Weekend Reading For Financial Planners (March 18-19)

Altruist Acquires SSG, Claims Number 3 Spot For Total RIA Firms

(Jeff Benjamin | InvestmentNews)

The independent RIA community has long lamented the dearth of RIA custodial competitive options beyond big-3 of Schwab, Fidelity, and Pershing – especially in the aftermath of Schwab’s acquisition of TD Ameritrade – and while there are a handful of RIA custodian alternatives, they have all struggled to achieve any substantive size and scale. But in recent years, RIA custodial platform Altruist has managed to gain traction with a particular focus on the small-to-mid-sized RIAs that tend to receive less service and attention from the big-3, and reportedly have grown their assets on platform by a whopping 400% in just the past year alone. But until recently, the company was not a ‘true’ custodian, instead operating as an ‘introducing broker-dealer’ (relying on Apex Clearing as its ‘behind-the-scenes’ clearing firm), which technically meant it could accept trade orders, but could not accept the money for the trades nor hold client securities directly, which in turn limited the types of accounts it could support and the depth of customization it could build for advisors. That changed with the introduction of its own self-clearing platform, Altruist Clearing, earlier this month, allowing the platform to transition even further into a ‘full-service, full-stack’ RIA custodian.

And now, Altruist has made another significant move by acquiring Shareholder Services Group (SSG), a competing RIA custodial platform with a reputation for very-high-quality service levels for its RIA clients, adding 1,600 SSG firms to Altruist’s roster (and bringing its total to more than 3,000 RIAs, ranking it third in terms of RIA customers behind Schwabitrade and Fidelity). With the deal, Altruist also gains access to BNY Mellon Pershing’s custody business (which served SSG clients) and can now offer RIAs on its platform two custodial options.

The move gives Altruist even more momentum as it seeks to reel in new RIAs with its ever-expanding capabilities, including in particular those on the TD Ameritrade platform who might be looking for a new home in advance of the transition to the Schwab platform, set to take place over Labor Day weekend later this year. Economically, it also gives Altriust the opportunity to substantively grow its revenue not merely by acquiring SSG and its custodial firms, but with the potential to convert them from SSG’s Pershing relationship (where SSG itself operated as ‘just ‘the introducing broker-dealer) to the new Altruist Clearing offering (where Altruist can generate more revenue as a custodian). At the same time, though, Altruist will have to work to manage the acquisition (and a significantly larger RIA customer base), without disrupting existing SSG advisors who may be happy with their existing Pershing relationship, and while maintaining its service levels at increasing scale.

From the broader perspective, in a year that was expected to be tumultuous in the RIA custodial space with the Schwab-TD transition, Altruist’s acquisition further shakes up the playing field and raises it up into the pantheon of large custodial platforms, joining Schwab-TD, Fidelity, and Pershing (which still sits in third in terms of client assets under custody, as Altruist now has more RIA firms but Pershing’s average firm is much larger). At the same time, firms looking to work with an alternative custodial platform will continue to have a range of other options (e.g., TradePMR, SEI, and Equity Advisor Solutions), which almost certainly will look to emphasize their continued small size and the service levels they can provide. Though in the long run, the question remains whether Altruist’s latest move will be the next step in rivaling the biggest RIA custody players and actually beginning to attract large firms away from their established relationships, or if Altruist simply doubles down on competing for small-to-mid-sized firms (and win business away from the other ‘smaller’ RIA custodians, and new advisory firms that are getting started from scratch) and grows upmarket over time as the firms on its platform steadily grow themselves?!

Bank Chaos Clouds Outlook For Markets

(Charley Grant | The Wall Street Journal)

Rising interest rates and their knock-on effects have been one of the major economic stories of the past year. From weak stock and bond market performance to increased borrowing costs for consumers and businesses, the rising rate environment has affected financial advisors and their clients alike. At the same time, inflation has cooled somewhat (though still remains elevated compared to recent history), leading observers to wonder whether the Federal Reserve would continue interest rate hikes in an attempt to further tame inflation or slow its pace to avoid derailing the broader economy.

