Category Archives: Announcements

Why Congressionally-mandated FIFO accounting will adversely impact your clients – and what you can do about it.

This past Saturday morning, the Senate passed their version of the Tax Cuts and Jobs Act bill. One of the lesser known provisions in the Senate bill, was the elimination of an investor’s choice to identify which shares of securities they may wish to sell or donate. The provision states that the only way securities may be disposed of is through use of an accounting method commonly referred to as First-in First-Out (FIFO) where the oldest shares purchased are the first ones an investor may sell. Because of the protracted appreciation of the securities market, the first shares purchased are likely to be the lowest cost and therefore carry the most gain (and resulting tax penalty).

The House version did not include this particular provision. And because there exists so many differences between both versions of the bills, this past Monday, Congressional Republicans went to a Conference Committee to begin reconciliation efforts on the various differences between the two tax bills. Led by House Ways and Means Committee Chairman Kevin Brady, and Senate Finance Committee Chairman Orrin Hatch, there are a number of hot topics that will need to be negotiated – including individual tax rates, the handling of AMT, child tax credits, corporate tax rates and repeals to the Affordable Care Act.

Because of the number of big-ticket and high visibility items included in the bill coupled with the pace the legislation is advancing, some experts fear that the FIFO provision may be overlooked and ultimately absorbed into the reconciled bill as collateral damage to bigger-picture negotiations.

However, we at Adhesion believe that this would be shortsighted as the provision is damaging to the very investors and savers that it is purports to protect. The provision has virtually no impact on the $1.7 trillion funding gap the bill creates as it is currently scored at generating just $2.4 billion over 10 years. As inconsequential as those revenues may sound they don’t even consider the expense side of the equation – no official estimates exist thus far on the offsetting expense associated with infrastructure retrofit needed to operate, report, comply and monitor the changes thrust upon the industry. And it certainly does not consider expenses associated with policing and adjudication of these matters.

Interestingly, the Investment Company Institute, the powerful lobby representing the mutual funds and ETF industry, were granted an 11th hour carve-out reprieve in the Senate bill to allow mutual funds and ETFs to continue to sell specific tax lots within their pooled investment vehicles. It is important to note this carve-out exemption for institutional investors does not extend to those retail investors purchasing and selling these instruments, only how the fund itself accounts for the gains and losses within their portfolios.

We feel there are some other anti-competitive and unwarranted elements in this provision that members of Congress, investment advisors and end-investors should be gravely concerned about. Specifically –

  • When the Senate proposed a carve-out provision that protected the institutional fund companies and ETF providers while ignoring the retail investor class, they created an uneven playing field that is heavily tilted against retail investors. Through this provision, the institutional investor will be afforded a significant advantage as they may exit any tax lot they wish. With the freedom to select tax lots, the institutional investors can sell at will, whereas the retail consumer will be locked-up due to tax costs associated with their low-basis FIFO shares. This sort of unfair playing field is analogous to suggesting institutional investors can trade commission-free yet retail investors must always pay commission. The provision creates an enormously unfair and artificial trading barrier that will heavily disadvantage retail investors.
  • With this barrier in place, end-investors will likely open up different brokerage accounts or have paper certificates issued to them. In both cases, there is no reasonable method to enforce or monitor for this type of behavior. This will drive up operational costs for advisors and custodians which will ultimately be passed through to the end investors. And by exploiting this loophole, the revenue projections for this provision are likely to fall even shorter than expected.
  • By adding friction to the retail investor’s ability to liquidate securities through a FIFO provision, one should assume that there will be less selling – which leads to less liquidity and efficiency in our capital markets. This also means that retail investors will be less inclined to eliminate assets in an attempt to seek diversification. This will ultimately lead to concentrated and highly appreciated holdings in client portfolios which runs in stark contrast to tried and true investment principles of diversification, rebalancing and buy-low/sell high for retail investors. This introduces the potential of an enormous loss during a market correction as well as introducing excessive levels of portfolio risk – all while stifling the efficiency of the capital markets.
  • This provision disproportionally burdens older investors who likely have a more extensive tax history and on average maintain a lower cost basis than younger investors. This FIFO tax also represents an unplanned expense that retirees had not budgeted for – which will erode retirement savings at a time when retirees have very little time to recoup this new, unanticipated retirement gap.
  • This provision also disproportionally disadvantages middle- and upper-income investors who are more likely to hold FIFO-eligible securities. Contrast that with ultra-high net worth and institutional investors who frequently hold real estate, hedge funds and other sheltered ‘accredited investor’ assets, which can be exempted from FIFO provisions as a result of the Senate’s proposed carve-out clauses.
  • Lastly, if legislation is advanced, one unintended consequence facing mutual funds and ETF providers is that retail investors will likely seek to avoid concentrated positions so as to have more choice on which shares to dispose of. Mutual funds and ETFs are pooled investment vehicles, and as such, they are generally far more concentrated in a client portfolio than individual equities. We believe advisors and investors will wisely consider diversifying out of concentrated mutual fund and ETF holdings into a larger basket of diversified equities so as to have multiple tax lots to sell. So rather than purchase Coke multiple times, an investor may consider purchasing Coke, Pepsi, Dr. Pepsi and Constellation Brands. Security prices and equity valuations may no longer be dictated based on rational, sound fundamentals, but rather from a desire to exploit loopholes in heavy-handed government legislation.

