PBN (Private Blog Network)
“We are absolutely going to see more of these options-based products come to market,” Ben Slavin told CNBC’s “ETF Edge” on Monday. “We see it in our own book.”
Options overlays are a way for investors to hedge against downside.
“Ultimately, there’s going to be more issuers that are continuing to chase this trend that we’re seeing,” Slavin said.
Bair, who ran the FDIC during the 2008 financial crisis, suggests Federal Reserve Chair Jerome Powell was irresponsibly dovish at last week’s policy meeting by creating “irrational exuberance” among investors.
“The focus still needs to be on inflation,” Bair told CNBC’s “Fast Money” on Thursday. “There’s a long way to go on this fight. I do worry they’re [the Fed] blinking a bit and now trying to pivot and worry about recession, when I don’t see any of that risk in the data so far.”
After holding rates steady Wednesday for the third time in a row, the Fed set an expectation for at least three rate cuts next year totaling 75 basis points. And the markets ran with it.
The Dow hit all-time highs in the final three days of last week. The blue-chip index is on its longest weekly win streak since 2019 while the S&P 500 is on its longest weekly win streak since 2017. It’s now 115% above its Covid-19 pandemic low.
Bair believes the market’s bullish reaction to the Fed is on borrowed time.
“This is a mistake. I think they need to keep their eye on the inflation ball and tame the market, not reinforce it with this … dovish dot plot,” Bair said. “My concern is the prospect of the significant lowering of rates in 2024.”
Bair still sees prices for services and rental housing as serious sticky spots. Plus, she worries that deficit spending, trade restrictions and an aging population will also create meaningful inflation pressures.
″[Rates] should stay put. We’ve got good trend lines. We need to be patient and watch and see how this plays out,” Bair said.
Moving to another country to eventually retire requires a lot of careful research and planning, taking into account social security, health care, and finances.
U.S. consultancy Mercer issues a closely-watched annual report that analyzes 47 different retirement income systems around the world — with European nations often coming out on top.
In fact, three countries have dominated the Mercer CFA Institute’s global index since 2021. Namely, Iceland (a 84.6 average), the Netherlands (a 84.4 average) and Denmark (a 81.8 average) have been considered to have the best pension systems over these past three years.
“All three have large industry funds with defined contributions from workers and employers. They have mandatory or quasi-mandatory schemes. These countries benefit from good economies of scale versus more fragmented markets like the U.K. for occupational pensions,” Eimear Walsh, Mercer’s head of investments and wealth, told CNBC.
The Netherlands got the highest overall index value (85.0) this year thanks to good benefits, a strong asset base and sound regulation, while popular European destinations such as Spain, Italy and Croatia have faced some shortcomings.
A key aim of any pension system should be to provide adequate income for retired people, essentially a safety net. The ability of governments to create incentives for average-income earners to save for retirement plays an important role for the health of any system.
The design of the payment plan is also key, according to Mercer’s ranking, and whether workers can continue to accrue benefits when they are temporarily out of the workforce, for childcare or illness.
Portugal took the top spot on this metric with a score of 86.7 in Mercer’s latest report, due to its earnings-based public pension system. Netherlands was a close second, with a score of 85.6. Both systems have a minimum pension rate, creating a net for even the lowest-income groups. The lowest rating in Europe was Poland which came 31st globally with a 59.8 score.
Portugal was also named the best European country for retirement by Moving to Spain, a relocation company. In a June report, it ranked European countries on several factors like visas, beaches, safety and home prices.
Another list from wealth management firm Blacktower, released back in 2021, ranks a much higher number of European nations and placed Belarus last using several key factors.
Funded pension plans provided by the private sector also play an important role in the stability of a country’s retirement system. The Mercer index looks at whether private pension plans in countries generate enough value for members and if there’s enough confidence in the public for these programs.
Finland had the best score on integrity with a 90.9 rate in 2023. Belgium came in second with an 88.2 score and Netherlands ranked in third place with a score of 87.7. France was the worst performer in Europe, with a score of 54.4. Notably, the U.S. is also placed well below the global average with 59.5 points in this category.
