Shorting Glaciers: Why You Should Know Your Asset Manager’s View on Climate Change

By David Hoy

This year is on track to be the hottest on record due almost exclusively to climate change. With a warming planet comes rising sea levels, severe storms, and drought. While governments are taking steps to prevent, or at least mitigate climate change, asset managers are looking for new investment opportunities. Fund managers now join politicians and business leaders at international climate summits and invest in technology that tracks and predicts significant climate events.

Climate events significantly impact national and local economies. In 2018, more than 1.8 million acres of California land was affected by wildfires which resulted in $24 billion in damages. The damages stemming from the floods in the midwestern United States earlier this year are still unknown, but some estimates put the total losses at least $12 billion. The total long term effects of unencumbered climate change cannot be quantified. Potential profits for those who can model climate trends and invest accordingly, however, can and are being monitored carefully.

Investor response to climate change has come in three forms. There are those who invest in mitigation technology like electric cars and solar panels, those who invest in disaster prevention (think sea walls and disaster kits) and those who place bets on how climate events will impact industries and economies. To a certain extent, the last category encompasses the first two.

In the short term, climate change will hurt some communities and benefit others. Some asset managers have capitalized on this trend by investing in real estate away from the coast because they anticipate that local governments will struggle to provide the infrastructure needed to mitigate the reported one- to four-foot increase in sea level within the next century.

Other professional investors are skeptical that there is enough time to reverse the effects of climate change, but still believe that sound investing can help mitigate its most severe consequences. These firms seek to align their capital with companies that try to reduce the amount of carbon dioxide in the atmosphere and prevent deforestation.

It is essential for clients of large mutual funds and private wealth management firms to be aware of the policies those firms have toward climate change and to understand where their money is going. Some may even opt for climate-sensitive mutual funds that primarily invest in energy efficiency and battery storage. Investors should discount any potential effects that their positions have on the planet from profits made by climate-agnostic firms. Everyday investors should seek to align themselves with asset managers that are climate hopefuls. If they are unsure of how to do so, they should, at the very least, express their concerns to their brokers.

The Dangers of Margin Trading

By Brandon Mantilla

Margin trading, although common practice in the investing community, can make or break your investment portfolio. Many investors, however, do not understand how margin loans work or why they can be so dangerous when not properly utilized or understood. Margin can vastly increase the profit in an account if the leveraged securities increase in value. On the other hand, investors can also lose more money than they put in if the securities perform poorly.

A “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities. There are several inherent risks investors should be aware of before agreeing to trade on margin. Pursuant to margin agreements, it is usual that firms can force the sale of securities in your accounts to meet a margin call. This means that a brokerage firm does not need permission to sell off securities when it determines an account-holder’s equity in the account is too low. Often firms are also not required to contact the investor when securities are being sold, although they often do. Another surprising aspect of margin calls, as these sell-offs are called in the industry, may be that investors do not have a right to choose which securities or assets are sold in the event of a margin call or to receive an extension of time. Lastly, firms reserve the right to change their margin requirements, or minimum amount of equity as a percentage of current market value, on any security, position, or account at any time without advance notice to account holders.

Despite the heavy risk involved in using margin, you can protect yourself from some of these risks by fully understanding the situation you are getting into when you open a margin account. Firstly, you should always make sure you fully understand how margin accounts work by reading about them in materials from reliable sources such as FINRA or the SEC before opening a margin account. Reading the margin rules, FINRA Rule 4210 and Regulation T, as well as your firm’s margin agreement and policies can also go a long way toward preventing any catastrophic consequences that commonly result from a poor understanding of margin trading.

In the event that you do choose to open a margin account, it is critical to actively manage your margin account by regularly reading account statements to understand exactly what is happening in the account. Finally, as any wise advisor might say, you should not put all of your eggs in one basket. In other words, do not put all of your available money in a margin account. Although a financial professional may want to maximize your margin use to raise funds for the firm on interest, keeping safety net funds outside of the account is integral to maintaining your financial well-being.

SEC Adopts Rule Intended to Protect Retail Investors

By Shawn Wilborne

On June 5 2019, the U.S. Securities and Exchange Commission (SEC) adopted a package of rules and interpretations relating to its Regulation Best Interest, including the Form CRS Relationship Summary (Form CRS). Form CRS is designed to increase transparency and decrease confusion surrounding investment relationships. Form CRS requires broker-dealers and registered investment advisors to provide retail investors with clarity and understanding. For example, firms are required to provide the nature and scope of services offered, the type of fees the investor will incur, any conflicts of interest, and the firm’s disciplinary history.

In the interest of simplicity, the Form CRS has a two-page limit. Dual registrants — firms operating as both a broker-dealer and an investment adviser — are permitted to combine the forms, but it must not exceed four pages. The format of the form is question-and-answer to promote standardization and to allow the SEC to easily compare filings. Initially, the Form CRS filings will be under close review by SEC staff “to help ensure that the relationship summary fulfills its intended purpose.”

Indeed, clarity and transparency are key elements that the SEC wants to preserve for retail investors. The SEC defined retail investor as any “natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family, or household purposes.” This definition includes potential and existing customers. In addition, the retail investor definition applies to natural persons regardless of assets or net worth. In pertinent part, the SEC found that “all individual investors would benefit from clear and succinct disclosures regarding key aspects of available brokerage and advisory relationships.”

Individuals participating in 401(k) and other employment retirement plans are also included in the Form CRS requirements. However, the SEC noted that participants making ordinary plan elections and not selecting a firm or brokerage or advisory service, fall outside the definition of retail investor and the Form CRS delivery obligations.

Moreover, brokerage firms and registered investment advisors must include on their websites an introductory paragraph with a link to the SEC’s investor education website. The SEC and its staff will also develop additional education content to increase the information available to investors.

The deadline for firms to file initial Form CRS’s is June 30, 2020.