Brokers’ Economic Interests
The article about credit unions’ future investment options ("Natural Person CUs Plunge Into DIY Investing," Feb. 9 issue) correctly asks, "Who can you trust?" To a large degree, credit unions are currently placing their trust in firms, such as brokers, whose economic interests are contrary to their own. But the advice of someone compensated to sell you products can’t replace the need to have someone in your corner. Credit unions now have the choice of building those capabilities internally or, as the article suggested, minimizing their internal investment while gaining the same advantages by using a registered investment adviser.
The costs associated with building resources internally are substantial, as the lack of a transparent fixed-income marketplace requires the addition of experienced personnel with the appropriate systems. These investments have become cost prohibitive for all but the largest credit union investors. The remaining credit unions, which still have reasonably large concentrations in investments, are then left in limbo, relying on relative value guidance from sales people, gleaning advice from the popular media and without the necessary operational resources to ensure their liquidity is being used most effectively.
Fortunately, the tools available to make sure credit unions are buying their securities at the lowest possible levels have increased over the past few years. It is interesting to note how few credit union portfolio managers are aware that all secondary trades in eligible fixed-income securities (including agency bullets, callables and municipal securities) are required to be publicly reported and posted either on FINRA’s TRACE (Trade Reporting and Compliance Engine) system or MSRB’s EMMA (Electronic Municipal Market Access). It has been our experience that credit unions purchasing these securities aren’t informed of these resources because, as they say, knowledge is power and markups by brokers may suffer if customers know the appropriate prices for securities. Ultimately, the ability to minimize execution costs creates a significant avenue to build a portfolio that will drive superior performance over time.
The decisions that credit unions have to face are daunting as a lack of growth in consumer lending products and an increase in deposits leaves many credit unions increasingly reliant on their portfolios to drive substantial portions of their net interest income. In our view, those credit unions would benefit from the retention of a fee-based investment advisory firm. A good firm won’t require commissions or mark-ups, so is free to truly be an unbiased partner in the credit union’s ongoing success. With the right advisor and a good understanding of sound investment practices, a credit union can make good choices that are safe, sound and provide attractive yields.
Director, Investment Advisory Services
Accolade Investment Advisory LLC