And now, in addition to fighting inflation, the Fed will have to consider potential risks to financial stability resulting from a series of bank failures. For instance, the collapse of Silicon Valley Bank has been blamed in part on the rapidly rising rate environment, which led to losses in its long-duration bond portfolio that hindered its ability to meet depositor withdrawal requests. And while the Fed, Treasury, and the FDIC stepped in to calm the immediate crisis, observers are wondering whether other banks could be struggling in a similar way (which led to a selloff in shares of other regional banks), or at least might be more reluctant to lend (which could slow down the economy). Which could further complicate the Fed’s decision making when it comes to further rate hikes.

While the future path of the economy and markets are inherently unknowable, the wide range of moving parts in today’s economy, from elevated inflation to continued strong unemployment to questions about the safety of the banking system, make these areas even harder to assess. Which perhaps suggests that advisors and their clients could consider focusing on the things they can control, from staying within FDIC insurance limits to maintaining a portfolio that can thrive in a range of interest rate environments.

IAA Advocates For Advisors As Portals To Private Investments For Clients

(Mark Schoeff | InvestmentNews)

To help prevent less-sophisticated investors from making risky private investments, the SEC’s Accredited Investor rule limits those who can invest in many early-stage companies to investors with certain income or wealth (currently, those with either $200,000 per year of earned income [or $300,000 with a spouse] for each of the prior two years and the current year, or who have a net worth of over $1 million, excluding the value of their primary residence), as well as investment professionals and certain entities. While some have argued that this rule is too strict (as it prevents many potential investors from accessing private markets and limits the pool of capital for companies), others have suggested that it could be tightened further (as income and wealth are not necessarily proxies for the ability to analyze a private company and the risks involved in such an investment).

Recent momentum in the House of Representatives has been on the side of expanding the definition of accredited investor, and proposals for expanding the accredited investor definition include those who invest 10% or less of their net worth or annual income in a private offering and those who self-certify, among others. In addition, the Investment Adviser Association is advocating for the inclusion of those investors who receive a recommendation about a private offering from a financial advisor who is accredited, with the idea that advisers, who owe a fiduciary duty to their clients, would serve as a proxy for sophistication (and, for advisers, could create a flow of clients to advisers who decide to offer access to private investments).

Proposals to expand the accredited investor definition have gained support primarily among Republicans in the House (which the Republicans control), with some Democrats expressing a willingness to consider such measures as well, though such legislation could have a harder passing the Democrat-controlled Senate. And while debate continues on these proposals, advisers can consider whether they have the interest and expertise necessary to serve as a conduit for their clients to invest in private offerings while maintaining their duties as fiduciaries!

Inside The Collapse Of Silicon Valley Bank

(Maureen Farrell | The New York Times)

At one time, banks were thought to be a relatively simple, slow-moving business. For years, many banks operated according to a version of the ‘3-6-3’ model (i.e., borrow at 3%, lend at 6%, and be on the golf course by 3:00). But as banks expanded their investments in the search for more profit, additional risks were introduced, brought into daylight by the 2008 financial crisis, which resulted in part from banks making extremely risky bets on mortgage-backed securities. And while it did not take on risks of the level of some of the banks involved in the 2008 crisis, the now-failed Silicon Valley Bank (SVB) demonstrates the continued importance of risk management for banks.

Part of SVB’s problems stemmed from its unique customer base. Unlike other banks, which typically serve a wide range of individuals and businesses in a variety of industries (a form of diversification), SVB’s customers were heavily concentrated among venture capitalists and start-up firms that thrive in Silicon Valley. And while one might assume that the primary concentration risk from this profile would be because of a downturn in the tech industry, the rapid influx of cash into this space during the past few years likely contributed to SVB’s undoing. While the bank only held $49 billion in deposits in 2018, this amount grew quickly to $102 billion in 2020 and $189.2 billion by the end of 2021. While deposit growth is often a sign of strength for a bank (and SVB’s stock price soared during this period), the bank’s managers had to find a way to earn returns from these deposits.

