Archive for December, 2014

AK In The News: F-Squared Settles Fraudulent Advertising Charge With SEC

Tuesday, December 23rd, 2014

I was asked to comment on an article in today’s Fundfire (A Financial Times Service) about F-Squared Investment’s settlement with the SEC. The firm, a very large exchange traded fund (ETF) strategist, agreed to pay $35 million and admitted wrongdoing in the case concerning false performance advertising.

The firm advertised real performance which was in fact hypothetical back-tested data. They also made a performance calculation which inflated performance by 350%, and the former CEO has also been charged with making false and misleading statements to investors.

I was asked how this would affect the firm’s distribution. Simply, I think it will be fatal. This is not simply a case where the SEC has alleged something, which may or may not be true. The firm has admitted that it has done what it has been accused of. From a due diligence point of view, and considering fiduciary responsibility, how can a sponsor firm, who is after all making recommendations to its advisors, who is in turn making them to investors, allow this firm to remain on their platform?

Many firms put the firm on “Watch” when the allegations surfaced – the correct move – and did not allow assets to be added. But now, the only correct move is to terminate F-Squared and help clients move the assets elsewhere. The firm obviously lied in the due diligence process, so this seems like a very clear case of sponsor’s being better off moving on. I personally can not see any rationale for not terminating this relationship.

To quote from the article: “The result of the investigation, and the fact that F-Squared admitted wrongdoing, could have serious consequences for the firm’s distribution prospects, says Andrew Klausner, a strategic consultant with AK Advisory Partners.

It could be “a kiss of death in terms of distribution through broker-dealers and RIAs,” Klausner says. Since the firm admitted wrongdoing, “I don’t know how [broker-dealers and RIAs] could justify keeping them on their platform.””

The firm does have new management,and in time, they should be allowed to present their case, but I would be hard pressed if I was in charge of a sponsor’s due diligence to allow them in now. I would much rather be competing against a sponsor who continues to use the firm than to be that firm!


Top 10 Predictions for 2015

Tuesday, December 16th, 2014

Time again to take out my crystal ball and have a little fun trying to guess what will happen next year. Here we go – these predictions are in no particular order:

10 – Hillary Clinton will announce her candidacy for the Presidency at long last. I am still not convinced that she really wants to run, but at this point I think the momentum is taking on a life of its own. However, I think she will be challenged by someone from the left of the party and her path to the nomination will not be easy as people thought a few short months ago. She will have to come-up with some new fresh ideas, and improve the effectiveness of her campaigning significantly.

Last week, I would have said that the challenge from the left would not have come from Elizabeth Warren. Now I am not so sure. Since I can’t stay on the fence, I predict that Elizabeth Warren will indeed eventually challenge Hillary. However, your politics aside, she has one glaring strike against her – she will be compared to Obama – a Senator with less than one term under her belt. Another candidate may emerge as well.

9 – Sticking with politics, but turning to the Republicans, I am surprised that Jeb has set-up an exploratory committee, but I would still not be surprised if he doesn’t actually run. As for the other Republicans, Christie will give it a shot, but he has an awful lot of baggage that will haunt him. Luckily, since the election is not next year, I don’t have to make the prediction of who will win yet.

8 – Political gridlock will continue in Congress to some extent, but I do believe that the Republicans will try for lots of small victories along the way as opposed to going for major pieces of legislation. The President has signaled a desire to fight since the mid-term elections, so I think the atmosphere will be bitter. But if the Republicans have any hope of winning back the White House they have to show that they can govern better than the last Congress.

7 – The President will actually continue to work better with the Republicans than the liberal wing of his own party. Bill Clinton faced similar changes and was able to rescue the last two years of his Presidency. However, I still think that given the President’s penchant for executive orders, these will all be minor victories as well and his status as a lame duck will be solidified in short order.

