legality or suitability. ProShares
based on the S&P 500 Dividend Aristocrats Index are not sponsored, endorsed,
sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their
respective affiliates, and they make no representation regarding the advisability
of investing in ProShares. THESE ENTITIES AND THEIR AFFILIATES
MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT
TO PROSHARES. ProShares are distributed by SEI Investments Distribution
Co., which is not affiliated with the funds’ advisor or sponsor.
For more information on Stark & Stark and articles
published by the firm, visit http://stark-stark.com.
www.naaim.org
11
Small RIA practitioners can thrive
continued from page 1
thrive – quite nicely, thank you. In fact, smaller firms are often
able to offer today’s investors greater responsiveness and a
more satisfying service experience.
The myth of extinction is unmasked by the data. The
vast majority of RIAs currently doing business are, in fact,
smaller firms. According to the RIA Database, nearly 75% of
RIA independent wealth managers have under $100 million in
assets under management. And studies by FA Insight (“People
and Pay,” 2015) and Investment News (“Compensation and
Staffing,” 2015) reveal that some of the most successful and
most profitable firms are solo financial advisors supported by
just a few staff members.
Clients may also disagree that bigger is better when
it comes to choosing a financial advisor. Many clients say
that they prefer to work with smaller firms. They value the
personal level of service they receive and the ability to know
and work with the firm’s founding partners. With the largefirm scandals of the last decade and the 2008 financial crisis,
investors seem less impressed with big firms and say they are
more interested in a financial advisor with whom they can
truly connect on a personal level.
How do the leading smaller firms thrive in an increasingly
competitive industry? They employ technology as the differentiator and as a gateway to scale and profitability. Here are some
common characteristics of successful small firms:
• They take full advantage of technology. Today, smaller
firms have access to a trove of cost-effective technology
tools, and the best small firms use technology to stay
competitive and profitable. Using a high tech, high touch
custodian offering a wide array of solutions can help a
smaller RIA reach great profitability while simultaneously weaving in best of breed specialty technologies like
CRM, account aggregation and risk assessment tools.
Trust Company of America is a tech savvy custodian who
embodies this approach.
• They control overhead and maximize operational
efficiency. Leading small firms limit the size of their staffs
and use technology to leverage staff efficiency. Employing
the right technology to automate back office tasks enables
small firms to handle more clients per staff member. We
regularly see advisors running a ratio of one person to
greater than $50 million of AUM.
• They simplify investment management. Leading small
firms use model portfolios to implement their investment
strategies, which enables them to leverage technology for
maximum efficiency. By managing these models on the
right technology platform, they can manage hundreds of
client accounts in minutes, not hours or days. They can
12
•
•
•
develop and manage multiple models in a single account,
trade all accounts at once and rebalance hundreds of
accounts in minutes with just a few clicks. And they can
do it from a mobile device, like a tablet, while on the go.
They have a plan for smaller accounts. The best small
firms develop specific strategies or models for smaller
accounts and then use a model-based trading platform
to make decisions at the model – not account – level.
Trading at the omnibus level – where account-level trades
get aggregated into one model-level block trade – and
asset-based pricing (no ticket charges) also help smaller
accounts from being eroded by fees.
They provide a client-centric service model. Leading
small firms make their clients feel valued. They build
deeper relationships and form more personal connections.
They set the right expectations and provide the right
services based on those expectations. And as they automate back office and investment management tasks with
the right technology, it frees up time to spend on a high
level of client service. Many of these smaller RIAs touch
their clients in one fashion or another on a monthly basis.
They differentiate themselves. In the competitive marketplace, the best small firms understand the importance of
building their brand and differentiating themselves. They
have a carefully developed value proposition that they
clearly articulate to their clients. A strong brand helps
small firms keep their services from being perceived as a
commodity, and helps them establish deeper bonds with
clients and connect more powerfully with potential clients.
To paraphrase Mark Twain, the reports of the death of the
small RIA firm has been greatly exaggerated. Smaller firms are
thriving and growing and serving their clients incredibly well.