Typically, banks will invest customer deposits in a range of assets, from mortgage and business loans to its customers to a mix of short- and long-term bonds issued by the government (that, unlike the mortgage-backed securities purchased in the run-up to the 2008 financial crisis, are assumed to be immune to default risk). But with short-term debt returning next to nothing as the Fed took interest rates close to 0% during the pandemic, SVB decided to tilt its portfolio to longer-duration debt that offered a higher yield. Notably, SVB classified 75% of its debt portfolio as “held to maturity” (unlike other banks with more than $1 billion in assets, which, on average, only classified 6% of their debt in this category), meaning that the bank did not have to show changes in the value of these bonds on its balance sheet (on the assumption that even if interest rates rose and the bonds declined in value, the bonds would be held to maturity and would receive their prescribed yield until then).

Of course, interest rates rose sharply in 2022, reducing the value of this bond portfolio. Still, as long as the bank did not have to sell these bonds (at a loss), it could muddle along earning a lower return than would be offered by newly issued bonds. However, the bank’s tenuous position was identified by the ratings agency Moody’s, which informed SVB leadership that bonds issued by the bank were at risk of being downgraded to ‘junk’ status. This led SVB to shore up its position by selling a portion of its bond portfolio (at a loss) and seeking out fresh capital. But this appeared to spook many depositors, who moved to withdraw their funds ($42 billion on March 9 alone), as well as investors (who sent SVB’s stock price plummeting). SVB was soon seized by the FDIC, which transferred the bank’s assets to a newly created institution in an effort to allow depositors to access their money as quickly as possible.

The case of SVB shows how a bank can put itself at risk without necessarily making extremely risky bets. And financial advisors can add value to their clients by applying lessons from SVB’s failure to their client’s portfolio and overall financial plan, from the value of diversification (e.g., across a range of investments), to ensuring needed liquidity can be accessed, to the risks of using leverage!

8 Questions On The Banking Panic Of 2023

(Ben Carlson | A Wealth Of Common Sense)

While the financial crisis of 2008 was one of the largest banking panics since the Great Depression, the banking system had been relatively calm for the previous decade, with failures concentrated among smaller banks. But the recent run of bank failures has raised new questions about what caused them as well as the safety of the banking system as a whole.

Some observers have blamed the recent banking crisis on the Federal Reserve and the rapid increase in interest rates they have instituted in the past year after an extended period of near-zero rates (even as inflation started to move higher in 2021 and into 2022). Though notably, while rising rates can affect a range of considerations for businesses and consumers (e.g., making financing an acquisition or buying a home significantly more expensive), it is still up to banks themselves to manage their interest rate and liquidity risk. In the case of Silicon Valley Bank, their portfolio of long-duration assets left them vulnerable to a rising interest rate environment.

The recent panic also raises questions about the future of banking for consumers and businesses. FDIC insurance has long provided a measure of security for depositors, who could feel confident that their deposits (subject to FDIC limits) were safe even if their bank failed. Though, as the Silicon Valley Bank incident showed, many depositors (particularly businesses) hold money in accounts well beyond the FDIC insurance limit, leaving them potentially exposed to losses if their bank fails. However, the recent government actions to ensure that depositors at recently failed banks can access their accounts (even those balances that exceed FDIC limits) creates a question of whether depositors will now assume they have ‘unlimited’ insurance on their deposits. At the same time, ‘unlimited’ insurance could come at a cost to depositors, as banks could be required to pay more in FDIC premiums and potentially pass those costs along to their customers in the form of lower yields on their accounts.

Ultimately, the key point is that the long-run ramifications of this recent banking crisis are yet to be known. However, advisors can still support potentially nervous clients by educating them on the insurance associated with different accounts (e.g., bank versus brokerage accounts) as well as assessing and mitigating their potential exposure to losses on their deposits (e.g., considering spreading out balances over official FDIC limits across multiple banks)!

