Compliance June 21, 2011

Institutional Investors to Get Lost Assets Back from J.P. Morgan

The Securities and Exchange Commission (SEC) announced that J.P. Morgan Securities LLC will pay $153.6 million to settle SEC charges that it misled investors in a complex mortgage securities transaction.
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The SEC alleges that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO), called Squared CDO 2007-1, without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.   

The SEC separately charged Edward S. Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio.  

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According to the SEC’s complaint, J.P. Morgan sold approximately $150 million of so-called “mezzanine” notes of the Squared CDO’s liabilities to more than a dozen institutional investors who lost nearly their entire investment.   

These investors included:  

  • Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis; 
  • Security Benefit Corporation, a Topeka, Kansas-based company that provides insurance and retirement products; 
  • General Motors Asset Management, a New York-based asset manager for General Motors pension plans; and 
  • Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd.

Without admitting or denying the allegations, J.P. Morgan consented to a final judgment that provides for a permanent injunction from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and payment of $18.6 million in disgorgement, $2 million in prejudgment interest and a $133 million penalty.   

Of the $153.6 million total, $125.87 million will be returned to the mezzanine investors through a Fair Fund distribution, and $27.73 million will be paid to the U.S. Treasury.   

The settlement also requires J.P. Morgan to change how it reviews and approves offerings of certain mortgage securities. In addition, J.P. Morgan’s consent notes that it voluntarily paid $56,761,214 to certain investors in a transaction known as Tahoma CDO I. The settlement is subject to court approval.  

More information is at http://www.sec.gov/news/press/2011/2011-131.htm.
Data & Research June 21, 2011

Written Retirement Income Plans Help Drive Business

A Fidelity survey found that advisers who provide comprehensive retirement income planning—specifically, written, detailed plans—generally receive higher satisfaction, referrals and, ultimately, higher concentrations of client assets.
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The survey, “Fidelity Retirement Redefined,” included more than 500 financial advisers and 500 pre-retirees and retirees who work with financial advisers.

Despite the correlation between the benefits of offering clients a written retirement income plan, only 18% of pre-retirees who work with advisers have retirement income plans and of those, only half (53%) have written, detailed plans.  What also makes these low numbers odd is that eight in 10 pre-retirees (81%) think a detailed plan is important,

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“Our survey found that advisers face a range of challenges that can make ‘writing a retirement income plan’ feel extremely complex—and for that reason, many are opting for more informal planning processes,” said Larry Sinsimer, senior vice president, practice management for Fidelity Investments Institutional Services Company. “Yet, investors are telling us that those advisers who can help them address the complexities of retirement planning—in writing—will secure their loyalty, referrals and business.”

Advisers reported reasons why they may not provide written, detailed plans include a difficulty in getting clients to focus on the future versus the present, and the fact that in today’s economic environment, plans may become obsolete too quickly. Yet the survey also finds that written, detailed plans may help to:

  • Drive satisfaction: Those investors who had written, detailed retirement income plans reported the highest levels of satisfaction with their advisers. Sixty-three percent of pre-retirees who reported having written, detailed retirement income plans said they were “very satisfied” with their advisers; that percentage grew to 69% for retirees.
  • Result in clients concentrating assets: Investors who reported being “very satisfied” with how their adviser is handling their retirement income plans consolidated more assets with them. “Very satisfied” pre-retirees consolidated 72% of their savings and investments with their primary adviser and “very satisfied” retirees consolidated 81% of their assets.
  • Generate referrals: Seventy-nine percent of pre-retirees and 83% of retirees who reported being “very satisfied” with their how their adviser is handling the development of their retirement income plans have referred business.

Once retirees develop an income plans, Fidelity found they have the best intentions to follow them – 80% of retirees say they would follow at least some of their plan.

The study found that retirees may be identical by age but totally different when it comes to their individual retirement planning needs. For that reason, retirement income planning has evolved from an age- or asset-based process to one that has many nuances, requiring highly personal discussions about spousal alignment, lifestyle and familial commitments.

Most advisers continue to rely on traditional financial models to aid them in their retirement income planning discussions. According to the survey, 88% use probability models and 76% use graphs/charts with historical trends.

While 76% of investors rate probability models as effective, many advisers note that they now are finding themselves in more of a "life coach" situation in which models don't enhance planning discussions. Advisers reported that conversation techniques, such as storytelling and re-framing the discussion, are more impactful.

 

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