The world’s largest asset managers are attempting to pull off the impossible.

State Street teamed up with Apollo Global Management to file for a new fund last month that neatly packages private assets into an easy-to-trade ETF — the first major step toward opening up alternative assets to retail investors. The actively managed fund holds public and private debt sourced by Apollo, and up to 20% in junk bonds, according to a filing. 

It could become a watershed moment for alternative assets, which are expected to top $2.5 trillion by the end of 2028. “If it does get approved, expect a title wave,” said Aniket Ullal, head of ETF research and analytics at CFRA. 

Drink Plenty of Liquids

State Street joins firms like Capital Group, Invesco, and BlackRock that are looking to make private assets more accessible to individual investors — the latter’s CFO called it one of the most attractive opportunities in the company’s history. Cerulli Associates estimates just 13% of alternative assets are currently held by retail investors. That means there’s major opportunity:

• Financial advisors own roughly $1.4 trillion in less than fully liquid alternative investment assets in the US alone.
• The retail channel is expected to make up 23% of alternative asset investors in the next three years.

We’re Totally Liquid. Still, it’s a difficult nut to crack. The good ol’ Securities and Exchange Commission imposes a 15% limit on funds holding illiquid investments. According to its filing, Apollo plans to get around the rule by owning the underlying assets and being able to sell or buy back the private debt at any time. “Apollo is wearing multiple hats,” Ullal said. “They’re making the argument that these are no longer illiquid.”

The main issue is whether there’s sufficient protection to ensure investors aren’t getting the short end of the stick. State Street and Apollo could become the only buyers or sellers of the assets in the ETF, especially in a stress scenario, which could mean investors lose out on more competitive pricing, said Bob Elliot, CEO of Unlimited and the former head of Ray Dalio’s investing team at Bridgewater Associates.

“There is certainly the appearance — and opportunity — for everyday investors to be disadvantaged,” he told The Daily Upside. A State Street spokesperson declined to comment, citing a quiet period.

The SEC will have to determine if it is ready to give the green light to a brand new product, much like it did with Bitcoin and Ethereum ETFs earlier in the year. The only difference is that cryptocurrency issuers waited more than a decade for their approvals. “In terms of what needs to be in there, the filing read in a way that suggested this is just the beginning of a conversation,” Elliot said.

Chief executive Dan Arnold is out at LPL Financial.

The country’s largest independent broker dealer terminated Arnold from his position as CEO on Tuesday for allegedly violating the company’s code of conduct, according to a filing. The decision was made by its Board of Directors after an investigation by an outside counsel determined he “made statements to employees” that violated LPL’s rules. Arnold also resigned his position on the board. 

“LPL’s Code of Conduct requires every employee, no matter their title, to foster a supportive and professional workplace and show respect to each other, our stakeholders and the broader community,” LPL board chair James Putnam said in the filing. “Mr. Arnold failed to meet these obligations.”

Rich Steinmeier, who became the company’s chief growth officer in May, has been appointed to the role of interim chief. LPL, which employs some 23,500 brokers managing around $1.5 trillion in assets, did not respond to a request for comment.

Left the Building

The abrupt firing of a chief executive is a rare occurrence in the wealth management world, where succession plans are typically laid out years in advance. 

In 2023, Arnold received almost $17 million in compensation, including a roughly $950,000 base salary and about $12 million in stock awards, according to a separate SEC filing in March. Because of his termination, Arnold is not entitled to severance benefits, and his outstanding equity awards, whether vested or unvested, are also subject to automatic forfeiture, per the latest filing.

Long Tenure: Arnold had been with LPL for almost 20 years, according to his LinkedIn profile. He took took up the role of CEO in 2017:

• While there, he helped transform the company into a leader among wealth managers, expanding its pool of advisors and growing the firm’s AUM. LPL’s stock price rose roughly 540% since he took over in January 2017.
• Just last month, LPL announced it will acquire The Investment Center, a New Jersey-based broker-dealer and RIA with 240 advisors and nearly $9 billion in assets. 

The company’s stock price dropped after markets closed Tuesday, but has since regained much of the losses.

Who doesn’t want a free vacation?

Sen. Elizabeth Warren, an outspoken investor advocate, ripped into the advice industry last week. Her target: some not-so-fiduciary perks that advisors allegedly receive from annuity and insurance companies for selling their products to clients. A recent investigation by her office cited incentives like a trip to Venice, a cruise down the Danube, and a week-long Australian getaway that was offered by one insurance agency. (We won’t name names, but the report does.)

“The industry’s secret kickbacks hurt consumers by incentivizing agents to sell certain products because they will earn a bigger cash bonus or fancier vacation, not because they are in their client’s best interest,” the report said. Such conflicts of interest may be costing retirement savers $5 billion a year in fixed-index annuities alone, and add up to 20% of total retirement income, the investigation found. 

Europe’s Nice This Time of Year

There were at least 29 annuity and insurance companies listed in the report that allegedly offered agents “secret perks” in exchange for hawking annuity and insurance products. While these President’s Club-esque rewards have been widely criticized and minimized in the industry over the past decade, they may still play a role in what products advisors are recommending to their clients.

“Too many annuity and insurance companies offer back-door rewards … even if these financial professionals hold themselves out as trusted advisors, not salespeople,” the report said.

The research supported the Labor Department’s proposed Fiduciary Rule that would require advisors to largely act in their customers’ best interest. Facing lawsuits from firms and industry groups, the rule was halted by two federal court judges in July and may never find its way out. 

Trust & Estate. It’s not all doom and gloom. Retail investors are actually trusting financial advisors now more than ever. Confidence in advisory firms has skyrocketed in recent years, with some 60% of clients saying their advisors have their best interests in mind, according to new research from Cerulli. In fact, a record 6 in 10 do-it-yourself investors are now interested in paying for professional advice. It’s a trend that’s likely to continue.

“The majority of investment professionals who honestly advise their clients are also harmed by these practices, having to compete with advisors not subject to fiduciary standards,” the Warren report found.