They do so by using technology as a game changer, a high
touch service model to support and grow their client base, and
they work only with partners who truly support their business
model and serve the RIA the way the RIA serves their clients.
Joshua Pace is President and CEO of Trust Company of
America. He assumed the role of CEO in June 2015 after serving as
the Chief Business Officer, leading sales and business development
efforts, since 2012. Joshua has more than 20 years of experience in
the growth and leadership of a diverse set of financial, service and
technology companies. He holds an MBA in international finance
from the University of Colorado and a bachelor of science in
accounting from the University of North Carolina, and is a certified
public accountant. He currently serves as the founder and president
of Bicycles for Humanity – Colorado, a non-profit delivering
donated bicycles to healthcare workers in rural Africa.
July 2016
Tricks of the Trade – Stock Market Clichés
Dewayne Hall
Q
uick, off the top of your head, recite your
favorite cliché. Got it?
“It is what it is.”
I say that one at least five times a week.
Some clichés are just plain silly.
“There’s no such thing as a stupid question.”
My wife tells me that one’s just not true, there are stupid
questions, and I tend to ask them.
“Give it the old college try.” I’m sure some people tried in
college, but neither I nor anyone I hung out with was one of
them.
“Take the bull by the horns.” Have you really thought this one
through?
The stock market has more than its fair share of clichés.
But stock market clichés are just Code words for simple truths
we are trying to hide. So here is your handy guide to the Top 30
Biggest Stock Market Cliches, along with their true meanings.
#30 “I’m neutral on the stock.”
Rather than do my research, last night I ordered
Dominos and watched Andy Griffith reruns, so now I don’t
have a clue about the stock but want to sound like I do.
#29 “I’m a long-term investor.”
“My stock has gone from $80 to $5.”
#28 “There’s a lot of macro volatility right now”
I have no clue what’s going on with the stock market,
but I heard it has something to do with Trump.
#27 “That was a fat finger trade”
I fell asleep at my computer while placing a trade
and accidentally hit the “0” a couple more times than I was
supposed to, and now I own more shares of Disney than my
house is worth. So now I’m going to hit the hydrocodone a
couple more times than I’m supposed to.
#26 “Sell in May and go away.”
I’ve lost enough money for one year and am ready to go
on vacation.
#25 “It’s the start of a new quarter.”
#22 “Buy when people are fearful, and sell when people are greedy.”
If I throw a Warren Buffet quote at you maybe you’ll
think I’m as good as Warren Buffet.
#21 “We bounced off the 50 day moving average nicely.”
Rather than inform you that we had you in cash and
missed some good profit, we thought we might throw some
technical jargon at you hoping to intimidate you into not
asking any questions.
#20 “There is minimal downside risk on this stock.”
I’m getting stock tips from my personal trainer.
#19 “What Wall Street is missing here is…”
The reason why other investors should bail me out of
my horrific trade is...
#18 “I like the stock right here.”
I flipped a coin and it came up heads.
#17 “Put a tight stop-loss on it.”
I have no confidence in this trade, so I’m adding this
disclaimer so when it tanks you can’t blame me.
#16 “The weak hands are getting shaken out.”
I’ve lost a ton of money on this stock already, but I’m
going to keep holding on until it gets delisted.
#15 “I cut my losses.”
I lost just one of my kids’ college tuitions.
#14 “I’m cautiously optimistic.”
I’m bipolar.
#13 “The company missed estimates, and guided down for the
next quarter.”
I’m thinking about applying at Denny’s.
#12 “We are hoping the bulls will take control of this market.”
We’ve received a margin call.
#11 “This is a strong buy.”
I’m putting all my money in this one stock, lighting a
candle, and praying for a miracle.
#10 “I’m waiting for confirmation before I jump in.”
I missed this entire move the first time, and want to
make it sound like I planned to miss it all along.
I realize your account didn’t make any money last
quarter, but I’m reading a Tony Robbins book on positive
thinking and thought I’d try it out on you.
#9 “The company guided lower.”
#24 “We need another round of quantitative easing.”
I’m tired of hearing you made a bunch of money while I
didn’t.