6 – The economy will continue to chug along with moderate growth, nothing spectacular but nothing terrible. The U.S. economy will continue to outperform the rest of the world. Europe will fall into a very short and shallow recession, and I think Japan will rebound now that the elections are behind them. Watch out for problems in the developing economies, in large part due to the drop in oil prices that we have seen.

5 – The biggest wildcard for the year is Russia – where the economic situation is deteriorating rapidly and sanctions are having a very major impact. The Ruble is in free fall, and the drop in oil prices is having a significant and negative impact. Continued turmoil in Russia could have a huge boil over effect in not only the rest of Europe, but the rest of the world as well. No one really knows how Putin will react and if these economic woes will make him more bellicose. But if any one thing can send the worlds markets and economies into chaos, it is Russia. Developments are worth keeping a close eye on.

4 – The Fed will raise interest rates by July of next year, but I think that they will do so in a measured way an more slowly than many currently believe – in part because of economic weakness around the world. Inflation remains under control, with the only thing that can really throw us a curve here is if wage growth picks up significantly (which I don’t see happening). The market will react negatively when rates do go up, but will rebound and regain all of the initial losses within six months (as is usually the case after Fed interest rate hikes).

3 – The stock market will have a below average year – and may in fact end down a little bit. There will probably be at least one 10% – 20% correction, either before or right after the interest rate increase. But corporate profits are still strong, and other economic positives will act as a floor on the market. But I see now compelling reason for a lot of upside in 2015.

For financial services specifically:

2 – Pundits will continue to focus on the growth of the RIA and independent channels, at the expense of the wirehouses and other traditional broker/dealers. But I see the continuation of the rebounds that the wirehouses have seen, and I think they will once again hold their own. There may be a few large mergers among the larger RIAs and perhaps one or two among the regional brokerage firms.

1 – The aforementioned Elizabeth Warren will continue to be a thorn in the side of banks and other financial services companies, and she will continue to fight anything or anyone that has a connection to Wall Street. While this may propel her into a run for President, I don’t see her having much impact on legislation, especially since the Republicans now control both houses of Congress.

Finally, a little sports. I see Alabama over Oregon in the National Championship Game and the Patriots over the Seahawks in the Super Bowl.

Feel free to share your own thoughts!

How Did I Do? A Review Of My Top 10 Predictions For 2014

Tuesday, December 9th, 2014

I will unveil my Top 10 Predictions for 2015 next week, but for now, lets see how I did this year. Original text is following by my comments in bold.

10 – The Republicans will keep the House of Representatives but fall short of capturing a majority in the Senate (although they will pick up net seats). The Republicans should be able to pick-up enough seats to take control of the Senate, but self inflicted primary wounds, led by Tea Party challenges, will hurt them once again. I was half right here, as the Republicans actually did pick-up the Senate because they avoided the pitfall of having extreme candidates. I guess I should be a pollster in my next life, as they didn’t do much better!

9 – Riding off of the momentum of the budget agreement, there will be no threats of government shutdown next year, there will be a small increase in bipartisan cooperation, but given that it is an election year, there will be no far reaching immigration reform or gun control legislation passed. The only progress I see next year, and it would be in the Republicans best interest to pursue this course, would be some smaller pieces of immigration legislation. On the gun control side, momentum only seems to be on the side of an overall of the mental health system. The debt limit discussions will be contentious, but will be solved without the US defaulting. I was pretty on target here except that even small pieces of legislation were not passed on immigration or gun control. The President has taken executive action on immigration, the impact of which we will feel next year – you’ll see my take on it next week.

8 – The problems with the Obamacare website rollout will seem minor next year as the reality of the totality of the massive law and its implementation move forward. The benefits of the program will be outweighed by younger people not signing up, choosing instead to pay the penalty, growing anger at not being able to keep doctors, and as the year progresses, the reality that costs will go up in 2015 as insurance companies lose lots of money. I was pretty on base here. Rates have increased for 2015 and the website has been a non-issue. The Supreme Court has some decisions to make next year, and it is still not clear how many people opted to pay the penalty. We will have to stay tuned for the conclusion of this number!