For a bill that is intended to promote simplification and fairness, we think it does just the opposite. It unfairly penalizes the retail investor with a FIFO tax while introducing liquidity friction and complicated recordkeeping. At the same time, it rewards the large institutional and ultra-high net worth investors with flexibility to use their own preferred inventory accounting methods. Most would argue that if framed properly and viewed in its totality it would be difficult to defend.

So what can you do? We think this particular provision just needs a bit of sunlight so that it can be evaluated and debated in the open. With enough voices we think we can make this happen and we encourage you to get involved.

First off, encourage your clients to take action.  Consider directing them to TD Ameritrade’s Legislative Action Committee site, which has done a fantastic job of highlighting the issue.  From this site, they may contact their local representatives .

Next, as investment fiduciaries we would urge you to read the Money Management Institute’s position on the Senate version of the tax reform legislation.  On their site, the MMI chairman, Craig Pfeiffer shares talking points and a number of template letters you can use to contact your elected officials.  Similarly, the Investment Advisor Institute – an advocacy group for SEC-registered investment advisory firms has developed a site to contact elected officials and communicate your concerns of FIFO legislation.  Adhesion has also drafted an open letter to Congress which can be found here.  Feel free to use it or modify it and share it with your elected officials.

Also, as we head into year end, consider generating losses through active tax harvesting.  These losses can be used to unwind concentrated mutual fund or ETF holdings or buffer against future taxable gains resulting from potential inflexibility associated with this bill.  For more information on the value of tax harvesting and how it can add value to a client portfolio, feel free to watch this webinar

Lastly, we think now is a good time to dump concentrated mutual fund and ETF holdings to spread those proceeds into a diversified pool of equity holdings.  If you are interested in active equity managers, please consider Adhesion’s Asset Manager eXchange which can be found here.

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Why Goals-based is not code-word for ‘ignore performance’.

There is a lot of confusion about what it means to deliver and receive a goals-based investment solution.  Most retail investors believe ‘goals-based’ is simply another attempt at dismissing under-performance.  Or at least so says a recent study cited by Wealthmanagement.com.  In the article, the study indicates that clients believe that “Goals-Based” equates to Performance.  We think it means much, much more.

Part of that disconnect can be attributed to our track record as an industry of wrapping otherwise straightforward ideas in jargon and arcane statistics.  Perhaps another cause of confusion is that many advisors simply do not have the wherewithal to architect, deploy, support and maintain a true goals-based framework.  At Adhesion, as we spoke with our advisory clients, we quickly came to realize that their clients were asking for investment solutions that not only identified where they were on their path to their goals, but also adjusted based on how they progressed on their objective.  We found that many so-called Goals-Based programs that were out there were largely theoretical and academic in nature – making them, at best  – unimplementable by most advisory firms.  We also found that many programs – in addition to missing the upfront and ongoing diagnostics of the client to their goal –did not take into consideration real-life factors like taxes, expenses, downside protection and real-life spending rates.  And for those that did, the cost and accessibility of the program was often prohibitive.

So we are excited to introduce Pathway Portfolios   The suite is comprised of 13 Unique Core/Satellite Portfolios – blending both active and passive investment styles across the three investor lifecycle phases – the Gain Phase, The Protect Phase and the Spending Phase.  The strategies have been built to address the unique challenges associated with each phase of an investors lifecycle:  The Gain Portfolios are designed for investors who are earlier in the investment lifecycle and looking to maximize capital appreciation through a globally diversified portfolio, but while staying within their risk appetite.  The Protect Portfolios are for those investors who are closing in on their goals and looking to achieve some level of capital appreciation yet limit downside exposure, which can be devastating for those approaching retirement (see 2008-2009).  And finally the Spend Portfolios are designed for those who have achieved their goals and looking to accomplish a target spending rate while simultaneously maximizing investment longevity.

The program leverages investment products from a combination of separate account managers, actively managed mutual funds, and passive ETFs and have been engineered to fully leverage the sophisticated Adhesion Unified Managed Account (UMA) platform.

We are excited to share them with Adhesion advisors who custody assets at TD Ameritrade, Schwab Institutional and Fidelity.  Please visit gotopathway.com to find out more.

