Robo Advisers Set to Capitalize Under New U.S. Retirement Plan Rule

Roboadvisers set to capitalize under new U.S. retirement plan rule

A new U.S. rule protecting retirement funds from commission-paid brokers could be good for roboadvisers, a fast-growing sector that manages money with algorithms who may collect new clients fired by other firms because their accounts are too small.

While it is not clear how much money is at risk of leaving bigger firms because of the new rule, industry trade groups say the costs of compliance will be high.

Individuals with meager retirement savings or small businesses who offer 401(k) plans could get the boot from big brokerage firms because the revenue they generate is not worth the expense.

The fiduciary rule, aimed at ensuring that brokers put clients' best interests ahead of their own profits when advising on retirement funds, was released last week and requires all retirement plan advisors to be completely compliant by the end of 2017.

Roboadvisers like Wealthfront, Betterment and Aspiration said they are in a position to scoop up business that has been tossed aside by larger brokerage firms.

"To the extent that this rule starts undermining the business models for incumbents, it absolutely opens the door for innovators," said Andrei Cherny, chief executive of Aspiration.

At Betterment there is no minimum balance required, while Aspiration clients determine their own fees based on what they think is fair. Wealthfront's minimum balance is $500.

Roboadvisers have lower costs and offer smaller fees than traditional firms partly because they do not have to pay an army of brokers to sell their products.

The Labor Department predicts the broader wealth management industry will face up to $31.5 billion in additional compliance costs due to the fiduciary rule over the next decade.

A Department of Labor official said roboadvisers must comply with the rule just as human advisers do. But these firms already adhere to a fiduciary standard set by the U.S. Securities and Exchange Commission, which means costs and fees may not go up in the same way.

Arjun Saxena, a consultant who deals with wealth and asset management firms at PricewaterhouseCoopers, called the fiduciary rule "a big win for digital and online advice."

"Many of the larger firms do have a great deal of smaller clients," said Saxena.

Some traditional firms may end up partnering with roboadvisers to offer low-cost services instead of pushing clients out the door, he added.

Mike Sha, chief executive officer and co-founder of roboadviser SigFig Wealth Management LLC, said roboadvisers are keen on those kind of partnerships as well.

"One way to drive up scale is to partner with traditional financial institutions that already have a trusted name and brand," he said.

Fiduciary Shift

When the Labor Department first started crafting its fiduciary rule in 2010, roboadvisers were barely a gleam in the industry's eye. Although the idea has been around for more than a decade, it has only gained traction the past few years.

The industry now oversees $100 billion in assets, or about 3 percent of the wealth management industry, according to Deloitte Consulting. By 2025, Deloitte predicts the industry will manage between $5 trillion and $7 trillion, representing 10 to 15 percent of U.S. retail assets under management.

Betterment and Wealthfront are the most prominent roboadvisers, and came on the scene in 2010 and 2011, respectively. Since then, competitors like Aspiration and Vanguard's Personal Advisor Service platform have also sprung up. Firms including Charles Schwab, Bank of America Corp, BlackRock Inc, and Goldman Sachs Group have either acquired stakes in or developed their own in-house robocompetitors as well.

The wealth management industry has broadly gravitated toward a fiduciary standard in recent years, driven by client preferences and fee pressure as much as expectations that rules would get stiffer.

The biggest wealth management firms inside Morgan Stanley , Bank of America, Wells Fargo & Co and UBS AG have been shifting client assets from "transactional" brokerage accounts, which generate fees by trading frequently, to fiduciary accounts that charge a flat fee regardless of how often they trade.

Firms hit hardest by the Labor Department rule are smaller ones that still have a healthy number of transactional accounts, like LPL Financial Holdings Inc, analysts said. Insurers may also face pressure when it comes to selling certain annuities that face restrictions.

A spokesman for LPL Financial said the firm will not be one of the hardest hit and about 40 percent of overall assets are fee-based, and roughly two-thirds of new assets are fee-based.

(Additional reporting by Elizabeth Dilts in New York, and Lisa Lambert in Washington D.C.; Editing by Lauren Tara LaCapra and Chris Reese).