7 – The Federal Reserve will begin to taper in the first quarter, although I don’t think the taper will be significant early on. The overall path of the Fed will remain the same under Chairperson Yellon. (It is a little dangerous making this prediction now since there is a chance that the Fed will begin the taper this week, but I fall in the camp that says they will wait – they may announce something, however.) The Fed remains dovish and the quantitative easing program ended in October. While the US economy is relatively strong, the rest of the world continues to be mired in slow growth, with Europe and perhaps Japan set to potentially go back into recession. This will limit the range of actions available to the Fed.

6 – The stock market will have an average year. I think the markets have, to a large extent, priced the taper in already, so I don’t think Fed actions will significantly impact the market. Coming off of a banner 2013 (which I did not predict), it is only natural that the market revert to more normal returns. There will be a natural bull market correction during the year, and by next December I see the S&P 500 up a modest 7% – 10% for the year. I was right here – a relatively good year for the market with only that minor almost 7% correction during the first two weeks of October. Volatility was tame most of the year, but re-emerged in the fourth quarter.

5 – Europe will continue to grow modestly and I don’t foresee any large crises within the EU or the Euro bloc. The worst seems to be behind most of these countries from an economic standpoint. No countries will exit the Euro – there won’t even be much or any talk about that anymore. The Euro was really a non-issue with no talk of countries leaving the currency. There was however a crisis that I missed – as do most other people – the Russian interference in The Ukraine/Crimea. And to say moderate growth would be generous – the threat of a triple dip recession in 2015 is very real.

4 – Hillary Clinton will finally signal that she will run for President in 2016. While it is too soon to make any predictions about how that will go, I think her record as Secretary of State will come under increased scrutiny, and while she will remain the front runner, my only preview of my thoughts on the actual election is that the campaign will be a lot tougher than people think. There is no certainty that she will actually get elected. Kind of right. She has done just about everything but declare already, and her book tour, which was meant to be a pre-cursor to her campaign did not go as smoothly as she would have hoped. The reality here is that she is not the world’s best campaigner…..More to come on Hillary next week!

For Financial Services:

3 – Elizabeth Warren will continue to raise her public profile and try to “stick it” to banks and other industry participants. This will be part of the Democratic election strategy – along with helping the middle class – that will be utilized to overcome the Republican’s continued slamming of Obamacare. Actual progress on new legislation will be slow. I was right here as in the aftermath of the election Elizabeth Warren was elevated into the Democratic leadership and she has continued to bash Wall Street. The strategy did not help the Democrats in the election – nothing really did – but her elevation makes it pretty certain that these issues will be front and center in the run-up to the Presidential election.

2 – It will be a good year for the wirehouses as they continue their comeback from 2008. There will be less negative news about them in the press. The RIA and independent markets will continue to grow – but there is room enough for both! I think this was true – I saw more positive stories about the wirehouses than negative ones, and the industry as a whole had a good year. 

1 – ETFs and retail alternative investments will start to get some negative press. As first ETFs and then alternative investment mutual funds have grown, they have received generally favorable press. I have been leery of both, particularly retail alternatives, and I think the press will finally start to raise some questions. I think this is also true, although not to a significant extent. People are beginning to questions retail alternative investments more than ETFs, but they do remain popular. Stay tuned on this issue as well – I see more happening in 2015!

Finally – sports. (I usually go over 10!). Florida State will win the collegiate national championship, ending the dream season of Auburn. The Seattle Seahawks will beat the Denver Broncos in the Super Bowl – yes, Payton and his pals will choke again. I nailed these! And choke the Broncos did in the Super Bowl – actually put a large damper on my Super Bowl Party. And as of this writing, Florida State has still not lost a game! We’ll see about the first college playoff series though …..