The Moral Hazards Of Banking Keep Increasing

(John Rekenthaler | Morningstar)

Banks are at the heart of a capitalist economy but can be challenging to operate and regulate. Banks typically take in short-term customer deposits while making long-term loans, leaving them exposed to duration risk. To ensure that they have sufficient cash on hand to fulfill customer withdrawal requests, the government institutes capital requirements to limit the amount of leverage banks can use to boost their profits (notably, these requirements can vary by the bank’s size). But this still leaves risk on the table, as a massive influx of withdrawal requests can leave banks shorthanded if it cannot meet these demands through on-hand reserves and the sale of investments.

Given the importance of banks to the functioning of the economy, the government has an interest in ensuring that banks remain healthy and that one bank getting into trouble does not lead to problems throughout the system. However, while emergency measures can prevent contagion, they can also introduce moral hazard, the idea that banks (or other entities) will take more risk if they know they will be ‘bailed out’ if trouble arises. For instance, while government officials argued that bailing out banks during the 2008 financial crisis might have prevented a broader economic disaster, others have argued that allowing bank officials to assume that they will be bailed out if they get in trouble can lead to excessive risk-taking. And as the recent failure of Silicon Valley Bank shows, even moderate risk-taking (in their case, buying long-duration Treasury bonds and other ‘safe’ securities that collapsed in value amid the rising interest rate environment) can lead to trouble.

Rekenthaler concludes that there are likely no easy answers when it comes to balancing the need to ensure a functioning banking system (and broader economy) while allowing banks to earn profits and remain in business. As more extreme measures by the government (e.g., nationalizing banks or taking a totally hands-off regulatory approach) seem unlikely to be enacted, it appears that a ‘middle ground’ regulatory approach will continue to rule the day, along with the moral hazard and other risks it presents.

How To Safely Store Deposits When Clients Have More Than $250k

(Charlie Wells and Misyrlena Egkolfopoulou | Wealth Management)

The Federal Deposit Insurance Corporation (FDIC) was established in 1933 in the midst of the Great Depression as part of an effort to restore trust in the American banking system. For the next 70 years, this insurance contributed to the minimal number of bank runs, which made the FDIC somewhat of an afterthought for many depositors. However, the importance of deposit insurance came back to the forefront in 2007 and 2008, when a series of bank runs occurred amid the subprime loan crisis. The crisis led the FDIC to temporarily increase the amount of deposit insurance from $100,000 to $250,000, a change that was later made permanent.

And now, recent bank failures have brought these deposit insurance limits to the forefront. For instance, many depositors (often businesses) at Silicon Valley Bank had account balances well over $250,000, leaving them potentially exposed to losses above this amount. While government intervention measures will apparently result in no losses for depositors, this crisis has made the potential inability to access one’s bank deposits (whether temporarily or permanently) much more salient.

Financial advisors have a few potential action items to consider implementing with clients. First, advisors can let clients know about FDIC deposit insurance limits, which currently stand at $250,000 per depositor, per insured bank, for each account ownership category, and, for clients with large balances, consider ways to ensure that all of their funds remain covered by FDIC insurance. For instance, a married couple could have $1 million insured at a single bank by putting $250,000 in individual accounts under each spouse’s name and $500,000 in a joint account. Clients can also consider having accounts at multiple banks; in case withdrawals are temporarily halted at one bank, they could still likely access funds deposited at the other bank.

In the big picture, the recent banking crisis could also serve as an opportunity to discuss cash management strategies with clients, particularly those with large bank balances. Whether it is shopping among banks for better savings rates (given that the gap in rates offered among banks has widened as broader interest rates have risen), or seeking out ‘safe’ non-bank products, such as Treasury bills, that offer more attractive rates than they did during the past decade, advisors can show their value in hard dollars by deploying their cash in ways that offer better returns (while ensuring their liquidity needs and broader portfolio goals are being met!).

What Income Level Makes You Rich?