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Around the Web with RIA Ideas

A few great reads from the month of February, highlighting some of the key conversations we’re having with advisors. Growth, technology, investment design, outsourcing, recruiting, compliance…all are key discussion points for RIA firms and we share the following for your own discussions:

Before hunting for new clients in the name of “growth”, advisory firms would do well to consider who they want to serve and how they plan to serve them. A Vince Lombardi-inspired read from Julie Littlechild on remembering the basic fundamentals of winning.

We desperately want to do it all and be a hero to our clients, colleagues, and family. Greg Menefee reminds us that we CANNOT effectively be everything to everyone, and empowering others really empowers ourselves to leverage our strengths where it really matters.

Finding prospective clients can be hard, and finding the right clients who appreciate the uniqueness of your offering can be even harder. Why not build and feed a virtual platform that is uniquely you, and tells a compelling story differentiating you from your competitors? Michael Kitces applies lessons from a best-selling book for a master class in narrowcasting.

This narrowcasting platform can also serve as the beginning of earning trust and loyalty. As Josh Brown writes, this key piece of the relationship is not an event but an ongoing process of earning investor loyalty requiring consistent, clear communication.

Diversification is said to be the only free lunch in finance, but 2015 left just about every investor starved for returns. Great set of graphics here from Resolve Asset Management shows how even perfect foresight led to pretty lame outcomes.

The TDA National LINC Conference was great, and focused heavily on growth and the integration of open-architecture technology into an advisor’s practice. A few perspectives from Adhesion and beyond.

A good advisor should hire themselves for planning and investment management, right? Seems obvious, but Bob Veres points out a few reasons why engaging an outside professional may be a better solution.

The upcoming DOL legislation is the great unknown for the financial services space, with “suitability” and “commissions” being replaced by “fiduciary” and “fees”. Michael Kitces chronicles the history of the broker-dealer model, and how firms would be wise to adopt a business model built upon the delivery of objective advice.

Innovation is great until it isn’t. The proliferation of novel ETF ideas has created the illusion of improvement, but can lead to complex, illiquid, overlapping allocations where simple, liquid, clearly-defined solutions may serve investors better. 3D Asset Management writes here on the dangers of complex design.

Growth-oriented firms are constantly thinking about the right team for the future. Financial Advisor magazine reminds us that the process of hiring and managing people is not to be taken lightly.

At some point, all successful business owners wrestle with capacity issues that directly impact the client experience. As the business evolves, which areas are most ripe to be handed off? TD Ameritrade shares a very cool infographic on Maximizing Your Resources as an advisor.

We all know this, but it never hurts to be reminded that working with the right clients and right colleagues are common elements to building a successful investment firm. Ben Carlson shares some common sense wisdom from an old interview with Charlie Ellis.

Adhesion continues to work behind the scenes in helping advisors grow, with new options allowing the integration of Outsourced CIO implementation via Mercer and robo technology via Riskalyze. We welcome your feedback at solutions@adhesionwealth.com, and encourage you to subscribe on the upper right of this page to receive our regular blog updates.

 

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Crafting Solutions at TDA National LINC

Growth was a big topic at the recent TDA National LINC conference, and Adhesion was central to the discussion on many fronts. First, our recent entrance into the TD Ameritrade Unified Managed Account Exchange (UMAX) generated much discussion about the value of leveraging a specialist to implement a firm’s investment approach. While some firms use Adhesion as a delivery vehicle for internally built strategies, others see additional value in outsourcing the design of the firm’s asset allocation blueprint.

Significant buzz also came from the announcement that Adhesion is partnering with Riskalyze and TDA to deliver the industry’s first open-architecture digital advice platform built solely for advisors. While much of the “robo” discussion has centered on adding an outside vendor with limited choice, the Adhesion/Riskalyze combo is designed to blend in seamlessly with an advisor’s existing practice. It is a true business solution, helping advisors meet the needs of web savvy prospects and preparing the firm to serve the next generation members of existing client families.

While there was significant focus on growth and robos, there was also time to sample some truly unique craft bourbon. The Adhesion booth was quite popular the first two evenings with tasters – ranging from bourbon novices through the very experienced. All enjoyed the selection offered.

Bourbon Tasting_Bartenders  Busy @TDA (002)

For a more complete roundup of LINC – inspired reactions, here are a few stories published since the conference:

RIABiz on the threats and opportunities for advisors

Investment News on TD Ameritrade’s open-architecture approach to technology

Wealth Management on the Adhesion/Riskalyze offering

Financial Advisor IQ on integrating a solution for small accounts

 

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TD Ameritrade Institutional UMAX powered by Adhesion

On the heels of an announcement to help advisors strengthen their investment offering, Adhesion is very pleased to have partnered with TD Ameritrade Institutional for their Unified Managed Account Exchange (UMAX) offering to advisors. UMAX powered by Adhesion makes Adhesion’s industry-leading, personalized UMA platform easily accessible to all advisors working with TD Ameritrade Institutional. We invite you to read more details about the offering in this summary.

