BrokerDealer Arbitration: Investors Now Beware of Being Counter-Sued

Posted on September 18, 2014 by admin

Brokerdealer.com blog update courtesy of extract from 17 Sept NYT DealBook, and reporter Susan Antilla

Cheryl Gerber for The New York Times

Ron Vaerewyck was making his way through the convention floor at the annual World Money Show in Orlando, Fla., in February 2008 when he stopped by the booth for Reef Securities of Richardson, Tex.

The brochures for Reef’s private placements in the energy industry showed an impressive track record, Mr. Vaerewyck said. By May, after a phone pitch from a Reef broker, he had made the first of several investments that would total $90,000.

After receiving an initial payment in the range Mr. Vaerewyck had expected, though, Reef’s distributions dropped from monthly to quarterly to zero. Mr. Vaerewyck, his wife, and seven other investors wound up suing Reef.

And then, much to their surprise, Reef countersued.

“They said we’d be liable for their legal expenses,” which could have been $400,000 or more, Mr. Vaerewyck said. “That’s a pretty significant piece of change for a group of retired individuals.”

Like Mr. Vaerewyck and the other Reef customers, investors who lose money in private placements face a new obstacle when they take their cases to arbitration before the Financial Industry Regulatory Authority, or Finra, as they are required to do in any dispute. The brokers they have sued are suing them back, accusing them of reneging on indemnification agreements.

The practice, which can intimidate investors already reeling from investment losses, is not widespread. About half of the at least two dozen scattered examples come from one brokerage firm — Berthel Fisher & Company, based in Marion, Iowa. But lawyers who represent investors say it could dissuade the public from making claims against brokers if the strategy were to catch on with other financial products.

“Every brokerage firm out there would do it if they thought they could get away with it,” said Michael D. Kennedy, a lawyer at the White Law Group in Chicago, who represented Mr. Vaerewyck and the other investors who were sued by Reef.

For the full story, please visit the NYT DealBook Blog:

CEO of BrokerDealer Electronic Exchange Platform IEX Speaks Out (Again)

Posted on August 8, 2014 by admin

In a July 9 BrokerDealer.com blog post, we profiled the coverage of start-up company IEX, the innovative and self-acknowledged “disruptive” institutional equities order execution platform for brokerdealers that has received unheralded PR courtesy of the book “Flash Boys”, written by former securities industry member Michael Lewis.

Subsequent to BrokerDealer.com being contacted by IEX communications executive Gerald Lam in his effort to set the record straight re: erroneous news media coverage, this blog has kept an eye on IEX; below are extracts from an op-ed article written by IEX CEO Brad Katsuyama to Bloomberg LP and published on Aug 3

‘Flash Boys’ and the Speed of Lies

65 Aug 3, 2014 6:03 PM EDT

By Brad Katsuyama

IEX CEO Brad Katsuyama, Image Courtesy of Wall St. Journal

In the last few months, I have had a strange and interesting experience. In early April, I found myself the main character in Michael Lewis’s book “Flash Boys.” It told the story of a quest I’ve been on, with my colleagues, to expose and to prevent a lot of outrageous behavior in the U.S. stock market.

Many of us had worked at big Wall Street brokerdealer firms or inside stock exchanges, and many of us believed something was amiss in the market. But it took the better part of five years to discover exactly how the market had been organized to benefit financial intermediaries, rather than the investors, the companies or the economy it was meant to serve. Only after looking at a flurry of market innovations — 40-gigabit cross-connects, esoteric order types, microwave towers — did we understand that the market’s focus was less about capital formation and more about giving certain market participants an advantage over others. In the end, we felt that the best way to solve these problems was to build a stock market of our own, which we did.

After the book, our stock market, IEX Group Inc., became a topic of discussion — some positive, some negative, some true and some false. Fair enough. If you’re in the spotlight and doing something different, you should take the heat along with the light.