(Ben Carlson | A Wealth Of Common Sense)

While being ‘rich’ is a relative term, a look at U.S. income data can show where one stands compared to the broader population. For example, the median income for all households in the U.S. is a little more than $70,000 (notably, the median income for married couples is more than $106,000). A household would need about $212,000 of income to reach the 90^th percentile of income, and, for those with higher aspirations, more than $570,000 to be in the ‘top 1%’.

Of course, income is only one piece of an individual’s financial picture. For instance, an individual who makes $300,000, but who has little savings and expenses equal to their income might not be as ‘rich’ as someone with $100,000 of income but a $1 million nest egg saved up. Feeling ‘rich’ can also depend on where an individual lives. While having $200,000 of income might not make someone surrounded by millionaires in New York City feel rich, the same income could be in a much higher percentile in a more rural area.

Further, being rich does not necessarily lead to happiness. While research shows that happiness tends to increase alongside income (albeit with diminishing returns as income rises), there are significant mediators that can affect this relationship. For example, the feeling of ‘time poverty’ (i.e., not having enough time to get done what an individual wants to accomplish) is a small but significantly negative mediator of the association between income and day-to-day happiness, suggesting that if increased income comes with substantial burdens on one’s time, the tradeoff might not be worth it when happiness is considered.

Ultimately, the key point is that each individual will have their own definition of what it means to be ‘rich’. For some, it might be having a high income that allows for extensive consumption. For others, it means having sufficient assets to meet their needs for the remainder of their lives. Still others might prioritize happiness and emotional wellbeing over any financial measure. And this means that financial advisors can play an important role in helping their clients live a ‘rich’ life, whatever doing so means for them!

Does More Money Correlate With Greater Happiness?

(Michele Berger | Science Daily)

Researchers have long sought to answer the question of whether having more money leads to more happiness. In a frequently cited study from 2010, Daniel Kahneman and Angus Deaton found that while overall life evaluation was positively correlated with income as individuals’ incomes exceeded $120,000, day-to-day happiness rose up to about $75,000, but failed to increase as income rose from there. This finding led to many headlines questioning the value of earning more money for the happiness an individual feels in their daily life.

But in 2021, researcher Matthew Killingsworth took a new look at this question using a different data source (that allowed for more timely and specific responses from those surveyed) and found that there is no income plateau for day-to-day happiness. Notably, gains in happiness in both studies were based on logarithmic income (e.g., an individual would get the same happiness boost moving from $50,000 to $100,000 of income as they would going from $100,000 to $200,000), suggesting that the same $10,000 increase of income would lead to greater happiness gains for an individual with lower income compared to someone with higher income.

In order to reconcile their seemingly contradictory results in terms of the relationship between income and day-to-day happiness at higher income levels, Killingsworth and Kahneman engaged in an ‘adversarial collaboration’ to explore the relevant data. Working together, the researchers found that, as Killingsworth identified, that, on average, larger incomes are associated with ever-increasing levels of happiness, but with a significant caveat: while individuals who are broadly happy did not see a plateau in their happiness as income rose, unhappy individual did experience this plateau (though unhappy low-income individuals saw significant happiness gains when their income increased). This suggests that if an already high-income individual is unhappy with their current course in life, earning more money might not actually make them happier.

Altogether, this research suggests that while increased income can be a contributor to happiness, even at high income levels, it is not the only factor that drives an individual’s happiness. Returning to the question of whether additional income leads to more happiness, research suggests the answer is a resounding, “it depends”.

New Research Upends Conventional Wisdom About How We Burn Calories

(Herman Pontzer | Scientific American)

Metabolism, the energy one expends (or the calories one burns) each day, is a word that gets thrown around often. But until recently, scientists were unsure about how it changes as we age and whether there are differences between men and women. While it had been sometimes assumed that metabolism speeds up in puberty and slows down in middle age, recent research suggests that this is not the case.