Finland is also classed as a “happy place” to retire by a Natixis Index. Despite not making it into Natixis’ top 10 in overall scores, Finland has led the investment bank’s “quality of life” category for five consecutive year. A high happiness score, high air quality, water and sanitation, and biodiversity are the main drivers of Finland’s number one position, it said.
Norway was the top performer in the Natixis index for 2023, retaining its place from last year and boasting an overall score of 83%. Switzerland ranks second in the overall index and tops the “finances in retirement category.”
Mercer believes the economic growth of a country in the long term also plays a crucial role, as this directly affects the number of people in the workforce and the amount of money saved for retirement. Additionally, the amount of debt a country has and the amount of public money it spends on pensions, affect the sustainability of its retirement system.
Based on these factors, Iceland has the most sustainable system in Europe with a rating of 83.8. Denmark and Netherlands come right after, with 82.5 and 82.4 respectively. Italy has the lowest score in Europe with 23.7, followed by Spain with a score of 28.5.
However, Mercer’s Walsh noted that there are some soft factors that the index doesn’t take into account which could still make countries like Italy and Spain popular retirement destinations for many people.
“We focus a lot on the pensions system but that’s not the only thing to consider. It’s an important balance. A lot of it also depends on the tax system, the climate and culture of the country, and whether people can actually be happy there,” she said.
Metaverse company Improbable has sold one of its key gaming ventures to London-listed video game developer Keywords Studios for £76.5 million ($97.1 million).
The company closed the deal to sell The Multiplayer Group (MPG), a multiplayer game services firm, to Keywords on Sunday, an Improbable spokesperson told CNBC.
Based in Ireland, Keywords owns more than 70 studios in locations including Los Angeles, France, Brazil, Mexico and Spain. The firm mainly develops games for third-party developers.
Keywords’ shares have fallen around 49% year-to-date. It has been on an acquisition spree lately, earmarking 91.9 million euros ($100 million) to new takeovers.
Keywords also reported earnings per share of 18.48 euro cents in its half-year results for the period to June 30, down 40% year over year.
Keywords said its acquisition of MPG was funded primarily through cash and its existing revolving credit facility, and would contribute double-digit revenue growth in 2024.
AI is a ‘huge uplift’ to the metaverse, says Improbable CEO
Keywords expects the transaction to be earnings per share accretive in its first full year post-acquisition.
MPG was founded in 2018 and is known for behind-the-scenes work on games such as Fallout 76 and Medal of Honor: Above and Beyond.
Herman Narula, Improbable’s co-founder and CEO, told CNBC the transaction was part of its “venture builder” strategy, through which it invests in or acquires gaming and metaverse-related teams with the option of expanding or spinning them off at a later point.
“The thought was, if we understand multiplayer well, and we understand metaverses, maybe we can spot opportunities where we can bring things in the den that we can do well with. And then, at the right time, if it makes sense, to either keep growing them or potentially spin them out,” Narula told CNBC in an exclusive interview.
“It became clear that working with MPG and bringing them in house would have let us learn a colossal amount and help them grow.”
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Improbable acquired MPG in 2019, and it has grown dramatically since. Employee numbers rose sixfold in the past four years to 360.
And MPG’s valuation has more than doubled to £76.5 million from Improbable’s original purchase price of £30 million.
While the move suggests a potential scaling back of Improbable’s gaming-related investments, Narula disputed the idea that a sale of MPG marks any sort of retrenchment from that space.
“We’re not in any way selling any technology, or in any way ceasing to operate with games companies,” Narula said. “MPG provide a very specific, specialised service.”
A series of games built on Improbable’s original SpatialOS technology have been canceled in recent years.
They include the open-world game Nostos, developed by NetEase, Worlds Adrift, made by Bossa Studios, and the console version of Scavengers, a game developed by Midwinter Entertainment.
Midwinter was sold by Improbable earlier this year to Behaviour Interactive.
Morpheus, a technology platform developed by Improbable, is now the company’s primary product. Morpheus is designed to host mass-scale multiplayer online games.
Improbable has hosted new experiences using its Morpheus tech, including virtual Major League Baseball games, and the “Otherside” metaverse developed in partnership with blockchain firm Yuga Labs.
Founded in 2012, Improbable is a British firm that aims to build what it calls a network of metaverses. In June, Improbable launched MSquared, a metaverse creation suite, and granted developers access to the platform.
