Another great one - Read and Share Finra Charges SWS with Improper Supervision of VA Transactions

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Finra Charges SWS with Improper Supervision of VA Transactions

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By: Darla Mercado

Finra on Monday charged SWS Financial Services Inc. with green-lighting numerous variable annuity applications with no principal review for suitability.

In its Sept. 29 complaint, the Financial Industry Regulatory Authority Inc.’s department of enforcement alleged that from Sept. 2009 to May 2011, SWS violated rules that require firms to have supervisory systems and written procedures to supervise VA transactions.

The five charges facing SWS include an allegation of inadequate supervisory systems and written supervisory procedures to supervise VA business, inadequate supervisory reviews of VA deals, failure to have registered principal review of VAs before submitting the application to the insurer, failure to have surveillance procedures to detect inappropriate VA exchanges, and failure to develop and document a specific training plan for supervisory review of VA deals.

Finra’s enforcement department seeks disciplinary action, including unspecified monetary sanctions, and an order that SWS bear the costs of the proceeding.

A call to Ben Brooks, a spokesman for SWS, was not immediately returned.

According to Finra, while SWS was lacking in its supervisory framework for VAs, sales of variable annuities made up 16% to 20% of SWS’ total revenue during the September 2009 to May 2011 review period.

FIRM FELL SHORT

SWS fell short when it allegedly failed to come up with specific procedures to approve VA sales generated in its offices that didn’t have an onsite supervisor. These offices accounted for about 1,300 of more than 1,500 variable annuity transactions executed by SWS’s reps during the relevant period.

Those applications were forwarded from these offices to SWS’ affiliated insurance agency, where two workers who weren’t registered with SWS were supposed to review the applications and then send them to a manager at SWS’ regional office of supervisory jurisdiction for a final suitability review and approval, Finra alleged.

Afterward, the applications were to be sent to the insurer, where they would be processed.

According to Finra, SWS didn’t follow this unwritten process. From September 2009 to May 2011, more than 70% of the VA business generated at the firm’s offices with no onsite supervisor were sent to insurers without ever having been reviewed by an SWS securities principal.

Without the necessary supervisory review, some fishy VA deals slipped through the cracks. In one scenario, a rep recommended that 29 of his clients swap VAs issued by MassMutual Life Insurance Co. for those from Jackson National Life Insurance Co. because the former would no longer issue certain guaranteed living benefits, according to the Finra complaint.

At least three of the 29 exchanges may have been inappropriate because the clients hadn’t reached the appropriate age of 45 to add the benefits offered by Jackson National, Finra said.

“Each of these customers incurred surrender charges and went into a VA contract with higher annual expenses, which may have been avoided in part if they had waited until age 45 to exchange their VA,” Finra noted.

Can’t go wrong with this one Gross Gives Janus Much-Needed Shot in the Arm

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Gross Gives Janus Much-Needed Shot in the Arm

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By: Jeff Benjamin

Just like that, Janus Capital Group Inc. has become a fresh new face in the bond fund universe with the abrupt and unexpected signing of Pimco co-founder and fixed-income guru Bill Gross.

“The market sees this as a huge shot in the arm for Janus,” said Jeff Tjornehoj, head of Lipper Americas Research, citing the early 35% spike in Janus’ stock price today.

With just $13 billion in total bond fund assets, compared with $67.8 billion in equity fund assets, Janus is still small potatoes for Mr. Gross, who is used to dealing in trillions at Pacific Investment Management Co. But the trend is certainly on his side, with Janus’ bond funds seeing $1.1 billion in net inflows this year, while the firm’s stock funds have had net outflows of $6.6 billion.

“I think this is big news for Janus,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ.

“While they have a strong fixed-income set of funds, this should certainly encourage more investors to want to work with Janus than before,” he added. “Janus has long been known for their equity mutual funds, but Bill Gross brings instant credibility and a strong long-term record in the fixed income market.”

Even though Wall Street nodded immediate approval of the sudden move by the 70-year-old bond king, financial advisers appear more comfortable waiting to see what kind of impact Mr. Gross will have on a company that has mostly been off the radar screen for the past decade.

