FINRA Raises Margin Requirements On Leveraged ETFs

The Financial Industry Regulatory Authority beginning Dec. 1 will increase the deposit customers must place with their brokers before placing a margin, or borrowed, investment in a leveraged exchange-traded fund. The greater the leverage involved in the ETF, the bigger the deposit. Investors who use cash to purchase leveraged ETF shares, trades rather than borrowing from the broker, won't be affected.

ETFs "are very complicated, with a high element of risk. They are very much on FINRA's radar screen," said FINRA spokesman Herb Perone.

Deutsche Bank to Launch Floating NAV Money Fund

Deutsche Bank's DWS Investments unit is planning to offer the DWS Variable NAV Money Fund, a money market fund with a floating net asset value and a minimum $1 million investment.

The offering comes at a time when the Securities and Exchange Commission is considering changing the stable NAV of money funds to a floating one. But big fund houses, including Fideilty and Vanguard, have said the change could ruin the money fund industry.

In its comment letter, Vanguard tells the SEC that "a floating NAV would eviscerate a successful and important product for investors." Fidelity said the move would lead to "significant shareholder outflows, destabilizing money market mutual funds and overall money markets." Fidelity estimates that 69% of institutional investors would leave money funds with a floating NAV.

Deutsche Bank, however, told the SEC it supports a floating $10 NAV. The firm apparently hopes the floating NAV will encourage the SEC to back off of stricter money fund rules, including those covering holdings. That would permit money funds to assume more risk, and juice returns.

Funds Reap $10.37 Billion

Long-term stock and bond funds took in $10.37 billion in the week ended Aug. 26, marking the 24th straight week of inflows totaling $250 billion, the Investment Company Institute reported. The lion's share of the flows went to bond funds, which took in $9.8 billion, whereas stock funds took in a mere $29 million. Money funds lost $28.93 billion in the week, according to iMoneyNet.

Bill Would Permit Two 529 Trades a Year

September is College Savings Month and a bill in front of Congress would give financial advisers more flexibility to help their clients who invest in 529 college savings plans.

The current bill (HR 1351) would make permanent some changes that so far are only allowed this year. The most useful change for advisers is the ability to make two switches per year from one plan to another, or to change allocations within a plan.

Traditionally, only one such annual switch was allowed, said Joseph Hurley, founder of This year, two changes were allowed, and this bill is an attempt to make that a permanent change, he said.

Hurley said that advisers will view this as an aid mostly in terms of adding a level of flexibility in their service to clients.

But Hurley said that there is another way to make a switch within a plan. "Something that most financial advisers don't realize, is that you can always just change your beneficiary, and when you do that you can also make a switch in your [529] plan," he said.

Average Growth Fund Down 32% in Past Decade

While growth funds have the potential to deliver stellar returns, their performance has been uneven over the past 10 years, in which they declined 32%. By comparison, large-cap value funds have lost only 1%.

Known for chasing performance, investors have responded in kind, with $185 billion in net redemptions from large-cap growth funds over the past decade, three times the amount that was redeemed from large-cap value.

Given the increasing volatility and risk, academic researchers are now saying that "growth investors belong somewhere between people who believe the Earth is flat and those who get their stock tips from talking dogs," USA Today says.

Nonetheless, it is possible the market is entering a period when growth will reward investors. Robert Millen, manager of the Jensen Fund, which has delivered returns in the top 5% over the past 10 years, thinks the economic recovery is for real, although it will be slow due to tepid consumer spending, lingering debt, and higher interest rates and taxes inevitably on the horizon.

31% of Wealthy Investors Back in Equities, Another 26% Awaiting Dow 10,000

The Dow's resurgence this year has convinced many wealthy investors to reinvest their money in equities, but those rich households are still expressing some trepidation about the market's health.

According to the latest "High Net Worth Advisor Insight" report by the Spectrem Group, 16% of people with more than $500,000 in investable assets were convinced to invest in equities when the Dow reached 9,000 in July. An additional 15% had already returned to equities. Approximately 26% will reinvest once the Dow tops 10,000. This would mean that more than 50% of wealthy investors are investing in equities again. However, 11% of these investors said they will never invest in the markets again.