It’s for this reason that we have done our best to resist responding publicly to misinformation about our company — even when we read memos circulated inside banks that “Michael Lewis has an undisclosed stake in IEX” (he does not); that “brokers own stakes in IEX” (they don’t); or articles in the Wall Street Journal that said we let “broker-dealers jump to the front of the trading queue,” putting retail investors and mutual funds at a disadvantage (in reality, all orders arrive at IEX via brokers, including those from traditional investors). Our hope in staying quiet was that the truth would win out in the end. But in recent weeks, the misinformation campaign has hit a new high (or low), and on one particularly critical matter, we feel compelled to set the record straight.

For the entirety of IEX CEO Brad Katsuyama’s Aug 3 op-ed piece to Bloomberg News, in which he seeks to dispel the erroneous information published by industry news media and select broker-dealer industry analysts, please visit the Bloomberg site at http://www.bloombergview.com/articles/2014-08-03/flash-boys-and-the-speed-of-lies

For those who are challenged with reading, Katsuyama was interviewed on Bloomberg TV Aug 5…The link to that video is http://www.bloomberg.com/video/iex-s-katsuyama-on-hft-full-exchange-ambitions-B0MB~4T7SIiBquvLC8nbLQ.html

Broker-Dealers Slated To Flock To Saudi Stock Exchange

Posted on July 23, 2014 by admin

BrokerDealer.com blog update courtesy of extract from July 22 coverage from Bloomberg LP

Saudi Arabia, the world’s biggest exporter of oil and de facto leader of OPEC, is removing barriers to one of the world’s most-restricted major stock exchanges as the government pursues a $130 billion spending plan to boost non-energy industries. King Abdullah, the 90-year-old monarch, has kept the economy expanding at an average rate of 6.4 percent in the past four years even as Middle Eastern neighbors from Egypt to Iraq grappled with political turmoil.

The Tadawul surged 2.8 percent to 10,025.14 at the close, the strongest level since May 2008.

“The big sleeping giant in the region is Saudi Arabia, a well-capitalized and large market that foreigners couldn’t get access to,” Gary Dugan, the chief investment officer at National Bank of Abu Dhabi PJSC, said by phone from Abu Dhabi. “It’s exciting. It gives greater credibility to the region.”

A listing of broker-dealers in the middle-east can be found via http://brokerdealer.com/databases/broker-dealer

“If you assume a neutral allocation to the market, and assuming the 4 percent that MSCI is guiding for, we will be talking about $40 billion” of foreign inflows in Saudi Arabia’s exchange, Dubai-based Rami Sidani, who oversees the $343 million Schroders International Selection Fund, said by telephone today.

“The move by Saudi Arabia helps accelerate efforts by the Gulf into becoming a more mainstream destination for international investors,” Ryan Huang, Singapore-based market strategist at IG Ltd., said by e-mail today. “Opening up the market will be a liquidity boost for Saudi corporations.”

At least three banks, including HSBC Holdings Plc and Deutsche Bank AG, have executed test trades, three people said, asking not to be identified as the plans are private. Access for money managers outside the GCC has so far been limited to indirect routes, including equity swaps and exchange-traded funds.

The full story from Bloomberg LP can be found via this link: http://www.bloomberg.com/news/2014-07-22/saudi-to-open-up-531-billion-stock-market-to-foreigners.html

BrokerDealer Blog: All Investment Categories Booming: Is This a Bubble?

Posted on July 8, 2014 by admin

When headline stories such as the one that appeared on the front page of today’s New York Times (“From Stocks To Farmland, All’s Booming, or Bubbling”)

Courtesy of the NY Times

, broker-dealers, investment brokers, global investment bankers and others in the business of guiding investors and entrepreneurs across various asset classes are right to become concerned about a potential investing bubble. Particularly those who have seen similar peaks (and troughs) over at least the past 15 years.

Per the NY Times article:

In Spain, where there was a debt crisis just two years ago, investors are so eager to buy the government’s bonds that they recently accepted the lowest interest rates since 1789.