MSquared includes its own network, tech stack, and open-source metaverse markup language.
What’s next for the ‘Metaverse’?
The deal to sell MPG, one of Improbable’s many notable bets on gaming, arrives after a series of struggles at the firm.
Improbable has undergone substantial cost reductions.
The firm, which scored a $3.4 billion valuation in October 2022, laid off dozens of staffers late last year after raising substantial sums from SoftBank and Andreessen Horowitz.
But valuations of once buzzy metaverse and Web3-related startups have been knocked this year and last year by waning investor enthusiasm for the space.
Improbable has more recently touted itself as artificial intelligence-enabled, saying this has helped lower costs. The company slashed its losses by 85% in 2022 to £19 million.
Improbable originally set out to build large-scale computer simulations that have applications in gaming and defense.
But its metaverse bets have now become its main focus.
Improbable sold its defense business to Noia Capital in September, marking an exit from a loss-making venture for the firm.
Narula says he expects to see a “tale of two metaverses” emerge next year. Centralized gaming experiences such as Roblox and Fortnite will be eschewed in favor of decentralized, “Web3″ metaverses, Narula said.
Web3 refers to the idea of a more decentralized and open version of the web, outside the control of a handful of powerful tech companies like Amazon and Meta.
Blockchain is a key technology involved.
“Ultimately, they [Roblox and Fortnite] are games with different modes made by users and by brands. But people can’t build businesses that they have control over, or that can do commercial things that would be appropriate,” Narula said.
“The other branch of the metaverse, which is driven in some ways by Web3 and in other ways by companies like ours … is really about creating a network of sovereign metaverses.”
Analysts have expressed skepticism about the ability for Improbable to commercialize its technology, not least owing to the technical limitations and high costs involved.
“The jury is still out if they have a viable business model going forward, or whether the reality will ever match the ‘virtual’ hype,” Greg Martin, co-founder and managing director of Rainmaker Securities, a private market trading firm, told CNBC.
Narula said he is hoping to sign up many more partners for MSquared in the future.
Improbable, which is focusing on putting on large-scale metaverse events, ran 30 such gatherings in 2023, up from only three last year. The company plans to raise that number to 300 in 2024.
The Fed voted last week to hold rates steady once again, and its updated projections showed an expectation of three rate cuts in 2024. That caused a rally in stocks and bonds, with the Dow Jones Industrial Average jumping to a record high.
“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,” said Chicago Fed President Austan Goolsbee said on CNBC’s “Squawk Box.” “I was confused a bit — was the market just imputing, here’s what we want them to be saying?”
The Dow hit a record high last week.
The Fed president also pushed back against the idea that the Fed is actively planning on a series of rate cuts.
“We don’t debate specific policies, speculatively, about the future. We vote on that meeting,” he said.
Trading in the options market implies that traders see 3.75% to 4.00% as the most likely range for the Fed’s benchmark rate at the end of 2024, according to the CME FedWatch Tool. That would be six quarter-point cuts below the current Fed funds rate, or double what was forecast in the central bank’s summary of economic projections.
“The market expectation of the number of rate cuts is greater than what the SEP projection is,” Goolsbee said.
Goolsbee is not the only Fed official who has downplayed the meeting in the wake of the market rally. New York Fed President John Williams said on CNBC’s “Squawk Box” on Friday that “we aren’t really talking about rate cuts right now.”
To be clear, artificial intelligence, like natural language processing and machine learning, has been used by wealth management and asset management firms for years. Yet with generative AI now on the scene, it can have a powerful impact when combined with other AI technologies, said Roland Kastoun, U.S. asset and wealth management consulting leader for PwC.
“We see this as a massive accelerator of productivity and revenue growth for the industry,” he said.
In fact, the banking sector is expected to have one of the largest opportunities in generative AI, according to McKinsey & Company. Gen AI could add the equivalent of $2.6 trillion to $4.4 trillion annually in value across the 63 use cases the McKinsey Global Institute analyzed. While not the largest beneficiaries within banking, asset management could see $59 billion in value and wealth management could see $45 billion.
Some of the biggest names in the business are already on board.
Earlier this month, BlackRock sent a memo to employees that in January it will roll out to its clients generative AI tools for Aladdin and eFront to help users “solve simple how-to questions,” the memo said.