“We don’t invest in any Janus funds right now, but this will certainly put them on our watch list,” said Chard Carlson, director research and wealth manager at Balasa Dinverno Foltz. “Janus wouldn’t have even registered in my mind as a bond shop, so this should generate some benefits for them.”

In terms of seeing such an industry legend take what initially looks like a subordinate role at a much smaller firm, Mr. Carlson said he will be watching for Mr. Gross’ “evolution at Janus.”

“It was a surprising move from a place like Pimco, where he had control of everything to a place like Janus, where he’s just running a fund,” Mr. Carlson added. “Maybe he’s set up on an island in Newport Beach, and he gets to do what he wants.”

Mr. Gross was not available for comment, but according to the Friday statement from Janus, he will be taking over management of the fledgling Janus Unconstrained Bond Fund (JUCTX). Mr. Gross is scheduled to start work at Janus on Monday.

The fund was launched May 27 and has just $13 million under management. The fund is currently being managed by Gibson Smith, a highly-regarded fixed-income manager, according to Mr. Tjornehoj.

“Gibson Smith has done a good job of showing investors that Janus is not just an equity shop,” he said. “They’ve had some good momentum, and this announcement changes that game entirely. It’s a huge opportunity for Bill Gross to help Janus’ bond fund assets go to places they’ve never gone before.”

Tracy Burke, an investment consultant at Conard Siegel Investment Advisors, is not currently investing in Janus funds, but he said the addition of Mr. Gross might actually make him more skeptical of Janus’ bond funds based, based on Mr. Gross’ reputation for using derivatives.

“It will be interesting to see if he carries over to Janus some of the things he’s been doing with the Pimco funds,” Mr. Burke said. “It seems like normally his funds are among the top or among the worst performers. We don’t invest in Janus bond funds now and frankly we probably won’t, out of concerns about exposure to derivatives.”

While Mr. Gross could easily be compared to a veteran quarterback switching football teams late in his career for a last chance at glory, some observers are already considering larger fallout that could include Mr. Gross brining a team from Pimco with him to Janus.

“I don’t see any downside for Janus, because this will give them an opportunity to develop a large fixed-income platform,” said Brad Cougill, chief investment officer at Deerfield Financial Advisors Inc.

“From a long-term track record perspective, the Pimco folks have proven to be a solid team,” he added. “It will be interesting to see how much of that team moves with [Mr. Gross], and how some of this shakes out.”

Along those lines, Mr. Rosenbluth of S&P Capital IQ said investors should wait to see how much of Mr. Gross’ teams end ups joining him at Janus.

“We think the departure of Mr. Gross will cause some investors to move money elsewhere, whether to Janus or other fixed income funds with strong long-term records,” Mr. Rosenbluth wrote in a Friday blog post.

“We would caution those looking to move to Janus that unless more of Mr. Gross’ team at Pimco similarly departs, his resources will be different,” he added.

This is a good article - check out Didn’t get in on the Alibaba IPO? These ETFs did

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Didn’t get in on the Alibaba IPO? These ETFs did

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By: Jeff Benjamin

With the dust still settling around last week’s historic stock offering by Alibaba Group Holding Ltd. (BABA), two exchange-traded funds have tweaked their policies to include the new stock earlier than normal.

Financial advisers showed little interest in chasing the hot stockfor their clients, but some ETF managers are hoping Alibaba adds some appeal to their funds.

The $29 million Renaissance IPO ETF (IPO) has fast-tracked the record-setting stock offering to include Alibaba this Friday, five market days after the $25 billion IPO.

Kathleen Smith, principal at Renaissance Capital, said the standard policy is to add newly public companies to the one-year-old ETF on a quarterly rebalancing schedule.

“Fast track exceptions are made when we see a product that is big enough and we believe would be a good candidate for the portfolio,” she said.

The $520 million First Trust US IPO ETF (FPX) took advantage of the time of the Alibaba offering, which coincided with the fund’s quarter end, to add the new stock after the market closed on Friday.

Portfolio manager Josef Schuster said adding Alibaba was a rare exception, but not beyond the flexibility of the portfolio management rules.

“In 99.999% of the cases we have not done that, but adding a new stock on the first day of trading is consistent with our flexibility,” he said. “It was our rebalancing date, by coincidence.”

