A roundup of the latest news and reports of interest to financial advisers.
Fiduciary backers seek ‘highest legal standard’ in Form CRS disclosures: InvestmentNews reports that the Institute for the Fiduciary Standard recently proposed a redesigned customer relationship disclosure, known as Form CRS, that provides a side-by-side comparison of advisers and brokers.
Investors flock to municipal bonds for yield and shelter: The $53 billion in assets flowing into tax-exempt municipal bond funds so far this year have already exceeded the inflows for all of last year, according to InvestmentNews.
Bank of America debuts digital retirement program to help employees get on track: Employees will receive personalized insights, guidance and tools to build a financially secure retirement, according to FinancialPlanning.
Don’t Let Your Clients Buy Bitcoin (or any other cryptocurrency): Joe Sweeney advises against investing in bitcoin in your client’s portfolios.
Inflation Inflection: Tiffany Wilding and Andrew Balls of PIMCO forecast that inflation in developed markets will peak in the coming months. However, the exact timing and magnitude is uncertain, largely due to supply constraints.
5 Planning Strategies to Use if Biden Repeals Stepped-Up Basis: President Joe Biden’s tax proposal eliminates the “stepped-up basis” on property transferred at death, a move that “reverses a century of tax law” and would have “far-reaching ramifications for investors,” according to Andy Friedman, founder and principal of The Washington Update.
Jeremy Siegel’s 7 Economic Predictions for Advisers and Investors: U.S. inflation will grow much higher than has been projected by Federal Reserve Chair Jerome Powell, according to Jeremy Siegel, senior investment strategy adviser at WisdomTree and professor of finance at the Wharton School of the University of Pennsylvania.
Some Advisers Stop Giving Rollover Advice Due To DOL Rule Complexities: ERISA experts say that other advisers are underestimating the complexities of the new fiduciary rule, according to Financial Advisor.
Crypto Rule Could Be Coming: Ex-SEC Exam Chief: Any potential rule could include four principal areas: issuance, trading, clearance and settlement and custody, Carlo di Florio, former director of the Securities and Exchange Commission’s Division of Examinations, tells FA-IQ sister publication Ignites.
Personalized Retirement Income Solutions to Play Central Role in Retiree-Friendly DC Plans: While the defined contribution (DC) industry has made substantial strides in aiding DC plan participants through the accumulation phase of their financial lives, plans are not typically designed to effectively support participants through their retirement years. New findings from Cerulli’s report, U.S. Retirement End-Investor: Solving for the Decumulation Phase, suggest that many larger plan sponsors express an interest in retaining the assets of retired participants and, in conversations with Cerulli, providers relay that some of their larger plan sponsor clients are actively seeking to make their plans more retiree-friendly.
Five Tax Planning Strategies for the Ultra-Wealthy: The Biden administration’s proposals won’t have much impact on the merely wealthy, but some changes will have huge consequences for the very wealthy, according to Allan Roth.
Noteworthy Research
Does Excluding Sin Stocks Cost Performance?
The researchers examine the impact of excluding sin stocks on expected portfolio return and risk. Taking an asset pricing perspective the researchers find that popular exclusions typically go against rewarded factors such as value, profitability, and low-risk. This is harmful for expected portfolio returns, but this return loss may be offset by overweighting non-sin stocks that offer similar factor characteristics. We then discuss whether sin itself could be a priced factor. Although there are theoretical arguments for the existence of a distinct sin stock premium, the empirical evidence does not consistently support this. A sin premium might arise in the future though, if exclusion policies reach the scale needed to significantly raise the cost of capital of sin stocks. Exclusions also involve risk relative to the market and peers. The researchers show how this tracking error can be translated into an equivalent loss in expected return, which is negligible at low tracking-error levels, but not at higher levels. However, even modest ex ante tracking-error levels may ex post result in substantial long-term underperformance, which may have consequences for the time-consistency of these strategies and the careers of investors implementing them.
The NFT Market and Its Relationship With Bitcoin and Ethereum
Non-fungible tokens (NFTs) are transferable rights to digital assets, such as art, in-game items, collectables or music. The phenomenon and its markets have grown significantly since early 2021. The researchers investigate the interrelationships between NFT sales, NFT users (unique active blockchain wallets), and the pricing of Bitcoin and Ether. Using daily data between January 2018 and April 2021, the researchers show that a Bitcoin price shock triggers an increase in NFT sales. Also, Ether price shocks reduce the number of active NFT wallets. The results suggest that (larger) cryptocurrency markets affect the growth and development of the (smaller) NFT market, but there is no reverse effect.
The Unsophisticated ‘Sophisticated’: Old Age and the Accredited Investors Definition
Accredited investors are able to participate in unregistered securities offerings such as private equity, venture capital, and hedge funds if they meet income and wealth thresholds. This definition provides a simple screening mechanism intended to restrict the purchase of complex securities to investors who are sophisticated enough to “fend for themselves.” The researchers investigate whether older households, who are vulnerable to age-related cognitive decline and are more likely to meet the accredited investor threshold, possess greater financial sophistication than younger non-accredited investors. The researchers find strong evidence that older households are at risk of meeting the accredited investor definition without having the sophistication needed to avoid high agency costs in a largely unregulated securities market. Accredited households aged 80 and older are more than 80% less likely than unaccredited investors age 60–64 to have high financial sophistication scores. This reduced financial capability in later life appears to mirror the rate of decline in measures of cognition.
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