“GenAI will change how people interact with technology. It will improve our productivity and enhance the great work we are already doing. GenAI will also likely change our clients’ expectations around the frequency, timeliness, and simplicity of our interactions,” the memo said.
Meanwhile, Morgan Stanley unveiled its generative AI assistant for financial advisors, called AI @ Morgan Stanley Assistant, in September. The firm’s co-President Andy Saperstein said in a memo to staffers that generative AI will “revolutionize client interactions, bring new efficiencies to advisor practices, and ultimately help free up time to do what you do best: serve your clients.”
Earlier this year, both JPMorgan and Goldman Sachs said they were developing ChatGPT-style AI in house. JPMorgan’s IndexGPT will tap “cloud computing software using artificial intelligence” for “analyzing and selecting securities tailored to customer needs,” according to a filing in May. Goldman said its technology will help generate and test code.
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Those who don’t embrace AI will be left behind, said Wells Fargo bank analyst Mike Mayo.
“If the bank across the street has financial advisors that are using AI, how can you not be using it too?” he said. “It certainly increases the stakes for competition, and you can keep up or fall behind.”
In fact, as the younger generation ages, those digitally native investors will seek greater digitization, more personalized solutions and lower fees, William Blair analyst Jeff Schmitt said in an Oct. 20 note.
“Given that these investors will control an increasing share of invested assets over time, wealth management firms and advisors are leveraging AI to enhance offerings and adjust service delivery models to win them over,” he wrote.
Cerulli Associates estimated some $72.6 trillion in wealth will be transferred to heirs through 2045.
The big appeal of generative AI — and a differentiator from other AI tech — is its ability to generate content, said PwC’s Kastoun.
It’s one thing for technology to analyze a large set of content, he pointed out. “It’s another thing for it to be able to generate new content based on the data that it has, and that’s what’s creating a lot of hype.”
Yet what he’s seeing in both the wealth management and asset management business is the use of multiple elements of AI, not just generative AI, he said.
“It’s the power of combining these different technologies and methodologies that is really creating an impact across the industry,” Kastoun said.
Firms are now figuring out how to incorporate generative AI into their businesses and existing AI technologies. At T. Rowe Price, its New York City Technology Development Center has been building AI capabilities for several years.
“We ultimately are looking to help our decision makers get the benefit of data and insights to do their job better,” said Jordan Vinarub, head of the center.
His team made a big pivot with the arrival of generative AI.
“We kind of saw this as an existential moment for the firm to say, we need to understand this and figure out how we can use it to support the business,” Vinarub said. “Over the past, I guess, six months … we’ve gone from just pure research and proofs of concept to then building our own internal application on top of the large language model to help assist our investors and research process.”
It’s not only the big firms adapting to generative AI; smaller upstarts are looking for ways to disrupt the industry.
Wealth-tech firm Farther is one of those. Its co-founder, Brad Genser, said the company is a “new type of financial institution” that was built to combine expert advisors and AI.
“If you don’t build the technology, along with the human processes, and you don’t control both, you end up with something that’s incomplete,” he said. “If you do it together, you’re building people processes and technology together, then you get something that’s greater than the sum of its parts.”
Then there is Magnifi, an investing platform that uses ChatGPT and computer programs to give personal investing advice. Investors link the technology to their various accounts, and Magnifi can monitor their portfolios. About 45,000 subscribers have connected over $500 million in aggregate assets to the platform, Magnifi said in November.
“It’s a copilot alongside individual consumers that they’re interacting with over time,” said Tom Van Horn, Magnifi’s chief operating and product officer. “It’s not taking over control, it’s empowering those individuals to get to better wealth outcomes.”
The technology is so fast moving, it’s difficult to know what use cases could exist in the future. Yet certainly as productivity continues to increase, advisors can increase their time and level of engagement with their clients.
It’s also about people working with the technology and not the technology necessarily replacing humans, experts said.
“The dream state is that every employee will have an AI copilot or AI coworker and that each customer will have the equivalent of an AI agent,” Wells Fargo’s Mayo said. “I’m not talking about computers alone. I’m not talking about humans alone, but humans plus AI can compete better than either computers or humans alone.”