I flunked Algebra.
#23 “The market likes it.”
Someone a lot smarter than me is buying it.
I won’t be getting any sleep tonight.
#8 “You have to get defensive here.”
#7 “We’re off the lows of the session.”
I’ve lost a boat load of money today, but at least I’m not
as far down as I was a couple of minutes ago.
continued on page 14
www.naaim.org
13
What’s Next for the Market
Richard Losch
T
he FED indicates it might raise interest
rates a quarter point and Mr. Market gets depressed.
We have seen these abnormally low rates for so long
that investors seem to have lost perspective. Realistically, it
is going to take a lot more than a quarter percent raise from
here to have any impact our economy. In 2008, the FED had
to raise rates to 5.50% before the economy started to cool. In
2000, rates got to 6.75% before the tech bubble popped. The
1990 recession was preceded by rates of over 10%, and the
granddaddy of all bubble poppers was Volker’s 1981 peak of
22.5%. Yet now Mr. Market is saying that increase from .5% to
.75% is going to tank the economy.
To get back to the 2008 peak at the current rate of
increase would take 8.5 years. Even if we double the current
rate and move up to a quarter of a point every quarter it
would still take almost five years before seeing anything that
approaches tight money.
Certainly there is much to worry about. With nothing in
the political news likely to help the economy, a lot of conversation topics include overvaluation in the stock market.
However, closer examination reveals that much of this
overvaluation is concentrated in a small number of very large
capitalization stocks. So, it is a bit of over simplification to
attribute this overvaluation to the stock market as a whole. In
fact, it is still not difficult to find reasonably priced companies
even though this is not the impression given by the price/earnings ratio of the S&P 500.
Surely, one of the best examples of this is Berkshire Hathaway. At its current price, it offers a very attractive balance
between risk and reward. There are others, such as IBM, Fluor,
Phillips 66, Core Molding Technologies, and Chicago Bridge
and Iron, to name a few.
Sentiment Indicators
While sentiment indicators mean very little most of the
time, sometimes they can be helpful as a contrary indicator by
identifying what is going on in the minds of investors. (Buy
when others are nervous, raise cash when the fear goes away).
Investor Sentiment shows only 17% of investors are
bullish as May 26, 2016, the lowest level of bullish sentiment since 2009. Short interest on NYSE stocks is currently
at all-time highs. A poll of professional investors by “Barron’s”
Magazine earlier this year showed institutional investors with
the lowest levels on long equity positions since 2012. This is
not to say that sentiment indicators should always be taken as
an absolute contrary indicator, but my sense is that periods of
high bearish sentiment do not coincide with periods of high
risk in the market. If everyone is already bearish there is not a
lot of fuel left to generate a major decline.
Being no better at predicting the future than anyone else I
do not know if the market is going to continue up from here, I
have been adding a few positions lately based on, of all things,
company fundamentals.
Richard Losch is a Fee Only RIA registered in Florida
for twenty years. His firm is based in Orlando and manages
concentrated Equity Portfolios.
Tricks of the Trade – Stock Market Clichés
continued from page 13
#6 “There are big headline risks right now.”
#1 “Our thesis is still intact.”
I’m not quite sure how I’m going to lose money, but I
should know pretty soon.
We are way underwater on this trade. We may not have
quite hit rock bottom on it just yet, but we can see the ocean
floor.
#5 “We try not to get emotional.”
We haven’t stepped out on the ledge for three days now.
#4 “We are looking for some safe havens here.”
A ten-year note yielding only 1% is still better than we
can do.
#3 “I think we’re close to a turn here.”
We better be close to a turn here or I may have to drop
basic cable.
Of course this list is not exhaustive, and if you’ve invested
for very long you probably have several to add.
DeWayne Hall founded Good Life Asset Strategies in 2012.
Utilizing a blend of both stocks and options, Good Life specializes
in active management strategies for high net worth individuals and
institutions. [email protected].
#2 “Your stock is up 10% in the past three days!”
I need you to forget that your stock is down over 50% in
the past three months.
14
July 2016