Mr. Schuster said this marks the first time in the fund’s eight-year history that a stock was added on the day of the IPO.

“But this is also the first time we’ve had a significant IPO price on our rebalancing day,” he added.

The strategic moves by both ETF managers underscore the uniqueness of the Alibaba offering, a Chinese electronic-commerce company that is only trading on U.S. stock exchanges. And, because the company is not based in the U.S., it is not expected to be added to most major market indexes, such as the S&P 500.

The Alibaba IPO eclipsed the $22 billion raised by the Agricultural Bank of China in 2010, as well as the 2008 Facebook IPO, which raised $10.7 billion.

After being priced at $68, Alibaba shares closed it first trading day Friday at $93.89 per share, and has since fallen more than 7% to close Tuesday at $87.17.

Investors shut out from the initial offering now can buy Alibaba shares on exchanges for more concentrated exposure than they will get in either of the ETFs holding the stock.

Mr. Schuster said Alibaba has a 2.8% weighting in his fund, which is made up of 100 stocks, and typically rebalances quarterly.

Alibaba will be among the largest holdings in the Renaissance ETF, at 10%, when it is added on Friday. Twitter Inc. (TWTR), which went public last November, also has a 10% weighting in the fund of 72 stocks.

The Renaissance ETF has gained 7.5% from the start of the year, and the First Trust ETF has gained 9.6%. The broad market S&P 500 is up 7.3% for the year through Tuesday.

Can’t go wrong with this one California Earthquake for Hedge Funds

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California Earthquake for Hedge Funds

By Barry Ritholtz

This was the big news yesterday out of California:

The California Public Employees’ Retirement System (Calpers) today announced that it will eliminate its hedge fund program, known internally as the Absolute Return Strategies (ARS) program, as part of an ongoing effort to reduce complexity and costs in its investment program.

The staff recommendation, supported by the Investment Committee, will exit 24 hedge funds and six hedge fund-of-funds valued at approximately $4 billion.

Though this move may shock some people, it was one of the most-telegraphed actions that the nation’s biggest pension fund has made. The seeds for this were planted last year, when Calpers moved the authority over hedge funds from its equity desk to its fixed-income group. Bond investors look at the world very differently from equity investors.

The criticism of hedge funds from the equity side of the investing universe typically focuses on performance and fees, to a lesser extent. Charging high fees — hedge funds usually collect fees equal to 2 percent of the assets under management plus 20 percent of any gains — is a pretty big drag on long-term performance. However, a handful of funds have managed to accomplish high returns over long periods of time. That is the promise of alternative investments. The reality is much different, as the industry as a whole and most of its components underperforms the broader market. Not surprisingly, paying high fees for a lack of performance has become a difficult investment practice to defend.

But that is the equity view. From the fixed-income side of things, the focus is on a risk-reward analysis. Hedge funds provide a lot of risk, but they don’t generate a significantly different profile from the rest of the equity universe. During the financial crisis, hedge funds as a group fell 28 percent versus the bottom-of-the-trough drop of 57 percent for the Standard & Poor’s 500 Index. When compared with fixed income, which had strong gains throughout the financial crisis, hedge funds proved they weren’t up to doing what they were supposed to do — providing a hedged bet against adverse market events. Losing almost a third of their value means that there is still a substantial amount of risk embedded within hedge funds. That is an anathema to most bond guys. Hence, the Calpers action was almost inevitable.

Back in April, because of two columns in these pages (“The Hedge-Fund Manager Dilemma” and “Why Investors Love Hedge Funds”), I spoke with several bond portfolio managers at Calpers. They were curious about some of the data I had used for those two articles, as well as some general investment philosophy on hedge funds. Our conversation was off the record, but I can share with you what I told them, all of which has been pretty much detailed in these pages during the past year:

• Hedge funds are a legal structure, not an asset class;

• Dilution of returns and talent was inevitable as the industry grew from $150 billion and a few hundred funds to $3 trillion spread out among almost 10,000 funds;

• Claims of hedge-fund noncorrelation with markets have been greatly exaggerated;

• Selection of outperforming hedge funds appears to be indistinguishable from random picks;

• If you are invested in a fund that is truly generating market-beating alpha (as opposed to random outperformance), I would be hard pressed to suggest not keeping it;

• The expectation that hedge-fund returns will exceed those of equities is an unsupported fiction created by consultants.