 

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Adhesion UMA platform adds Mercer Research

Reflecting its core beliefs, Adhesion has become known in the advisor space for its commitment to open-architecture solutions and responsiveness to RIA needs. True to that vision, a significant new piece has been added, enabling firms to leverage world-class research in an affordable way, with customized implementation just one step away inside of Adhesion’s Managed Account desktop.

This strategic relationship with Mercer Investments gives advisory firms a single, fully integrated solution for building, implementing, and monitoring client portfolios across major RIA custodians. We invite you to read the details about this exciting new way to leverage specialists in building out a scalable practice.

 

 

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Adhesion Wealth Nominated for Top Industry Award

Exciting news! Adhesion has been nominated for Money Management Institute’s prestigious “Advisor Solutions Service Provider of the Year” Award for the second year in a row.  It’s awarded to the service provider that best contributed to the innovation, growth, and long-term sustainability of the advisory solutions industry.

Barrett Ayers, our Chief Solutions Officer, on the nomination: “We are proud and tremendously humbled to be nominated in this category, particularly as voters consist of a wide swath of participants, including partners, clients and, in some cases, competitors – all engaged in delivering advice and investment solutions.  Just as humbling are the entries that emphasize Adhesion’s dedication and focus on the RIA space, our service-oriented culture as well as our ability to innovate – all of which enables our advisors to better serve the needs of their clients.  It further underscores that our peers recognize and appreciate our mission to deliver innovative and flexible solution to investment advisors.”

Check out a sample of what the nominators had to say:

“Adhesion Wealth has enabled RIA firms like ours to outsource trading, data reconciliation, reporting and client billing so that we can focus on servicing our clients.”

“Their unique focus on this industry and commitment to focusing on the needs of the advisor, as well as partnerships with custody providers, is well-recognized in the industry.”

“Adhesion is an innovative firm dedicated to the growth and support of the registered investment advisor community.”

“The firm’s many new client signings this year should be evidence that they are successfully managing rapid growth while promoting innovation.”

This is a validation that RIAs are recognizing the need for a superior turnkey solution that allows them to leverage their Alpha towards client-facing activities.  Adhesion offers the best of the best in terms of an all-in-one outsourcing platform, and we are extremely proud to be up for this award in 2014.

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Adhesion Wealth Advisor Solutions Honored as one of Charlotte’s 50 Fastest-Growing Companies by Charlotte Business Journal

Adhesion will be recognized as a top local firm for two consecutive years

November 21, 2013 – Charlotte, NC – Adhesion Wealth Advisor Solutions Inc. (“Adhesion”), a leading practice management and investment solutions partner to wealth advisors nationwide, is pleased to announce that it has, for the second year in a row, been recognized by the Charlotte Business Journal as one of the Charlotte region’s 50 fastest-growing private companies. This awards program recognizes 50 local companies that display outstanding growth, entrepreneurial excellence and leadership.

All 50 companies that made the list will be honored during the Thursday, December 5th awards luncheon at the Charlotte Ritz-Carlton. In addition, the CBJ will reveal the 2013 company rankings, which are based on their percentage of annual growth over a three-year period.

“We are honored to again be included as one of Charlotte’s fastest growing companies for 2013,” said Michael Stier, CEO of Adhesion. “While we work with financial advisors all over the country, we are so proud to be one of the only firms in our specific niche—offering outsourcing and investment solutions for wealth managers—that still believes in keeping all of our operations in-house and in the United States. 100% of our employees, even our IT, is housed right here in Charlotte. Our continual growth, and recognition by the Charlotte Business Journal, shows not only our commitment to our clients but also our commitment to our communities.”

Adhesion has called Charlotte home since 1999, and now has more than 20 employees and over $13 billion in assets under administration.

For more information, or to speak with an Adhesion executive, please contact Kathran Martin kjmartin@adhesionwealth.com   |  888.295.8351

About Adhesion Wealth Advisor Solutions

Founded in 1999, Adhesion offers flexible solutions specifically designed to meet the unique needs of today’s wealth managers. Adhesion serves as a true partner, providing a scalable and customized Investing-Monitoring-Reporting solution that enables advisors to grow their business from within, enhance their “Advisor Alpha” with each investor interaction and strengthen their client relationships. Located in Charlotte, NC, Adhesion currently has more than $13 billion in assets under administration. For further information, visit Adhesion Wealth Advisor Solutions at www.adhesionwealth.com

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