Originally published by Tariro Mzezewa on Wealth Image credits: Images Bazaar, Getty Images.

India just stunned the gold market

India just stunned the gold market

(Business Insider) Dave Forest from discusses latest Indian government taxes that affect the global gold market.

wrote a few weeks ago about record slowdowns in gold sales across India. With buyers in the world’s number-one consuming nation holding off on purchases ahead of an expected cut in import taxes from the federal government.

And yesterday we got the decision from India’s officials on the gold tax. Although it wasn’t at all what the market had hoped for.

Finance Minister Arun Jaitley presented the government’s gold plan as part of the annual federal budget. Saying that gold import taxes will remain unchanged this year – dashing hopes for a cut.

In fact, Jaitley actually announced an increase in taxes on gold sales. Saying that the government will add a sales tax of 1 percent to all gold jewelry sold in India.

Such a sales tax had been scrapped by the government four years ago. But is now being revived by officials with the stated aim of reducing gold consumption.

And that wasn’t the end of increased taxation on bullion. With Minister Jaitley also saying he will raise taxes on imports of dore gold bars – to 8.75 percent, from a former 8 percent.

Dore purchases had recently become a preferred way for India’s gold buyers to get a break on the 10 percent import tax for refined gold. But the new tax significantly narrows the arbitrage here.

All of which suggests that the government is very serious about reducing gold demand – in order to keep down the country’s current account deficit.

The increased taxes could also be aimed at driving buying away from physical gold. And toward paper instruments such as the gold-backed bonds recently introduced by the government.

Whatever the case, these measures are very likely to have a dampening effect on gold purchases in this key market. Watch for statistics on gold purchases to see how great the damage will be.

Article republished from Business Insider by Dave Forest. Image credit to Reuters

Puerto Rico bonds crash after "moratorium" raises default risk

Just a day after Governor Alejandro Garcia Padilla signed a law that enables him to temporary halt debt payments, dramatically raising the risk of widespread defaults, Puerto Rico securities had the biggest one-day drop in more than eight months.



Today's plunge is the biggest decline since July 28, 2015, a day after PR indicated that it was set to skip interest and principal payments on some securities for the first time.

As The NY Times reports, Gov. Alejandro García Padilla of Puerto Rico on Wednesday signed a bill that would allow him to declare a state of emergency and give him authority to halt payments on the island's crushing $72 billion debt.

The measures capped two days and nights of marathon debate in Puerto Rico's legislature, where lawmakers from the main opposition party called any unilateral debt moratorium dangerous and members of the governor's party insisted that doing nothing would be even worse.

"This legislation provides us with the tools to address the highest priority of needs -- providing essential services to our people -- without fear of retribution," the governor said in a statement on Wednesday. He accused Puerto Rico's creditors of hampering federal assistance by "misinforming the public and dissuading Congress from doing what is right for our 3.5 million American citizens."

The Puerto Rican Senate approved the measure at about 3 a.m. Tuesday. The House, after becoming embroiled in a dispute over whether certain types of bonds should be excluded, approved it around 1 a.m. Wednesday.

The bill did not specify a starting date for a moratorium, leaving that decision to the governor. But a big debt payment, $422 million, is due on May 1, and there have been many signs that Puerto Rico is not able or willing to pay it.

That payment is due on bonds issued by the Government Development Bank, an institution that plays a critical role in the island's financial affairs, including holding deposits of municipalities and other government entities. As recently as last week, holders of the bank's debt were in talks about an agreement that would give the bank some breathing room if it failed to make the payment.

But those efforts broke off in the face of a flurry of revelations that the bank was insolvent, that it might be placed in receivership, and that it was swiftly moving deposits to other financial institutions, apparently to keep them from being frozen or drained away by frightened depositors.

The bill says the bank has just $562 million in cash. A moratorium would be intended, among other things, to help preserve that cash, so the bank can use it to finance the activities of other parts of the government.

