More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
How are advisors reacting to the latest news of the changing landscape on Wall Street, with the bankruptcy of Lehman Brothers and the acquisition of Merrill Lynch by Bank of America? For one thing, they're putting it into the context of the broader credit and housing crisis that has affected the markets and the economy for the past 18 months. For another, they're taking a much longer view.
Harold Evensky, chairman of the wealth management firm Evensky & Katz in Coral Gables, Florida, admitted that the most recent turn of events was "unique in that we haven't seen failures like this, but we've been through some other terrible experiences in the past," particularly the 1973-74 market downturn and the savings and loan failures of the 1980s.
"To the extent there is a silver lining, the markets have been driven by uncertainty [as of late], so this is going to wash a lot of it out." In the case of Lehman, the Fed and other large financial institutions had the resources to step in but they decided to pass, notes Evensky, which means they didn't perceive its failure as something that would devastate the markets.
Lou Stanasolovich of Legend Financial Advisors in Pittsburgh thinks that in the short term, there will be more volatility, and the share prices of financial stocks will continue to suffer. "We are short on financial stocks already for our more aggressive portfolios," says Stanasolovich, but he sees the effect continuing longer term, and not just in the U.S. "We're seeing a lot of countries lowering interest rates, which means they are very concerned about a global recession," he reports. "I think emerging market equities will have a lot of problems going forward, at least over the next three to four months."
Evensky believes that the turmoil in the market "still all comes down to subprime and the credit [crisis] and to leverage." He says there is still "a huge amount of leverage in the credit markets and this is an unwinding."
Stanasolovich agrees that leverage is the main culprit in this drama. "The basic trouble is that people have paid way too much for houses; there is way too much leverage in the system, not only for housing but other financial areas, and loans of all types." He thinks there will be much more "tightening in who gets loans going forward," and that the housing situation isn't going to recover anytime soon--meaning housing prices will come back; it could be five or even 10 years."
As for the danger to clients, Evensky believes that "in the short term it's not a risk for investors," while for the markets "this is not black Monday, we're just talking about a couple percentage points down right now, not 20%," speaking midday on the 15th of September, but "I think we're going to continue to see some volatility."