Compliance December 28, 2022

Swing Pricing Proposal Comment Period Remains Open Until Early February

The proposal has been met with criticism from those in the retirement industry.

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The Securities and Exchange Commission proposed a rule in November that would mandate “swing pricing” for all open-ended funds, except for money-market funds and exchange-traded funds.

The proposal also requires that covered funds keep at least 10% of their assets in highly liquid assets and would mandate a “hard close” at 4 p.m. Eastern time. Open-ended funds must also appoint a swing pricing administrator, who cannot be the same person as the portfolio manager.

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The comment period for the swing pricing proposal opened on December 16 and will remain open until February 4, 2023. Instructions on how to submit a comment can be found here, and existing comments here.

Swing pricing is a pricing mechanism which adjusts the net asset value of a fund to account for trading costs and passes those costs to the traders in the form of a reduced redemption price, instead of absorbing them back into the fund and effectively forcing remaining fundholders to bear the cost.

When a fund processes a transaction, there are various costs involved, such as administrative and recordkeeping expenses, as well as the cost of selling off illiquid assets if many fundholders try to redeem them in a short period of time. Swing pricing uses a “swing factor,” expressed as a percentage of the fund’s NAV and intended to represent an estimate of the transaction costs, to adjust the NAV per share.

If net inflow is higher than outflow by a set threshold, then the redemption price would swing upwards, while it swings downwards if outflows exceed inflows.

A hard close would require funds to receive a redemption order by 4 p.m. Eastern time in order for the investor to receive that day’s price. Under current rules, an investor can receive that day’s price if an intermediary receives the order by 4 p.m. Eastern time, even if the fund itself receives it after.

Implementing swing pricing requires funds to have a quick inflow of information in order to swing the price. A hard close is designed to ensure that funds receive this information in time to calculate the new price.

Mike Hadley, a partner in the Davis & Harman law firm and a member of the executive advocacy team at the Society of Professional Asset Managers and Recordkeepers Institute, disagrees with this interpretation and is skeptical that a hard close is necessary to implement swing pricing. Many trades come to a fund after 4 p.m., and a fund’s management does not necessarily need to know the volume of those trades to calculate the next day’s NAV, according to Hadley.

Hadley also noted that 401(k) plans often bundle their transactions together and send them in bulk to funds to process, sometimes overnight. 401(k) plans would effectively have an even earlier deadline than 4 p.m. because of the size of these transactions. This would make a 401(k) plan “a second-class investor,” according to Hadley, because it would be harder to receive that day’s NAV in the same period as other investors.

Hadley explains that transactions that could currently be done overnight would have to take place over multiple days if this rule is implemented. Bundles of transactions that include buying and selling might have to be divided into multiple days to ensure that some receive that day’s price, and those that cannot be processed in time for the close would be processed in subsequent days.

Tim Rouse, the executive director of the SPARK Institute, agrees and says that institutional investors, or anyone with an intermediary, would be in “second place.” Rouse uses an example: If a couple both own shares in the same mutual fund, the partner that does not use an intermediary can get that day’s price until 3:59 p.m., but the other who does use an intermediary would have to wait until the next day, possibly paying a different price.

Swing pricing is intended in part to reduce the impact of panic sales which could threaten the liquidity of mutual funds by reducing the price of redemption as the fund is forced to sell off more illiquid assets, disincentivizing further redemptions. Rouse disputes this, however, and says swing pricing does not prevent panic sales, since it does not actually prevent investors from redeeming.

Hadley summarized his position on the proposal: “Whatever gains might be had, they do not justify the costs of hard close. The cure is way worse than the disease.”

The comments from Hadley and Rouse, who argue that retirement plans would lose out due to swing pricing, are in stark contrast to the position expressed by a Vanguard swing pricing explainer document.

The Vanguard explainer argues that long-term investors (such as those saving for retirement) benefit from swing pricing because the costs of trading are borne by those doing more frequent trading instead of being absorbed by the fund and effectively borne by continuing fundholders.

