Bonds Go Green

By Flor Morillo

Over recent years “Going Green” has been a recognized trend in many industries.  Green cars and appliances have become the standard.  As the current generation becomes more environmentally conscious and global warming is believed to be more than a hypothesis, more businesses have made an effort to adjust to the preferences and new needs of this generation.

The financial industry is not any different from these other industries.  A new class of financial instruments resulting from this green trend is “green bonds”.  Green bonds are debt instruments issued to finance or refinance environmentally friendly projects. Born in France, green bonds currently represent 1% of the global fixed-income market and are projected to continue growing rapidly.  These bonds have helped fund projects such as energy efficient buildings, water and sewer systems and mass transit around the world. In February 2016, the New York Metropolitan Authority (MTA) issued $500 million in green bonds to fund infrastructure renewal in an effort to reduce the emission of carbon dioxide. The same month, Apple issued $1.5 billion in green bonds to finance clean energy projects.

Governmental entities, banks, and corporations can issue green bonds. Like any other bond, the issuing entity promises to repay the principal at maturity and to pay interest (coupons) over time. They could be tax-exempt if issued by a governmental entity like MTA or taxable like in the case of Apple. The credit rating of the bond is based on the issuer credit rating.

To be classified as green, the bond has to be certified. The certification can be achieved by following any one of the voluntary “standard” or “principles” available. These standards or principles try to achieve transparency and compliance by setting out guidelines of what is “green” and creating rules for internal and external monitoring throughout the life of the projects. The certification later serves as an information tool for investors who want to ensure their investment is in fact green from beginning to end.

Bond issuers benefit from having green bond classification because it enhances its reputation and attracts new investors. Some green bond issuers including MTA have used this type of bond to attract non-traditional investors such as millennials seeking to make a positive impact. The issuer, however, has to pay a price for these benefits. There are high costs associated with the additional monitoring and reporting as well as large up-front costs to fulfill the green criteria. Furthermore, green bonds can expose the issuer to liability as investors may seek penalties for failure to stick to green requirements or “green default”.

For investors that want to make an impact in the environment these bonds may be a great alternative. However, these investors have to be aware of potential risks. Due to the lack of popularity, green bonds at the moment could be highly illiquid. The demand is likely to peak in upcoming years, but in the meantime, green bonds are recommended to investors who will keep it until maturity. The investor may also face a moral dilemma as the proceeds of the bonds could be used to fund projects that are not necessarily “green” enough for the particular investor. For instance, there is an ongoing debate about whether nuclear power is considered to be “green” despite the discharge problems nuclear plants create. Investors also need to be aware of “green washing” by companies seeking to benefit from superficially displaying concern for the environment just to sell.

Why Your Doctor or Lawyer May Owe You a Higher Duty Than Your Broker

By Erika Jensen

When you visit your doctor for a checkup or medical emergency, you trust that your doctor will use his or her expertise to provide you with the medical care in your best interests. Similarly, when you retain an attorney, you expect that he or she will use their expertise to advise and handle your case in your best interest. Can you reasonably expect the same from your financial advisor? The Department of Labor thinks you should be able to; however, some industry groups believe otherwise.

In April of 2015, the Department of Labor rolled out the final version of a new rule intended to address the estimated $17 billion dollars lost each year by investors with retirement accounts through commission and fees. The final rule attempts to balance the need to both protect investors’ retirement accounts and allow broker-dealers to generate revenue. Additionally, the final rule expands the pool of individuals who are obliged to act under the constraints of a fiduciary duty, while continuing to allow broker-dealers to receive a variety of compensation, provided they are willing to adhere to a “best interest of the customer” standard. Under the rule, financial advisors for retirement accounts are required to either avoid payments that create conflicts of interest or comply with the protective terms of an exemption issued by the Department. Additionally, firms and advisors will be required to make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer; charge only reasonable compensation; and make no misrepresentations to their customers regarding recommended investments.

As of June 9, 2016, numerous industry groups have filed lawsuits attempting to halt implementation of the Department of Labor’s fiduciary rule. Some of the groups include the Indexed Annuity Leadership Council, Life Insurance Company of the Southwest, American Equity Investment Life Insurance Company, Midland National Life Insurance Company, North American Company for Life and Health Insurance, and Market Synergy Group. The lawsuits allege among other things that the rule is arbitrary, capricious, and unconstitutional, and that it will ultimately harm investors rather than protect them.

Ironically, despite their push back, industry groups claim to be in support of a uniform fiduciary standard. As Dale Brown, CEO of the Financial Services Institute put it, “being pro-fiduciary is not something new.” Considering the pending litigation, however, this support seems to be a mere facade in an attempt to escape public distrust. Investors, specifically retirees, need to ask themselves, why do broker-dealers not want to be held to the same standard as those in other sectors such as doctors or lawyers? Furthermore, investors need to be comfortable enough to ask their broker those difficult questions regarding duties, commissions, and fees.

Smartphone Investing Applications

By Krystina Trogolo

A new culture of investment has recently emerged. This new financial platform is redefining the conventional target market of investment sales to include first time investors with little capital disposal–i.e.- Generation Y. Now, in 2016, the average college graduate has $37,172 in student debt. Millennials are virtually unable to absorb the financial realities of their present, let alone invest toward their future. Student loan debt, coupled with runaway rents, and an overall higher cost of living, make millennials terrible consumers for brokerage services. That is, until now. iPhone applications such as ACORNS, Betterment, and Robinhood have figured out a way to cater to the average millennial, a market that is practically untapped. These apps adopt an “investing for dummies” approach in order to attract their target audience. Although differing slightly in construction, for the most part, the majority of these “micro-investing” companies place subscribers into an assortment of exchange-traded funds (ETFs) based upon very rudimentary investment-profile principles.

Among the most popular of these iPhone apps is “ACORNS.” ACORNS is one of the fastest growing investment apps on the market. The software is such that, when a user completes a transaction via their credit or debit card, ACORNS will automatically round the transaction to the nearest dollar. ACORNS subsequently invests the deduction into a user-set diversified portfolio. In other words, ACORNS will invest your chump change for you. Put differently, ACORNS “helps millennials manage the money they don’t have.

As of 2016, 75% of ACORNS accounts belong to millennials, with a great weight of their customers ranging from 18 to 34 years old. Not even a year post launch, ACORNS has hundreds of thousands of users, and is backed by companies as large as PayPal. So what makes ACORNS so popular? Without a doubt, the allure of a product such as ACORNS lies in its effortlessness. Aside from setting up an account, the user does almost nothing, all the while generating small and steady savings. What is more, ACORNS eliminates the need for a broker, and discounts commissions altogether on any account with a balance below $5,000. Moreover, though it is possible to lose principal on ACORNS, the conservative nature of the recommended investments make for less volatile consequences than that of a traditional investment.

ACORNS’ overwhelming success leaves some to believe that micro-investing mobile applications may in fact be the future of investing. The success of a micro-investment platform could lead to the implementation of similar products for large-scale investments. Though this is plausible, it is unlikely. The necessity for companies such as ACORNS is largely contingent upon its simplistic technology. In order to remain user-friendly, the product must yield to certain pitfalls, such as lack of investment options. Because the average ACORNS user is an unsophisticated investor, this is actually an advantageous characteristic. However, for those sophisticated investors, the elementary nature of micro-investment companies will likely not suffice for their investment needs. Hence, though it is undeniable that ACORNS has streamlined traditional investment practices, for now ACORNS is simply filling a gap, which had not been previously occupied.