The law also establishes a new framework for putting the development bank into receivership, and creating a "bridge bank" that would take over some of its deposits and obligations during the moratorium.

The situation was not helped by Puerto Rico Treasury Secretary Juan Zaragoza who said there was "absolutely" no way the Treasury will have the funds make the more than $700M payment due July 1.

  There are $300M in checks made out to suppliers that are being held because the Treasury doesn’t have the funds, Zaragoza said

Estimates that between other central government debts and public corporations, the amount owed to suppliers of government goods and services is about $2B, Zaragoza said

'Conversations' with creditors continue but the pendulum appears to be swinging towards Puerto Rico's restructuring,

Stephen Spencer, who represents some investors who have already agreed to restructure their bonds, said, "We intend to carefully review the legislation, but at this stage we believe that it may lead to violations of the terms of the agreement."

He said that the administration last fall had hailed that restructuring as a model for others to follow, adding that the bondholders he represents should have been excluded from any coming moratorium, "rather than being cast into a state of uncertainty."

And/or a US taxpayer funded bailout...

In Washington, House Republicans seeking to rescue Puerto Rico prepared to release a revised plan that includes a federal oversight panel. The proposal has been contentious on the island, where the governor and his top advisers are increasingly at odds with investors over how to restructure the debt, most of it in the form of municipal bonds.

As we detailed yesterday, what was more troubling is that in a move similar to what we have seen in Greece, only this time a voluntary one on behalf of the island and not its vassal owners (as happened with Greece), the newly signed Puerto Rico Emergency Moratorium & Financial Rehabilitation Act also empowers the governor to order the financially battered Government Development Bank (GDB) to restrict the outflow of cash in a bid to stabilize its dwindling liquidity levels, which stood at roughly $560 million as of April 1, according to the bill.

In other words, capital controls.  

This, incidentally, confirms what we said yesterday, when we concluded that "the situation is getting messier by the day with a compromise deal now seemingly impossible - absent a US government bailout - and meanwhile Puerto Rico's money is running out, which will ultimately be the decisive catalyst that leads to the next step in the crisis."

That moment may have just arrived.

Originally published by Tyler Durden on Zero Hedge.

Need to hide some income? You don’t have to go to Panama.

For wealthy Americans looking to veil their assets and shield some of their income from taxation, there is no need to go to Panama or any other offshore tax haven. It’s easy to establish a shell corporation right here at home.

“In Wyoming, Nevada and Delaware, it’s possible to create these shell corporations with virtually no questions asked,” said Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, a nonprofit research organization in Washington.

In some places, it can be more difficult to get a fishing license than to register a shell company. And it doesn’t cost much more.

The Panama Papers — the cache of leaked documents from a Panama law firm, Mossack Fonseca — have revealed how thousands of the firm’s clients, including an array of powerful figures around the world, stashed billions of dollars in tax havens. So far only a tiny number of American names have surfaced (although that could change as more of the documents are reviewed).

That in no way means that Americans citizens are refraining from such practices, experts emphasized.

“This is just one firm in one place,” said Gabriel Zucman, an economist and the author of “The Hidden Wealth of Nations: The Scourge of Tax Havens,”“So it cannot be representative of what’s happening as a whole in the world.”

But Mr. Zucman, who estimates that about 8 percent of the world’s financial wealth — more than $7.6 trillion — is hidden in offshore accounts, said another reason was that it is so simple to create anonymous shell companies within the United States.

Wealthy individuals and businesses that want to mask their ownership can conveniently do so in the United States, and then stash those assets abroad.

Yet while the United States demands that financial institutions in other countries share information about Americans with accounts overseas, its reciprocation efforts fall short, critics say.

“You see a ton of wealth in tax havens in Switzerland and the Cayman Islands that is owned by shell companies that are incorporated in Panama or in Delaware,” he said. “The bulk of this wealth does not seem to be duly declared on tax returns.”

A recent report by the Institute on Taxation and Economic Policy called“Delaware: An Onshore Tax Haven” noted that the state’s lack of transparency combined with an enticing loophole in its tax code “makes it a magnet for people looking to create anonymous shell companies, which individuals and corporations can use to evade an inestimable amount in federal and foreign taxes.”

