Social Security, Inflation and Crypto News for Financial Advisers

A roundup of the latest news and reports for financial advisers
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Ex-SEC commissioner targets rogue brokers turning to insurance sales: A study co-authored by Robert Jackson Jr. shows that “wandering advisers” who leave one regulator and continue operating under another are more likely to commit misconduct, according to InvestmentNews.

Onramp Invest debuts crypto asset management for RIAs: Onramp Invest emerges from beta mode amid a rapidly evolving crypto marketplace that historically kept financial advisers on the sidelines, according to InvestmentNews.

Fidelity Is Helping Financial Advisers Change Business Models with Wealth Advisory Institute: Fidelity Institutional has launched the Wealth Advisory Institute, an educational and training program aimed at helping firms and their advisors grow their practices, according to Financial Advisor IQ.

Why Retirement Bills are a Bipartisan Slam-Dunk in Congress: Raising the contributions limits in order to encourage saving by the under-saved seems as useful as raising the height of a basketball net to encourage the participation of shorter players, writes Kerry Pechter.

Signs Inflation’s Surge Is Transitory: While it’s very early to say the rise in inflation has passed, there are signs that the fastest part of the rebound in inflation might soon be over, writes Jeffrey Kleintop.

Greenhouse Gas Emissions Have Had No Effect on Profitability or Stock Returns: Advocates of ESG investing may be disappointed to learn of a new research study showing that greenhouse gas emissions have had no measurable effect on corporate profitability or equity performance, writes Larry Swedroe.

How to Eliminate the Dangers of Concentrated Stock Positions: Unless an investor has compelling reasons to maintain their concentrated position, they should liquidate that position and reinvest in a broadly diversified portfolio, writes Scott MacKillop.

New Orders for Durable Goods Declined 1.3% in April: According to the First Trust Economic Blog, orders for durable goods fell in April, as supply chain shortages – most notably in semiconductors – continue to hold back activity in some sectors.

Research of Interest

What Can Betting Markets Tell Us About Investor Preferences and Beliefs? Implications for Low Risk Anomalies

An empirical puzzle in financial markets, known as the low-risk anomaly, is that riskier assets earn lower risk-adjusted returns than less risky assets, according to this research. Theories for this phenomenon focus either on market frictions, such as leverage costs, or non-traditional preferences for lottery-like payoffs. The researchers relate the low risk anomaly to the Favorite-Longshot Bias in betting markets, where returns to betting on riskier "longshots" are lower than returns to betting on "favorites," and provide novel evidence to both anomalies. Synthesizing the evidence, we study the joint implications from the two settings for a unifying explanation. Rational theories of risk-averse investors with homogeneous beliefs cannot explain the cross-sectional relationship between diversifiable risk and return in betting markets. Rather, the researchers appeal to models of non-traditional preferences or heterogeneous beliefs. The researchers find that a model with reference-dependent preferences, featuring probability weighting and diminishing sensitivity, two features of Cumulative Prospect Theory, best fits the data, and is able to capture the choice and the amount to bet. Calibrated parameter values for probability weighting and diminishing sensitivity that capture financial markets facts can simultaneously explain the betting market facts. However, explaining the choice to bet is at odds with loss-aversion, a feature of Cumulative Prospect Theory often used in financial markets applications.

The Power of Love: Emotional Support and Financial Hardship

Using microdata from two complementary U.S. household surveys, researchers document that individuals who lack emotional support from family and friends are more likely to experience financial hardship. This pattern is substantially stronger for women as well as for those prone to anxiety and depression. Further evidence suggests a belief-based channel through which emotional support improves financial preparedness for potential adverse shocks. Overall, these findings underscore the importance of the psychological dimension of social networks in shaping household financial outcomes.

The Best Strategies for Inflationary Times

Over the past three decades, a sustained surge in inflation has been absent in developed markets, write researchers. As a result, investors face the challenge of having limited experience and no recent data to guide the repositioning of their portfolios in the face of heighted inflation risk. The researchers provide some insight by analyzing both passive and active strategies across a variety of asset classes for the U.S., U.K., and Japan over the past 95 years. Unexpected inflation is bad news for traditional assets, such as bonds and equities, with local inflation having the greatest effect. Commodities have positive returns during inflation surges but there is considerable variation within the commodity complex. Among the dynamic strategies, the researchers find that trend-following provides the most reliable protection during important inflation shocks. Active equity factor strategies also provide some degree of hedging ability. The researchers also provide analysis of alternative asset classes such as fine art and discuss the economic rationale for including cryptocurrencies as part of a strategy to protect against inflation.

Use of Advisors and Retirement Plan Performance

As defined contribution plans become more popular than defined benefit plans, American workers are increasingly responsible for their retirement savings. Because retirement plan participants’ portfolio allocation is constrained by the available funds in the plan, the construction of a plan’s investment menu has become extremely important. No research has evaluated fund selection in retirement plans or compared plans involving an advisor with self-directed plans. To fill this research gap, this study employs cross-sectional, nationwide data that include 5,570 retirement plans with 100 or more participants in 2013, 2014, and 2015. Results show that in most cases, using advisors is not related to plan performance. Plan sponsors should require advisors to periodically evaluate the performance of plans under their management using objective measures.