The 167-year-old bank was rescued by domestic rival UBS in March in a deal brokered by Swiss authorities, after a string of risk management failures and scandals triggered a client and investor exodus that forced it to the brink of insolvency.
The Swiss Financial Market Supervisory Authority (FINMA) said in a Tuesday report that, alongside the government and the Swiss National Bank, it had achieved the aim of safeguarding Credit Suisse’s solvency and ensuring financial stability.
It also drew attention to the “far-reaching and invasive measures” taken over the preceding years to supervise the bank and to “rectify the deficiencies, particularly in the bank’s corporate governance and in its risk management and risk culture.”
From summer 2022 onwards, FINMA also told the bank to take “various measures to prepare for an emergency” — a warning it suggests went unheeded.
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“FINMA draws a number of lessons in its report. On the one hand, it calls for a stronger legal basis, specifically instruments such as the Senior Managers Regime, the power to impose fines, and more stringent rules regarding corporate governance,” the regulator said.
“On the other hand, FINMA will also adapt its supervisory approach in certain areas, and will step up its review of whether stabilisation measures are ready to implement.”
FINMA said that strategic changes announced to de-risk Credit Suisse, such as downsizing its investment bank, focusing on its asset management business and reducing its earnings volatility, were “not implemented consistently,” while “recurrent scandals undermined the bank’s reputation.”
It also noted that, even in years when the bank posted heavy financial losses, the variable remuneration remained high, with shareholders making little use of opportunities to influence pay packets.
Between 2012 and the bank’s emergency rescue, the regulator says it conducted 43 preliminary investigations of Credit Suisse for potential enforcement proceedings. Nine reprimands were issued, 16 criminal charges filed, and 11 enforcement proceedings were taken against the bank and three against individuals.
FINMA said it repeatedly informed Credit Suisse of risks, recommended improvements and imposed “far reaching measures.” These included “extensive capital and liquidity measures, interventions in the bank’s governance and remuneration, and restrictions on business activities.”
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“In the period from 2018 to 2022 it also conducted 108 on-site supervisory reviews at Credit Suisse and recorded 382 points requiring action,” FINMA said.
“In 113 of these points the risk was classed as high or critical. These figures and measures illustrate that FINMA exhausted its options and legal powers.”
At the time of its collapse, Credit Suisse bosses attributed the loss of confidence to the market panic triggered by the collapse of Silicon Valley Bank in the U.S.
Credit Suisse was asked over the summer to put in place crisis preparation measures, such as partial business sales and the possible sale of the entire bank in an existential emergency.
The regulator therefore called for “extended options that would enable it to have more influence on the governance of supervised institutions.”
These include the implementation of a Senior Managers Regime, powers to impose fines and option of regularly publishing enforcement proceedings.
“To enable FINMA to effectively intervene in remuneration systems, a more solid legal mandate is required,” it concluded.
Large language models, similar to the one at the heart of ChatGPT, frequently fail to answer questions derived from Securities and Exchange Commission filings, researchers from a startup called Patronus AI found.
Even the best-performing artificial intelligence model configuration they tested, OpenAI’s GPT-4-Turbo, when armed with the ability to read nearly an entire filing alongside the question, only got 79% of answers right on Patronus AI’s new test, the company’s founders told CNBC.
Oftentimes, the so-called large language models would refuse to answer, or would “hallucinate” figures and facts that weren’t in the SEC filings.
“That type of performance rate is just absolutely unacceptable,” Patronus AI co-founder Anand Kannappan said. “It has to be much much higher for it to really work in an automated and production-ready way.”
The findings highlight some of the challenges facing AI models as big companies, especially in regulated industries like finance, seek to incorporate cutting-edge technology into their operations, whether for customer service or research.
The ability to extract important numbers quickly and perform analysis on financial narratives has been seen as one of the most promising applications for chatbots since ChatGPT was released late last year. SEC filings are filled with important data, and if a bot could accurately summarize them or quickly answer questions about what’s in them, it could give the user a leg up in the competitive financial industry.
In the past year, Bloomberg LP developed its own AI model for financial data, business school professors researched whether ChatGPT can parse financial headlines, and JPMorgan is working on an AI-powered automated investing tool, CNBC previously reported. Generative AI could boost the banking industry by trillions of dollars per year, a recent McKinsey forecast said.
