More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
A new alternative investment with astronomical growth and inflows that seemed to come from nowhere?
In the wake of recent scandal, it should have broker-dealers and their reps running for the door. But quite the opposite, Franklin Square Capital Partners has the support of Ameriprise, MetLife and a number of other large firms for the business development companies it manages.
In November of last year, three top executives of KCAP Financial, a New York-based publicly traded fund being regulated as a business development company, were charged by the SEC with overstating the fund’s assets during the financial crisis. The fund’s asset portfolio consisted primarily of corporate debt securities and investments in collateralized loan obligations (CLOs).
In January, FINRA chimed in with a letter to the broker-dealer firms it oversees that it is concerned about “potentially unsuitable and otherwise problematic” business development company investments for retail investors based on risk factors such as liquidity and credit ratings.
None of it fazes Michael Forman, CEO of Franklin Square.
“In an environment of closer scrutiny for all investments, we realize regulators have a job to do,” he says. “We have a very good relationship with regulators, and they view us as kind of a thought leader in the space.”
Thought leader is an important distinction, as Forman and the firm are heavily involved in education on BDCs.
“We stay on message and keep it simple,” he adds. “We tell clients that we will treat their capital with respect, and not try and oversell or overpromise. We fully explain the risks to acknowledge that the investment is not for everyone.”
The firm focuses on corporate credit investments, and gives clients the potential for income and capital preservation with reduced volatility.
“It used to be that folks could simply get their required income and preservation by investing in Fortune 50 companies,” Forman argues. “No longer.”
It somewhat of a bold claim, he says “we’re the first true institutional alternative investment available to the retail investor.”
When asked for clarification, he explains that CalPERS, or Sovereign Wealth of Dubai, or any of the large institutional funds have as much as 54% of assets allocated to non-real-estate alternatives.
“Most Americans have no access to those, but it’s something we offer.”
Forman claims a number of best practices that set Franklin Square apart from other firms in the space.
First, “We make a significant investment in the funds ourselves, so we have skin in the game. Studies show that managers who invest in their own funds consistently leads to better performance."
Second, distributions are fully earned. “Some funds make distributions from capital; we do not do that.”
Third, “We mark our portfolio on a daily basis, which is published on a quarterly basis. Everyone knows exactly what the NAV is at any moment.”
Fourth, education is a major focus. “A lot of this is common-sense stuff at the institutional level, but not for retail investors."