Millionaires still remain cautious despite the Dow's recovery, although their reluctance to invest appears to be ebbing. The Spectrem Millionaire Investor Index (SMII) rose only four points in July, to -16 from -20. This was an improvement from June, however, when the SMII plummeted a record 18 points. The Spectrum Affluent Investor Index (SAII) gained one point in July, to -19 from -20.

And the number of affluent investors who say they are "not investing" dropped to 15% from 22% in June. Among millionaires the improvement is even greater, moving to 9.4% from 21.4%. Millionaires have also increased their likelihood of investing in stocks to 35.2% from 28.2% and stock mutual funds to 41.1% from 33.3%. At the same time, millionaires have indicated their plans to increase their cash and bond investments-a sign that market trepidation remains.

The Spectrem Group has also found that the economic crisis is affecting the way wealthy investors are managing money. Specifically, they are taking greater initiative when it comes to using investment websites to check their balances. They are checking those balances online much more frequently than in the past. Approximately 62% of wealthy investors check their balances weekly, while 21% check them monthly. Another 66% of investors would like to aggregate all of their financial information at one site. Younger households go online to check their investments most frequently.

According to the report, affluent households are also concerned over the impact that the proposed healthcare reform bills being considered by Congress will have on their taxes. In research conducted in late July, 67% of individuals with $500,000 or more investable assets felt that the health bill will have a serious or severe impact on their taxes. Only 8% believe the bill will have no impact on their taxes. Although the Spectrem Group suggests that it "would not be a stretch to infer that many affluent households are reducing their spending until they are certain of the upcoming tax burden they will bear," it offers no concrete data to support this speculation.

Affluent Investors' Optimism Rose in 2Q

Confidence among affluent investors grew in the second quarter, according to the TNS Investor Confidence Index.

The quarterly survey released last week by Taylor Nelson Sofres, a unit of Kantar Group, said that confidence rose 5.9 percentage points to 107, from the previous quarter. Only once in the past eight years-in October-did the index fall below 100, the level at which optimism is exactly offset by pessimism.

The company said that, though still low historically, the index's increase indicated greater optimism about affluent households' personal finances, particularly expectations for their investments.

Taylor Nelson Sofres said 78% of affluent investors say their investments' value would grow or remain steady during the next six months. In October, 53% of affluent households expected the value of their investments to decline.

Hedge Funds Hiring Again

After a rough 2008 in which almost 1,500 portfolios closed, hedge funds and bank trading desks are hiring again, and the top managers are being snatched up quickly, Reuters reports.

Citadel, RBC Capital Markets, Artadis and Tribridge have begun hiring more staff as returns improve and redemptions slow down.

"Things have definitely turned around," said Bob Olman, founder of recruitment firm Alpha Search Advisory Partners.

Olman said hedge funds and proprietary trading desks are hiring, and the volume of job placements is up threefold from the first quarter, with the biggest growth coming from hedge fund marketing efforts.

Top Wholesalers On Track For Large Commissions

Sales and national accounts professionals saw average compensation losses ranging from 10% to 30% in 2008, but with smart management, top producers will be well-positioned for a recovery in 2010, according to a new study by kasina.

Internal wholesalers took the biggest hit, with a decline of more than 32.7% in total compensation from 2007 to 2008, largely driven by a 22.3% drop in variable compensation, kasina said. External wholesalers saw a 20.7% decline.

National sales managers experienced a 13.5% drop, while internal and hybrid wholesalers saw increases of 8.8% and 18.4% in total compensation.

So far, asset managers have responded to the market crisis in three main ways, kasina found. A third of firms are doing nothing at all, simply waiting for the markets to rebound; 45% are cutting costs across the board; and the remaining 22% are taking advantage of this opportunity to innovate and reorganize their operations, the study found.

The kasina study recommends that firms try to keep the top people happy by maintaining reasonable pay for top performers, even if it means eliminating other positions or expanding responsibilities of some employees. Firms must reward activities that are important, controllable and that yield long-term benefits to the firm, even if those activities don't yield short-term, measurable sales results.

Lastly, kasina recommends firms try to tie sales to corporate profitability by helping sales professionals rationalize travel and expense budgets, cross-sell products and advance long-term value creation and profitability for their firm.


(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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