In Practice December 28, 2022

Financial Advisers Increasingly Land Clients Through Social Media

41% of advisers told Broadridge they generated clients through social media, up from 34% in 2019.

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Registered investment advisers are increasingly landing clients via social media marketing, according to recent research.

The number of advisers converting social media leads to clients continued to trend up in 2022 to 41% of those surveyed, a 1% increase from last year, but up from 34% since 2019, according to the fourth annual “Financial Advisor Marketing Trends” survey conducted by Broadridge Financial Solutions, Inc.

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The leading platforms for client conversions are LinkedIn (67%), Facebook (54%) and Twitter (7%), according to the survey of 401 financial advisers conducted in September and October. The success of digital media tactics in gaining clients was a positive amid a rocky year for advisers, said Kevin Darlington, general manager and head of Broadridge Advisor Solutions, in a press release.

“It has been a challenging year for financial advisors, with many struggling to adapt to new compliance and regulatory guidelines, increased market volatility and ongoing hiring and talent retention challenges,” he said. “Digital media usage is a bright spot and continues to show upward-trending success, as advisors double down on digital strategies and maximize the use of websites, LinkedIn and Facebook to generate leads.”

The largest increases in marketing investments are expected on digital platforms such as websites and social media, as opposed to television or radio, Broadridge found. Meanwhile, many advisers plan to supplement the digital push with increased spending on in-person options, including events and word-of-mouth referral programs.

A trend toward digital marketing comes in part due to the pandemic’s influence, resulting in people spending more time on digital devices such as smartphones, says Rebecca Hourihan, founder and chief marketing officer of 401(k) Marketing.

“Prior to the pandemic, the average person spent 2 1/2 hours on their phone,” Hourihan says. “Now, we spend four hours a day staring at these little five-inch devices. Advisers need to be phone-first from a marketing perspective so that all of their content, whether plan sponsor-facing or employee-facing, is easily viewable by phone.”

Hourihan, who works with retirement plan advisers that include independent broker/dealers and registered investment advisers, says phone-based marketing is one of the big trends the industry will continue to see in 2023. Another area of marketing growth Hourihan has seen in her business is video, with advisers using the format in increasing number to post on social media.

“Advisers are really excited to be on video and are getting more comfortable with the platform,” says Hourihan, whose company offers standard scripts on various employer-facing topics that advisers can adjust to their own messages.

Spending Up, Satisfaction Down

The Broadridge survey found that average marketing-spend increased in 2022 to $17,433, up from $16,090 in 2021. But while more dollars were spent, the percentage of revenue allocated to marketing dropped to an average of 3.1% in 2022, compared to 3.6% in 2021, according to the New York-based consultant and financial technology provider.

Satisfaction with that marketing spend also declined, with 68% of advisers reporting they are either very satisfied or satisfied with their return on investing for marketing, as compared to 77% in 2021.

The Broadridge survey touted the importance of advisers having a defined marketing strategy to land clients. The firm found that advisers with a marketing plan are more likely to achieve better business outcomes than their counterparts without a strategy. When it came to social media spending, 57% of advisers with a defined marketing strategy converted a social media lead to a new client, compared to 36% of those without a strategy.

Hourihan, of San Diego-based 401(k) Marketing, says that, in general, advisers are not allocating enough budget to marketing. She says the 3% to 3.5% range of budget spend is nowhere near enough for success.

“In other industries, it’s expected that companies invest 10% to 15% in marketing,” Hourihan says. “Our industry is very low, so I encourage people to spend 5% or 6% and see what happens.”

Hourihan says every adviser must have a strong digital presence to meet the demands of the current market, as plan sponsors will shop around for the best adviser, looking them up on LinkedIn and other platforms.

“They’ll look to see: Does this person look competent?” Hourihan says. “If the answer is, ‘No,’ then they quickly leave, but if they see that the adviser has a great page, resources and talks about how they can solve problems for plan sponsors, then they’re likely going to be interested.”

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