Hold the phone. 

The enforcement of off-channel communications has become a hot-button topic for the Securities and Exchange Commission — with at least one commissioner at the agency calling it an overreach. This week, the SEC tagged a dozen more advisory firms with a combined $63 million in fines over client conversations that took place on personal devices or apps. Employees, including supervisors and senior managers from Charles Schwab, Blackstone, Apollo Capital and nine other firms, allegedly sent and received messages from clients that weren’t being recorded by their compliance departments.

It’s the latest development in a years-long campaign to crackdown on advisors that use personal messaging platforms, like Whatsapp or personal emails. “The SEC is certainly acting in the best interest of the investing public here,” said Bill Singer, a securities lawyer with more than four decades of experience. “It often is used to defraud public investors and short-circuit the employer’s necessary compliance oversight.”

Used to Call Me On My Cell Phone

Off-channel communication rules help ensure regulators keep track of what advisors are telling clients, and that they’re playing by the rules. More than two dozen advisors agreed to settle SEC allegations in August, including Ameriprise, Edward Jones, LPL, and RayJay, which paid $50 million each. That’s after the agency had dished out some $3 billion in fines to industry firms over the past two years:

• Eleven advisory firms were fined in September, including Stifel and Invesco.
• Citi, Goldman Sachs, Bank of America, and more than a dozen others, were collectively fined more than $1 billion in 2022 for using WhatsApp and personal emails.

Leave a Message. The controversial enforcement actions are now being lampooned by officials at the SEC itself, like Commissioner Hester Peirce who called the actions a “cash cow” during a Congressional hearing in September. The problem is that at least some of the cases took place during the pandemic when advisory firms were shut down. That forced advisors to take their work home with them, meaning personal cell phones or home lines became the new norm. Pierce has said the typical enforcement action was not based on fraud.

“We also have to be careful that we are not engaging in a Luddite form of regulation,” Singer told The Daily Upside, adding that many Millennials and Gen-Xers see telephone and email communications as antiquated. Critics have also questioned whether off-channel communications warrant this much attention. The settlements are certainly well within the SEC’s purview, but did they truly merit billions of dollars in fines? 

“For many firms, that all amounts to little more than a nuisance and the cost of doing business,” Singer said.

What a finale. 

It’s earnings week for the final quarter of 2024, which means Wall Street’s biggest firms are either patting themselves on the back or making excuses. Thankfully, Wall Street ended the year on a high note with some of America’s largest firms crushing analysts’ expectations for the fourth quarter. That gave retail investors — and the advice industry as a whole —  something to cheer about as we enter the new year.

More Wealth, Please

Citigroup was a standout, reporting earnings of $1.34 per share for the fourth quarter and annual revenue of more than $81 billion. Client assets in its wealth business also jumped to $587 billion at the end of the quarter, up 18% from the previous year. Now, the bank aims to scale up the division, according to a presentation released with the report.

“2024 was a critical year and our results show our strategy is delivering as intended and driving stronger performance in our businesses,” Citi CEO Jane Fraser said in a statement. For years, the wealth division has lagged competitors, plagued by tens of thousands of complaints each month. Citi tapped former Merrill Lynch exec Andy Sieg to oversee the unit in 2023. 

Happy New Year. Most of the industry’s wirehouses also opened up the books, with Goldman Sachs, JPMorgan, and Wells Fargo all delivering in the fourth quarter. 

Gabelli Funds portfolio manager Macrae Sykes said the industry’s fundamental growth was driven by strong gains in investment banking. He also pointed to the Bureau of Labor Statistics’ latest Consumer Price Index, telling The Daily Upside it was “icing on the operating cake” for firms moving forward. Most firms beat earnings expectations:

• Goldman saw its full-year profits jump almost 70% year-over-year to about $14.3 billion. 
• JPMorgan Chase posted quarterly earnings and revenues of $4.81 per share and roughly $43.74 billion, respectively. Its full-year profits rose to a record $58.5 billion.
• Wells Fargo came in about $200 million below revenue expectations, but its earnings per share beat the mark, thanks to a rebound in dealmaking activity.

A quartet of very different exchange-traded funds ironically have the same New Years’ resolution this year: make investors forget about 2024.

With poorly performing ETFs, investors can sometimes get what the psychology crowd calls “the recency effect.” It’s a cognitive bias that causes people to better remember information they took in most recently. Or as some market commentators like to say: Investors want what they wish they owned last year. In the ETF business, there’s a long history of dollars chasing past performance. 

That bias works the same way in reverse, meaning investors generally head for the hills when they come across funds with a questionable track record. But poor performance is not necessarily an indication of what’s to come. Sometimes it is best to look at the losers’ list for new ideas, rather than what’s been working. 

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