Evolution Of Hard Money Lending Investing   Hard Money Lending has been around for as long as real estate investing has existed. In its earliest form, Hard Money Lending was just an individual asking someone they knew for money to complete a project. Over time, these individuals evolved into small lenders, pooling several investor’s capital. Not too long after, private equity type firms with access to deep pools of capital became interested and started lending. After the JOBS Act in 2012, some real estate investors realized there was an opportunity to get individual investors more involved by bringing more transparency and the ability to diversify by buying parts of many different loans through online platforms. AlphaFlow takes the best aspects of working with a large group (like a private equity group) and online platforms by combining the deep knowledge of a private lender and the transparency and diversification offered by crowdfunding. Join us for a deeper tour of the history of Hard Money Lending!  
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Robo-Investing   The robo-investing and the robo-advising market keeps growing here and around the world. Here are some recent news stories in our market.

Not Just for Millennials

Canada’s Globe & Mail reports that the average age of the Canadian robo-investing client is 44 years old. In the U.S., 48 percent of clients are over 36 meaning they are Generation X and older. One of the Canadian robos, Responsive Capital Management, has an average client age of 50, highest of the 14 operators in Canada. Our Take: This is no surprise to us as we have clients across different age groups and, other than being accredited investors, they are a pretty diverse group. With Gen X so familiar with technology, we expect they would like the robo-investing platforms. Millennials like robos too, as this Schwab piece looks at a poll where 54% already use a robo-advisor and up to 25% more would be willing to do so.  

Aviva Goes Robo

Aviva Investors Logo   Aviva bought a majority stake in British robo-investor Wealthify. CNBC reports the Welsh startup targets millennials for ISA investing,  the UK equivalent of an IRA here. Aviva, whose primary businesses are insurance related will integrate Wealthify into their MyAviva app. Our Take: We will see more of this where well capitalized traditional finance companies like an insurer partner with a robo-investor firm for their mutual benefit. We expect to see separate formalized partnerships as well as acquisitions and direct investments like this. The robo gets capital and a new customer base and the insurer gets a new line of business and better technology for their customers. A win/win.  

Blooom Hits $1 Billion Assets Under Management

Bloom Logo   Our friends at Crowdfund Insider report that robo-advisor Blooom now has $1 billion in assets under management. The Kansas firm got to $1 billion sooner than Betterment and nearly matched Wealthfront in time to this important milestone. The company charges $10/month for the management of 401k or 403b accounts. Our Take: The power of technology along with not being caught up in traditional old-line thinking allows robo-investors to do more with less. It’s a great accomplishment that a firm that targets the ‘traditionally unhelped’ is able to get so many assets to manage so quickly.  

Banks Investing in Robo Internally

Bloomberg reports that banks are getting into the robo market. Morgan Stanley, Chase, and Goldman are all looking at ‘digital enhancements’ to their wealth offerings aka robo-investing. While fintech and direct bank investments are growing, funding for startups is down 49% from Q2 according to a CB Insights report. Our Take: We’ve seen banks and robos, and all of fintech, work together in one of 3 ways: Build, Partner or Buy. The Aviva story is a buy and this one is about those looking to build. Some will be successful at building from within and others will go the partner or buy direction. Banks are using their big capital advantage to enter the robo-investing market.  

Is the Largest Robo-Investor Getting TOO Big?

It’s easy to think of Robo-investing as a brand new innovation to finance and there are many firms that are new and innovative, including what we do here at AlphaFlow. However, there’s one firm that has been doing robo-investing since way back in 1976: Vanguard. Their index funds are passive robo-investment. They’ve been so successful at it that they have a new problem. Are they too big? Vanguard’s legendary founder John Bogle thinks the company may be too large. This ThinkAdvisor piece is an interview with Bogle where he talks about how mutual funds have specific concerns on how much stock they own thanks to the Investment Co Act of 1940, although Vanguard owns only 2.4% of their largest holding, Apple. Our Take: None of the fintechs in our space have been around long enough or are large enough to become potential victims of our own success like Vanguard. At 2.4% ownership of Apple, there is still room for them to grow before ownership stakes are too large or they are able to move markets with their decisions. Vanguard’s low fees, service, and growth in AUM are a testament to the success of robo-investing at the stock index level.   fiduciary_rule_investmentadvisers_alphaflow   Recently, there’s been a lot of discussion and media attention around President Trump’s order to the Department of Labor (DOL) to review what’s known as the “Fiduciary Rule”. The amount of information and conflicting arguments about the Fiduciary Rule can cause confusion.  This post is meant to help clarify the rule, who it applies to, and when it applies.  It will also help to define and clarify some terms that being written or talked about in the investment management and financial services industries.  

What Is The Fiduciary Rule?

The Fiduciary Rule clarifies how persons (usually brokers, investment advisers, financial advisers) selling retirement-related products or offering retirement-related investment advice must interact with their clients.  More specifically, it means that they must act as a fiduciary for their clients.  Acting as a fiduciary means that the broker or adviser must put their client’s interests ahead of their own, and disclose all conflicts of interest when offering advice or products for a retirement related account.