Delaware allows companies to shift royalties and similar revenues where they actually do business to holding companies in Delaware, where they are not taxed.

Heather A. Lowe, the legal counsel and director of government affairs for Global Financial Integrity, a research and advocacy group in Washington, warned that the problem was much more widespread than just a handful of states.

“You can create anonymous companies anywhere in the United States,” Ms. Lowe said. “The reason people know about Delaware, Nevada and Wyoming is because these states market themselves internationally.”

In annual reports, Delaware’s secretary of state has boasted of marketing efforts that have “helped the state reach thousands of legal professionals in dozens of countries across the globe” and visits by delegations to Brazil, Israel, Canada and Spain “to tell the Delaware story.” The resulting incorporation fees make up a hefty portion of state revenue.

Although individuals and businesses can have legitimate reasons to want to screen their holdings — for privacy or to prevent competitors from discovering investment plans — several experts said cloaking wrongdoing was a more common purpose.

Aside from avoiding taxes, shell companies are routinely used by terrorist organizations to hide assets, by political donors to sidestep campaign finance laws and by criminals to launder money, Mr. Gardner said.

The Treasury Department indicated this week that it planned to require financial institutions to verify the identities of customers who set up accounts in the names of shell companies, thus closing a loophole in the American banking system that thwarts transparency efforts.

The Treasury also recently began a program that tracks people who use shell companies to purchase expensive real estate in New York and Miami.

But the new rules would not affect state law.

John A. Cassara, a former special agent for the Treasury Department, said that American and foreign law enforcement officials conducting investigations were regularly stymied by state secrecy laws surrounding shell corporations.

“If somebody is conducting an investigation and it comes back to a Delaware company and you want to find who or what is behind that company, you basically strike out,” he said. “It doesn’t matter if it’s the F.B.I., at the federal level, state or local. Even the Department of Justice can’t get the information. There is nothing you can do.”

He recalled a case where investigators ended up abandoning their inquiry of a Nevada-based corporation that had received more than 3,700 suspicious wire transfers totaling $81 million over two years.

“Why incorporate in Nevada?” the state’s website advertised in 2007. “Minimal reporting and disclosing requirements. Stockholders are not public record.”

Mossack Fonseca, the Panama law firm, set up offices in Nevada and Wyoming.

After revelations came to light about Americans using Swiss bank accounts to evade taxes, the United States in 2010 passed the Foreign Account Tax Compliance Act, which requires financial firms in other countries to disclose details about American clients with offshore accounts.

Yet the United States is one of the few countries that has refused to sign new international standards for exchanging similar financial information with other countries.

Another country that has failed to sign the standards? Panama.

“The United States demands that the rest of the world tell it when an American holds an account at a foreign institution, but the U.S. does not return the courtesy by automatically providing comparable information on foreign investors in U.S. banks to their home tax jurisdictions,” said Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff of Congress’s Joint Committee on Taxation.

Mr. Kleinbard and Ms. Lowe of Global Financial Integrity said that American banks are awash in money from foreign investors using shell corporations to conceal money from their own governments and law enforcement.

“Where is that money going?” Ms. Lowe asked. “Not to Delaware, Nevada and Wyoming, but New York, Miami and Los Angeles banks.”

Originally published by Patricia Cohen for The New York Times.

How The U.S. Treasury just crushed 80 hedge funds

The following list, according to Goldman Sachs, shows 50 stocks that most frequently appear among the largest 10 holdings of hedge funds. Spot the top one.

After today's absolutely slaughter of Allergan, we expect the Goldman Hedge Fund VIP basket, whose constituents this table shows, to be absolutely obliterated.

And just like that, the US Treasury singlehandedly crushed the second quarter, and perhaps the year, for at least 80 (and as much as 107) hedge funds, which likely means more redemptions to come, more illiquidity, an even more volatile market in the months to come, and obviously, even more central bank intervention to offset it all.

Originally published by Tyler Durden on Zerohedge.