The Pulse Episode 3: What Role Does Luck Play in One’s Success?

January 30th, 2020 · 4 min read


...But before we start, let’s consider the role of luck in one’s success. We’ll learn what one famous author had to say about that in a bit.


Brokerage Overseer Turns Focus To Sweep Accounts

Finra has resolved to prioritize an ongoing probe into brokerage "sweep" programs, citing worries some firms aren't as forthcoming to clients as they should be about these vehicles, reports InvestmentNews.

Against a backdrop of historically low-interest rates for money-market investors and rapidly declining commission revenue for brokerages, Finra recently made scrutiny of sweep-account programs an examination priority. In its "2020 Risk Monitoring and Examination Priorities Letter," dated Jan. 9, the industry-funded watchdog of US securities firms says that while "sweep programs may offer useful features to customers – and in some, but not all, cases offer higher-than-average interest rates – they have also raised several concerns about firms’ compliance with a range of Finra and SEC rules."

Sweep accounts are a common feature of retail banking. At the close of business days, they automatically transfer amounts in excess of pre-set levels into higher interest-earning investment options -- commonly money-market funds. Typically, when funds in the original account drop below a set level, money is automatically swept back to keep the original account fully funded. The idea is to reduce "idle cash drag" by putting more or less ready cash to work in higher-interest vehicles.

Finra wants to ensure brokerages keep clients informed of cash-management alternatives. The regulator is also worried that firms may incorrectly imply "that a brokerage account is similar to or the same as a checking or savings account at a bank,"complete with FDIC coverage, according to the priorities letter.

Brokerage sweep accounts aren’t typically guaranteed by the FDIC. Further, interest payments to clients for use of their funds in sweep vehicles are quite modest — 0.25% on average versus an average money-market fund return of 2.0%, according to InvestmentNews.

Wirehouses Shorten the Leash on Advisors

Advisors employed by big-name brokerages -- especially at the four "wirehouses" -- are losing control of their business lives, recruiter Mindy Diamond writes in

Diamond sites specific developments to bolster her argument.

  • The demise of the Broker Protocol, which set rules for the orderly migration of advisors between firms that gave FAs a fighting chance to re-paper old clients with their new firms. Wirehouses Morgan Stanley and UBS ditched out of the Protocol two years ago, and rumor has Merrill Lynch poised to follow suit. The fourth wirehouse, Wells Fargo, has pledged fealty to the Protocol, but that was 18 months ago.

  • Under new recruiting strategies, wirehouses are hiring fewer financial advisors with experience in favor of novice FAs who sign on as salaried workers. The firms' aim here, writes Diamond, is to create "a new generation of financial advisors who are not paid on a commission basis." This strategy also underlines the wirehouse view that clients belong to the house, not the advisor.

  • Retire-in-place programs like Merrill's Client Transition program also make this point. In a bid to keep them from skipping off, Merrill FAs get payouts as a percentage of their production on a "trailing 12-month basis." While that's common practice at wirehouses, Merrill has recently said it would also reward advisors for taking accounts from retiring colleagues. Looking ahead, Merrill wants its FAs "to start here, build their client base here, and retire from here,” the firm's wealth boss Andy Sieg told advisors in November.

  • Wirehouses seem to delight in rolling out new compensation structures every year. But the not-so-subtle point of these often bewildering edicts is to save or make money by raising payout thresholds, trimming bonuses and nagging advisors to "cross sell" banking-unit products to their clients.

Taken together, these alterations add up to "a glide path for changing advisor compensation" into something more in line with a salary-plus-bonus model for FAs that in turn will make advisors and clients harder to pry away, Diamond concludes.

Activist Hedge Funds Got Busy in 2019

Hedge funds that don’t mind telling the companies they invest in how to run themselves got louder in 2019, Reuters writes. They were in fact responsible for nearly “half of all activist investor campaigns waged in 2019,” the news wire reports, citing data compiled by asset manager Lazard.

Last year, a record of 99 investor campaigns pushing for M&A-related moves by listed companies were launched by “activist” shareholders, with hedge-fund involvement up 12% last year over 2018.

2019 examples include a call for Hewlett Packard to accept a takeover offer from Xerox by Carl Icahn, who has shares in both; fund manager Elliott Management’s insistence that AT&T sell off parts of its business, and the same firm’s apparently successful pressure campaign to persuade Marathon Petroleum to spin off its Speedway convenience-store unit.

It wasn’t just US companies in the crosshairs of activist hedge funds in 2019. Reuters says that “non-U.S. targets made up 40% of all campaigns, up from 30% in 2015,” with, for instance, hedge fund Third Point trying to buffalo Sony into making strategic divestitures.

Question of the Week

Our question this week is, What role does luck play in one’s success? For writer Jonathan Swift, best known for “Gulliver’s Travels,” it all depends on your circumstances.

“The power of fortune is confessed only by the miserable,” Swift wrote. “The happy impute all their success to prudence or merit.”