Distinguishing Fiduciary Advisers

The distinction between someone who does or does not act as a fiduciary is important when we define the roles that different ‘advisers’ play in an investor’s financial life. The term adviser is sometimes used loosely to describe any number of people with various roles related to personal investments. From giving advice to soliciting the sale of a security, many investment professionals are referred to as advisers, when in fact, they may not be registered as such. And this matters because if they are not held to a fiduciary standard, they are not bound to hold the client’s best interests above their own.

Registered Representative or Investment Adviser Representative?

How then, do we understand someone is a fiduciary? In part, it comes down to a distinction between someone registered as a representative of a broker-dealer (RR – registered representative) and someone registered as a representative of an investment adviser (IAR – investment adviser representative).   Usually, an RR is someone employed by a brokerage company licensed by the SEC.  They have usually passed the series 7 and either 63 or 66 exams and are registered to do business in one or more states and with one or more self-regulatory organizations (like FINRA).   An IAR is employed by an investment adviser, which means a company that provides securities advice or analysis, as a business, and for compensation.  Generally, this means the IAR has passed their series 65 exam and is registered to do business in one or more states or with the SEC.  
Investment Adviser & Registered Representative Comparison
PersonExams Passed
Pre-Rule Retirement StandardPost-Rule Retirement Standard
Registered RepresentativeSeries 7 & 63SuitabilityFiduciary
Investment Adviser RepresentativeSeries 65FiduciaryFiduciary
Dual Registered Dual Registered Series 7 & 66
EitherFiduciary
 

Suitability Vs. Fiduciary Duty

One of the most hotly contested aspects of the Fiduciary Rule is around the standard of suitability as a determinant for an investment choice made by a registered representative. Today, a registered representative must only ensure that an investment is ‘suitable’ for a client. This suitability is determined by factors including investment risk tolerance, time frame, and goals. However, there is no determination made as to whether the investment is in the client’s best interests. To illustrate, let’s say the registered representative (RR) has a choice of offering two different mutual funds to a client. Both invest in similar stocks and have relatively similar returns (before fees), but one charges higher fees and also pays the RR’s firm based on the total dollar investments made into that particular fund.  The RR only offers the client the one for which they get compensated, even though the other mutual fund option may be a better option for the client (because it charges lower fees).  The reason the RR can do this is that both mutual funds are considered “suitable”: meaning as long as the recommendation meets the client’s risk profile and investment goals, then they can offer that product to their client. In contrast, an investment adviser representative (IAR) must act as a fiduciary.  In the same situation, if the IAR wanted to offer the same mutual fund that the RR did, they would need to disclose to the client that they are getting compensated for sales of that fund and that the lower cost option makes more sense for the client.  So, instead of simply offering a suitable choice for the client, the IAR must: 1) disclose conflicts of interest and, 2) act in the best interest of the client rather than in their own best interest.

What The Fiduciary Rule Would Change

Staying with the scenario above, the Fiduciary Rule would require an RR to act like the IAR in when selling any products related to, or be advising on anything related to retirement.  It would require an RR to only act in the best interest of the client and to disclose conflicts of interest. With our mutual fund scenario, the RR would now be required to disclose that they are being paid commissions to sell the higher fee fund, and they would be required to select the fund that is in the client’s best interest, which would be the fund with the lower fees to the client. The rule would also apply to anyone dually-registered (meaning they are registered both as an RR and an IAR).  Currently, the dually-registered representative can decide what ‘hat’ they wear (RR or IAR) when suggesting investments for retirement. In other words, they will decide whether they are making a suggestion based on meeting the suitability standard or the fiduciary standard. Under the fiduciary rule, the dually-registered representative must always act as a fiduciary when related to retirement advice.

Application Of The Fiduciary Rule

One point that is worth clarifying, is that the Fiduciary Rule would only apply to retirement-related advice and product sales, not any general investment sales or advice since the rule comes in under the Department of Labor’s ERISA purview, which pertains only to retirement plans and related investments and advice.  If the SEC were to issue a similar rule, it would cover all investments, not just those related to retirement.   As the Fiduciary Rule’s implementation has been suspended until at least 2018, RR’s still must only meet the suitability standard when suggesting products for retirement accounts.  IAR’s must, as before, continue to act as fiduciaries for their clients.

Further Reading

Here are some other great resources to look at if you’re interested in learning more about the fiduciary rule including commentary both for and against the Fiduciary Rule, as well as information on investment advisers in general: Department of Labor: Fiduciary Rule Investopedia: Fiduciary Rule New York Times: Before You Pay For Financial Advice, Read This Guide CNBC commentary: Why Obama’s Retirement Advice Rule Is Bad for Investors NerdWallet Commentary: Why the Fiduciary Rule Is Good for Investors Bloomberg: Fiduciary Rule Fight Time: Wall St. Fights Fiduciary Rule  

About the author:

Nick GiovacchiniNick Giovacchini is the Client Services Director at AlphaFlow. Prior to joining AlphaFlow, Nick worked for Barclays Risk Analytics and Index Solutions team, working with institutional asset managers to analyze risk and performance drivers of their portfolios. He also was an Account Manager for MarketFactory, a leading technology provider for the FX world.

Nick has a BA in Political Science from George Washington University in Washington, DC.

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