Pontzer worked with other researchers to organize an international effort to develop a large metabolic database of individuals with a wide range of characteristics (e.g., participant ages ranged from 8 days to more than 90 years old). Upending the conventional wisdom, the researchers found that metabolism skyrockets during the first year of life, slowing down during the remainder of childhood before holding steady between ages 20 and 60, at which point it begins to slow by about 7% per decade. Notably, the researchers also found no differences in the metabolic slowdown between men and women of the same body weight and body fat percentage.

Compared to our ancestors, humans today have to do remarkably little physical exertion to gain the calories needed to survive. From studying hunter-gatherer and subsistence farming cultures that exist today in remote locations, the researchers were able to see how the easy availability of calories allows humans living in contemporary society to thrive culturally. While hunter-gatherers are able to find sufficient calories to feed themselves and their children, there is not much energy left for other pursuits. Subsistence farmers are able to produce more calories (which lets them have more children than do hunter-gatherers), but food production remains one of the central roles for individuals in these communities.

Thanks to modern food production techniques, individuals can spend their days taking on a wide range of professional pursuits and hobbies beyond seeking out food (hunter-gatherer societies likely have few financial advisors!). At the same time, given that in modern society it doesn’t take nearly as much exertion to gain needed calories, humans today have to balance calorie intake with ‘optional’ physical activity to ensure a healthy lifestyle!

The Surprising Ways Walking Delivers A High-Intensity Workout

(Jen Murphy | The Wall Street Journal)

For many, starting an exercise routine can be intimidating as many of the hottest exercise trends, from High-Intensity Interval Training (HIIT) to marathon running, seem to require an elevated baseline level of fitness. But recent research suggests that the simple act of walking has the potential to burn as many calories as higher-impact activities.

While a leisurely walk can be a great way to relax, the health benefits of this activity can be boosted by incorporating weights (e.g., carrying hand weights), intervals (alternating periods of a faster and slower walking pace), or hills into a walking routine (without needing to jog or run!). Notably, while counting steps has become more popular with the availability of pedometers, experts suggest that the quality of steps (in terms of increasing the level of exertion) is more important. In addition to the previously mentioned tactics, individuals can also consider ‘power walking’ (i.e., swinging your arms while you walk), or even just taking higher steps throughout the day (but maybe not in a silly way).

Ultimately, the key point is that an individual can get health benefits from exercise without having to rely on the highest intensity workouts. So whether it is scheduling a walk-and-talk or taking a few minutes away from your desk to hop on the treadmill for a walk, busy financial advisors have a range of options to maintain a healthy exercise routine!

A 10-Minute Workout Can Do More Than You Think

(Jen Murphy | The Wall Street Journal)

When balancing a hectic professional schedule with family life and personal interests, it can be hard to find an hour-long block to exercise, which might discourage you from starting an exercise routine in the first place (not to mention the costs of gym memberships and pricey exercise equipment). However, recent research suggests that individuals can accrue significant health benefits from shorter bursts of exercise, with little or no equipment needed, making the barrier to entry significantly lower than what one might assume.

For instance, a 2022 study showed that ‘exercise snacks’, or isolated vigorous exercise lasting under 1 minute and performed 3 to 8 times throughout the day, can improve cardiovascular fitness and reduce the risk of high blood pressure and elevated blood sugar. Another study found that 15 to 20 minutes of vigorous activity a week (just over 2 minutes a day!) accrued through short bursts led to a 16% to 40% lower mortality rate in subjects studied. And creating a routine consisting of short bursts of exercise could be particularly useful for those just getting started on their fitness path, as they require less stamina than longer workouts.

One option for those looking to exercise in shorter bursts is to take on a ‘10-minute workout’ consisting of a series of bodyweight movements (e.g., jumping jacks, jump squats, and push-ups) performed consecutively that can work various muscles and get your heart rate up. To help get started, several apps for 7- or 10-minute workouts are available that demonstrate the different exercises and keep you on pace.

Altogether, research shows that exercise is not an ‘all or nothing’ matter, where benefits only come to those who put in long, intense workouts. Rather, taking at least a few minutes per day for vigorous exercise (particularly for those who spend much of their day at a desk!) can lead to significant health benefits!

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