It was a bit hard to hear over the roar last Thursday when Merrill Lynch told its 14,000 brokers they were likely out of the retirement advice business. Indeed, whether anyone outside of the Thundering Herd heard it or not, what is now the Bank of America’s brokerage unit announced it was abandoning the traditional Wall Street commission sales model – at least when it comes to business affected by the Labor Department’s ham-handed new “conflict-of-interest” rules on retirement accounts.

The DOL’s fiduciary rule requires stockbrokers providing retirement advice to act as “fiduciaries”

At heart is the elimination of what folks who know nothing about investing have decided are incentives that cause brokers to give conflicted advice, i.e., anything with a sales charge. The resulting consequence – unintended or otherwise – is that full-service firms will charge a level fee based on a percentage of a client’s assets. High-minded bureaucrats see this as a noble effort to protect simple-minded investors from commission-hungry salesmen. Adults with money in the real world see it as an involuntary choice between higher fees, steeper investment minimums, and fewer investment options.

The rule could affect $14 trillion in retirement savings

While the DOL’s magnanimous public servants didn’t ban commissions altogether, the rule’s imprecise – purposefully or not – best-interest contract provision makes “life a lot harder for people who want variable compensation.” Translated: An unobstructed path to the brokerage industry for class-action lawyers. No surprise that Merrill, and likely its biggest rivals, will avoid the provision entirely.


Firms are required to be fully compliant by Jan. 1, 2018


From here, investors with full-service retirement accounts will have to think about moving their assets to a self-directed option, a robo adviser, or a competing brokerage – whether they were happy with their adviser or not. Hardly seems like that’s in their best interest.

What the markets have been doing…

With a collective eye toward the start of third-quarter earnings reporting season, traders honed in on global macroeconomic factors this period, primarily things Brexit-related. With Friday’s steep plunge in the British pound weighing on sentiment, stocks ended mostly lower for the two-week stretch. Interestingly, sectors that pay high dividends fared worst as expectations grew for increased competition from higher bond yields. Utilities and telecom shares had previously been among the market’s leading performers year to date.

U.S. economic data were generally favorable, meanwhile, most notably Friday’s monthly payrolls report, which investors regard as a key influencer of Federal Reserve policy. While the number of new jobs created in September came in slightly below expectations, an increasing number of Americans are apparently being lured back into the labor force. Cleveland’s Fed President indicated the report was strong enough for the Fed to raise interest rates. No comment from the other eleven.


Index Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 18240.49 -(20.96) +4.68%
S&P 500 2153.74 -(10.95) +5.37%
NASDAQ 5292.40 +136.49 +5.69%


Bond markets, meanwhile, behaved as if a rate increase was altogether likely, with yield on the 10-year Treasury note rising to its highest level since early June. Rates on investment grade corporates also rose slightly amid strong demand and a thin new issue calendar. High yields were relatively quiet, despite strength in the energy sector. Municipal bonds modestly underperformed Treasuries and the broader taxable market.


Fixed Income Yield Two-Week Yield Change
2-Year Treasury
10-Year Treasury 1.72% +0.10%
30-Year Treasury 2.45% +0.10%
30-Year Municipal Bonds 2.46% +0.19%

The Great Grocery-Store Giveaway of 2016?…

The U.S. is in one of the longest the longest streaks of food deflation since 1960

Quote of the Week…

“For active managers, it’s a double whammy right now. Rising costs and regulatory burdens are squeezing profit margins at a time when passive investments are taking assets away.”

Kyle Sanderos, Edward Jones analyst, on Janus Capital’s sale to U.K.-based Henderson Group PLC

Number of the Week…

$216 billion

The value of assets covered by BlackRock’s decision to lower fees on more than a dozen exchange-traded funds.

What Fund Architects has been doing…

We suggested last period that barring something extraordinary, we would probably be repositioning assets back into U.S. Treasury when we traded the first of October. Well, something extraordinary did happen: Asian equities ex-Japan stood at the top of our list at trading time. As a result, we repositioned a portion of the Fund Architect equity portfolio into the iShares MSCI Pacific ex Japan ETF, ticker symbol EPP.

We did, however, exercise a bit of caution given that October is historically a volatile month. (A fact only exacerbated this year by the coming elections.) Accordingly, we hedged our bet a bit by splitting the reallocated assets between Asia ex-Japan and the still-highly ranked U.S. Treasuries. All in, the equity rotation going in to October includes the Global Tech ETF we purchased last month, MSCI Pacific ex Japan ETF, and Treasuries. The remainder of the portfolio consists of the high-yield bond ladder and an energy MLP we’ve held for a while.

No changes were made in the fixed income rotation. We’re still bullish on the emerging market sovereign debt and convertible bond positions we took a few months ago.

At this hour, it’s hard not to be excited about the Fund Architect portfolios. Fact is, it’s been some time since we owned overseas equities – MSCI Pacific ex Japan is the kind of position where we can add real alpha if we’re right. We’re satisfied enough with performance this difficult year, but there’s good reason to be enthusiastic our fairly aggressive positioning going in to the last quarter of 2016.

The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional.  The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.