In New York, the Art Deco office tower at One Wall Street sold in May for $585 million, only three months after the going wisdom in the real estate industry was that it would sell for more like $466 million, the estimate in one industry tip sheet.

In France, a cable-television company called Numericable was recently able to borrow $11 billion, the largest junk bond deal on record — and despite the risk usually associated with junk bonds, the interest rate was a low 4.875 percent.

Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

But frustrating as the situation can be for investors hoping for better returns, the bigger question for the global economy is what happens next. How long will this low-return environment last? And what risks are being created that might be realized only if and when the Everything Boom ends?

Safe assets, like United States Treasury bonds, have been offering investors paltry returns for years, ever since the global financial crisis. What has changed in the last two years is that risky assets, like stocks, junk bonds, real estate and emerging market bonds, have also joined the party.

Want to buy shares of American companies? At the current level of the Standard & Poor’s 500 index, every dollar invested in stocks buys you about 5.5 cents of corporate earnings, down from 7.4 cents two years ago — and lower than just before the global financial crisis in 2007-8.

Why some brokers stand by commissions?

Posted on July 2, 2014 by admin

Thanks to Mason Braswell for taking his time to write a useful piece of article on brokers in investmentnews.com.

LPL adviser Sharon Joseph of Joseph Financial Partners knows she could make more money if she moved her clients onto a fee-based platform with a recurring annual charge of around 1%, but after three decades in the industry, she said that the math doesn’t add up for her clients.

She said that for her approximately 700 clients, all of whom have assets below $2 million, a commission-based model works best.

“I am not afraid of much, and certainly not afraid of the way my pay would change if I moved to fee-based,” Ms. Joseph said. “I stay commission-based because it is the right thing for my clients.”

That puts Ms. Joseph, whose firm manages around $163 million in assets, in the minority of advisers. For more than a decade, firms such as LPL Financial have been encouraging advisers to go fee-based, meaning that they derive a majority of their business from charging clients around 1% to 2% of assets under management annually. Around 57% of all advisers are fee-based, according to the most recent Cerulli Associates data from 2013.

Meanwhile, broker-dealers continue to push for more fee-based business. Morgan Stanley Wealth Management, which reported it had around $724 billion — or 37% — of assets under management in fee-based accounts as of the end of March, has said that number could rise to around $1 trillion if growth continues at a similar pace.

Firms market fee-based accounts as more transparent and having less conflicts of interest than charging on each transaction, but in reality there is a lot of gray area around what makes sense for the client, said Brian Hamburger, president and chief executive of MarketCounsel, a legal and regulatory consulting firm focused on registered investment advisers.

“We have a tendency to look at this as black and white as commissions are wonderful, or commissions are evil; fees are wonderful, or fees are evil,” he said. “But when you peel back, you start to see the reasons they look at it differently is because clients have different needs.”

CRUNCHING THE NUMBERS

From an expense standpoint, it might be hard to justify a fee-based relationship on a smaller portfolio, such as those Ms. Joseph manages, or on a long-term retirement investment that does not require frequent changes.

The compounding effect of a 1% annual wrap fee on a $1 million retirement account over 20 years is more damaging than an upfront commission and a quarterly 12b-1 marketing, or “revenue sharing,” fee that usually runs around 25 basis points, or .025% of assets, Ms. Joseph argued.

She said she put one of her wealthiest clients who sold a small business for around $2 million into a well-known fund family with a low expense ratio that will allow her to shuffle assets around different funds in the family free of charge.

“Except for capital gains tax, they’ll have no other sales charge for the rest of their life,” she said.

If she had charged a fee on those assets as well, it would have taken out another 1% to 2% of their annual return in addition to the fund’s annual operating expenses.

Overall, around 49% of Joseph Financial Partners’ assets are in mutual funds; 38% is in insurance and annuities and another 13% is in brokerage.

Still, the math can be complicated and depends on what is being offered, said Ned Van Riper, a former financial adviser who now counsels advisers going independent through his firm, Finetooth Consulting.

Click here to read full article