Understanding why Calpers did this is less obvious than you might have imagined: Sure, it was paying very high fees for a group of investments that underperformed every single benchmark it looked at. But what it actually did was far more significant. Instead, it made a broad decision that it wasn’t worth embracing the correlated risk of hedge funds. Fees and performance were certainly a concern, but I suspect this issue mattered just as much.

Even so, I was expecting Calpers to reduce its hedge-fund holdings by as much as 40 percent, mostly by cutting the underperformers. This is a huge change beyond the $4 billion in hedge-fund investments Calpers will now shed. It has enormous potential for disrupting the consultants and infrastructure of the 2 & 20 firmament.

What it means for the rest of the investment world is an even more fascinating subject. Consider these three questions:

1. What will other pension funds do? Calpers has long been known as an industry thought leader. Along with its sheer size, it also has used its status and location in the progressive and experimental state of California to manage things a little differently from the pack.

2. What might this mean for venture capital and private equity? Recent studies have shown that VCs are surprisingly correlated to equity, reducing one of its key rationales. (Private equity is much less correlated.) But like hedge funds, there also are concerns about liquidity, redemption gates, fees and performance. Will big pension funds like Calpers reduce their VC and PE exposure?

3. What does this do to the belief that hedge funds deliver higher returns than equities? This expectation, of course, has proven to be a myth. But state treasurers bought into this fiction because it allowed them to make much smaller contributions to employee-retirement accounts, keeping local tax rates down. This short-term patch is setting up much bigger shortfalls in the future.

The hedge-fund world is changing. I suspect we may be surprised by just how radical the change will be.

Ed Butowsky on CNBC 6-24-13 on Flickr.Ed Butowsky, wealth manager, financial advisor, and managing partner of Chapwood Investment Management, joins The Closing Bell on CNBC to discuss the recent stock market roller coaster ride and what may behind it.

Ed Butowsky on CNBC 6-24-13 on Flickr.

Ed Butowsky, wealth manager, financial advisor, and managing partner of Chapwood Investment Management, joins The Closing Bell on CNBC to discuss the recent stock market roller coaster ride and what may behind it.

Ed Butowsky on Fox News 4-3-13 on Flickr.Ed Butowsky, wealth manager, financial advisor, and managing partner of Chapwood Investment Management, joins Fox News to examine the French Super-Tax that would apply a 75% tax rate on those people making near and over $1 million dollars.

Ed Butowsky on Fox News 4-3-13 on Flickr.

Ed Butowsky, wealth manager, financial advisor, and managing partner of Chapwood Investment Management, joins Fox News to examine the French Super-Tax that would apply a 75% tax rate on those people making near and over $1 million dollars.

Employers Added Fewest Number Of Jobs In Nine Months | Ed Butowsky (by Ed Butowsky)

College Student Parents W‎ill Not Like This | Ed Butowsky (by Ed Butowsky)

Ed Butowsky on Fox Business 3-6-13 on Flickr.Ed Butowsky, wealth manager, financial advisor, and managing partner of Chapwood Investment Management, joins Fox Business’ Varney & Co.  to examine the short and long term impact of the Fed printing money on the stock market.

Ed Butowsky on Fox Business 3-6-13 on Flickr.

Ed Butowsky, wealth manager, financial advisor, and managing partner of Chapwood Investment Management, joins Fox Business’ Varney & Co. to examine the short and long term impact of the Fed printing money on the stock market.

Ed Butowsky on CNBC 2-27-13 on Flickr.Ed Butowsky, wealth manager, financial advisor, and managing partner of Chapwood Investment Management, appears on CNBC The Closing Bell to analyze the market and its performance today topping a 5-year high and exactly what we could possibly connect the gains to.

Ed Butowsky on CNBC 2-27-13 on Flickr.

Ed Butowsky, wealth manager, financial advisor, and managing partner of Chapwood Investment Management, appears on CNBC The Closing Bell to analyze the market and its performance today topping a 5-year high and exactly what we could possibly connect the gains to.