The Markets April 13, 2015

Interest Rates and Practice Management

Little doubt remains that the Federal Reserve will act within the year—or at least before mid-2016—to raise rates, but less clear is what this means for advisory practices.
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As analysts’ commentary converges around late 2015 being the time to expect Fed action on interest rates, a new report from strategic consulting firm Tatum shows U.S. business owners are split on what an increasing rate environment could mean for profitability and performance.

The first-quarter 2015 edition of Tatum’s Survey of Business Conditions finds just about half (54%) of chief financial officers (CFOs) and strategic business executives feel it is likely the Fed-driven prime interest rate will reach 3.125% by the end of 2017. Researchers note that interest rates have hovered at or near record lows since the depths of the financial crisis—a largely unprecedented period of “easy money” policy that has coincided with strong stock market recovery.

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As noted by Tatum researchers, increasing interest rates will impact businesses and investors in a wide variety of ways, positive and negative. More alarmist analysts suggest a rise in rates could shock markets grown used to rock-bottom rates and derail the ongoing recovery. Others feel a rate hike is long overdue and necessary to prevent asset inflation and another bubble-crash cycle.

In the financial services and advisory space, increased interest rates can be favorable for retirement clients relying on fixed-income products—so long as net portfolio volatility is kept in check as rates normalize and markets adjust. Defined benefit (DB) retirement plan clients are especially looking forward to higher interest rates. This client group has struggled since the financial crisis to maintain healthy funding levels, given that lower interest rates mean more dollars must be invested today to meet future liabilities. Lacking sufficient yield through traditional fixed-income allocations, pension fund clients have had to settle for lackluster returns or surplus risk-taking.

But it’s not just large pension funds that are closely tracking interest rates and their impact on portfolio strategies—defined contribution (DC) plan advisers are paying heed, too. Research published last year by Janus Capital group found more than nine in 10 financial advisers  (93%) felt rising interest rates would be a critical client conversation topic to address in 2015. That report suggested interest rate changes will be both a challenge and an opportunity for advisers and their clients. One practice all advisers should consider, Janus researchers suggested, is to run some type of stress testing on commonly used client portfolio models to ensure there are no unexpected reactions to interest rate moves.

 

Looking to practice management, Tatum finds advisory companies could accelerate capital investments in the near term, perhaps pulling the trigger on a strategic acquisition or significant capital expenditure while rates remain low. Other firms could dial back on longer-term projects that will require additional financing later on.

Similarly, Tatum finds some companies inside and outside financial services expect to increase debt levels sooner rather than later, to take advantage of better rates and liquidity. Others will replace debt with new credit/equity arrangements or reduce their debt levels, Tatum notes. However, the majority of CFOs foresee no major change to their debt pricing structure or cash investment management strategies, should interest rates increase slowly and modestly, as intended by the Federal Reserve.  

The Tatum survey also asked participants to reflect on trends over the past 30 days and share their predictions and projected business outcomes for the next quarter. CFOs from Tatum's partner network and external organizations alike report improved business conditions over the previous month, and the forward outlook remains positive even in the face of potential interest-rate action. Overall, 46% of Tatum partners and 47% of external CFOs expect that business conditions will improve over the next 60 days.

The Survey of Business Conditions is a high-level executive survey based on the aggregated opinions of Tatum's internal chief financial officer partners and external CFOs surveyed by the firm. The full findings are presented here. 

Compliance April 10, 2015

Initiative Seeks to Help Participants Investigate Retirement Plans

A former SEC attorney says retirement plan participant lawsuits don’t benefit anyone, but he has launched a new initiative designed to hold plan fiduciaries accountable for their actions.
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At the beginning of my conversation with Edward “Ted” Siedle, founder and president of Benchmark Financial Services, and a former Securities and Exchange Commission (SEC) attorney, based in Ocean Ridge, Florida, he was ruminating about an article in the New York Times concerning fees of New York City pension funds.

