More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
The subprime loan debacle continues to cause volatility in the markets, leading to the Federal Reserve Board's decision August 17 to improve market liquidity by cutting its discount rate (not the Fed funds rate) by 50 basis points to 5.75%, and a Federal Open Market Committee separate announcement on the same day that noted that the "downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."
Advisors are taking at least two courses of action to the volatility: telling clients not to panic through this short-term bumpy ride, and repositioning clients' portfolios to weather the bumps. Ron Rhoades of Joseph Capital Management in Hernando, Florida, says he's not worried because his firm "uses a disciplined approach to rebalancing" clients' portfolios. "Our clients are trained to anticipate market downturns," he says, adding that he's been telling his clients via personal phone calls over the last two weeks that "short-term volatility happens, and it's nothing to worry about."
Peter Demirali, portfolio manager at Cumberland Advisors in Vineland, New Jersey, says he and his colleagues are now putting money back into the market, "but we're underweighting financials." He adds: "We think the market has sold off sufficiently to warrant slowly scaling into equities." Before the subprime mess caused the market to gyrate, Cumberland "had 20% cash in [clients'] portfolios," Demirali says. "Our goal now is getting [the cash holdings] between 8% and 10%; if we saw another 5% down move in the stock market, we would go to a fully invested position." On the bond side, Cumberland has been selling Treasuries, he says, and buying agency mortgage-backed securities (not private labeled ones) from Fannie Mae, Freddie Mac, and Ginnie Mae, as well as long-term municipal bonds "that have reached the magic 5% yield level."