According to that article, an analysis by City Comptroller Scott M. Stringer “concluded that, over the past 10 years, the five pension funds have paid more than $2 billion in fees to money managers and have received virtually nothing in return.”

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Stringer said the pension funds have traditionally reported the performance of many of their investments without taking the fees paid to money managers into account. After factoring in those fees, his staff found the fees have dragged net returns $2.5 billion below expectations over the last 10 years, the newspaper said. Stringer noted in his report that the reason why the trustees of the funds would not have performed those calculations in the past is not clear.

“Not clear?” Siedle says. “How can this board after 10 years not know massive fees have cast doubt on employees’ ability to retire and called into question the city’s entire investment program over decades? Taxpayers and plan participants may want to know.”

It is just this type of scenario that Siedle has been dedicated to combating with his forensic investigations of retirement plans over the years—he has performed more than $1 trillion in forensic investigations during his career. He tells PLANADVISER he uncovered hidden fees in the pension programs in the state of North Carolina and the state of Rhode Island pension systems. If you’re a public pension plan sponsor, you should look over your shoulder for Siedle.

But, it’s not just public pensions he’s investigated. Corporate pension, 401(k), 457 and 403(b) plan sponsors take heed: Siedle wants you held accountable too.

“All plan sponsors have a fiduciary duty to monitor fees,” Siedle says. “These investigations need to be done today more than ever due to the explosion of fee opacity in past years. There’s more to investigate now than ever in the history of our country.”

Groups, unions, cities, counties and state attorneys general hire Siedle to do investigations all the time, but plan participants couldn’t afford to do them, so Siedle set out to remedy that. “For every investigation I’ve done for a group or moneyed client, I’ve gotten calls from individual participants also having concerns about their retirement plans and I’ve had to say there’s nothing I can do for them unless they can come up with the money for an investigation. I’ve taken great note of recent crowdfunding efforts, and the confluence of those two gave me the idea for my initiative.”

Siedle’s initiative is the Investigate My Retirement Plan website. The website says, “Let’s build a new retirement plan paradigm—where workers and stakeholders have a voice.”

According to Siedle, if his idea catches on, it will be the first time that participants can get an expert, independent second opinion about their retirement plan. If a participant thinks her fund is a proper candidate for an investigation, she can call Siedle, and if he agrees he can “do a high-impact investigation on a budget that is acceptable,” he’ll start a campaign on Kickstarter to raise the necessary funds. If Siedle decides he won’t be able to get enough information or the investigation will cost way more than what can logically be raised, he won’t start a campaign.

The first-ever effort to crowdfund an investigation of a state pension—Rhode Island's—has begun. Siedle feels the price of an investigation should be in the neighborhood of $25 per participant, but on Kickstarter they can contribute anywhere from $1 to $1,000. “Our thought is, what would you as an employee of [x or y employer] be able to afford—probably the cost of a dinner,” he says. If the money cannot be raised in the specified time period on Kickstarter, the investigation will not happen.

According to the Investigate My Retirement Plan website, “Greater transparency, lower cost and better performance is our goal.” Siedle notes that the alternative for participants who want to call out plan sponsors is lawsuits—something plan sponsors want to avoid for obvious reasons. He contends participants who discover a fiduciary breach too late never get their money back.

Lawsuits also may not result in improved processes or continued plan sponsor accountability. Reports of Siedle’s investigations will be given to plan sponsors, posted on the Investigate My Retirement Plan website, and given to media and the participants in the plan. He says the reports are intended for public distribution and written in professional, expert, defensible language. “We’re not casting grenades; we’re just saying, this is what we found.”

Siedle wants his effort to lead to annual checkups or regularly scheduled second opinions for retirement plans that are independent from the plan sponsor. “[Plan sponsors] should realize that two years from now, we’ll be back to look at changes they’ve implemented,” he says. “If this works, it should result in plan sponsors not only being concerned that what they’re doing can be investigated by the public, but that they will continue to be monitored by the public.”

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