But GPT’s entry into the industry hasn’t been smooth. When Microsoft first launched its Bing Chat using OpenAI’s GPT, one of its primary examples was using the chatbot to quickly summarize an earnings press release. Observers quickly realized that the numbers in Microsoft’s example were off, and some numbers were entirely made up.
Part of the challenge when incorporating LLMs into actual products, say the Patronus AI co-founders, is that LLMs are nondeterministic — they’re not guaranteed to produce the same output every time for the same input. That means that companies will need to do more rigorous testing to make sure they’re operating correctly, not going off-topic, and providing reliable results.
The founders met at Facebook parent company Meta, where they worked on AI problems related to understanding how models come up with their answers and making them more “responsible.” They founded Patronus AI, which has received seed funding from Lightspeed Venture Partners, to automate LLM testing with software, so companies can feel comfortable that their AI bots won’t surprise customers or workers with off-topic or wrong answers.
“Right now evaluation is largely manual. It feels like just testing by inspection,” Patronus AI co-founder Rebecca Qian said. “One company told us it was ‘vibe checks.’”
Patronus AI worked to write a set of more than 10,000 questions and answers drawn from SEC filings from major publicly traded companies, which it calls FinanceBench. The dataset includes the correct answers, and also where exactly in any given filing to find them. Not all of the answers can be pulled directly from the text, and some questions require light math or reasoning.
Qian and Kannappan say it’s a test that gives a “minimum performance standard” for language AI in the financial sector.
Here’s some examples of questions in the dataset, provided by Patronus AI:
Patronus AI tested four language models: OpenAI’s GPT-4 and GPT-4-Turbo, Anthropic’s Claude 2 and Meta’s Llama 2, using a subset of 150 of the questions it had produced.
It also tested different configurations and prompts, such as one setting where the OpenAI models were given the exact relevant source text in the question, which it called “Oracle” mode. In other tests, the models were told where the underlying SEC documents would be stored, or given “long context,” which meant including nearly an entire SEC filing alongside the question in the prompt.
GPT-4-Turbo failed at the startup’s “closed book” test, where it wasn’t given access to any SEC source document. It failed to answer 88% of the 150 questions it was asked, and only produced a correct answer 14 times.
It was able to improve significantly when given access to the underlying filings. In “Oracle” mode, where it was pointed to the exact text for the answer, GPT-4-Turbo answered the question correctly 85% of the time, but still produced an incorrect answer 15% of the time.
But that’s an unrealistic test because it requires human input to find the exact pertinent place in the filing — the exact task that many hope that language models can address.
Llama 2, an open-source AI model developed by Meta, had some of the worst “hallucinations,” producing wrong answers as much as 70% of the time, and correct answers only 19% of the time, when given access to an array of underlying documents.
Anthropic’s Claude 2 performed well when given “long context,” where nearly the entire relevant SEC filing was included along with the question. It could answer 75% of the questions it was posed, gave the wrong answer for 21%, and failed to answer only 3%. GPT-4-Turbo also did well with long context, answering 79% of the questions correctly, and giving the wrong answer for 17% of them.
After running the tests, the co-founders were surprised about how poorly the models did — even when they were pointed to where the answers were.
“One surprising thing was just how often models refused to answer,” said Qian. “The refusal rate is really high, even when the answer is within the context and a human would be able to answer it.”
Even when the models performed well, though, they just weren’t good enough, Patronus AI found.
“There just is no margin for error that’s acceptable, because, especially in regulated industries, even if the model gets the answer wrong 1 out of 20 times, that’s still not high enough accuracy,” Qian said.
But the Patronus AI co-founders believe there’s huge potential for language models like GPT to help people in the finance industry — whether that’s analysts, or investors — if AI continues to improve.
“We definitely think that the results can be pretty promising,” said Kannappan. “Models will continue to get better over time. We’re very hopeful that in the long term, a lot of this can be automated. But today, you will definitely need to have at least a human in the loop to help support and guide whatever workflow you have.”
An OpenAI representative pointed to the company’s usage guidelines, which prohibit offering tailored financial advice using an OpenAI model without a qualified person reviewing the information, and require anyone using an OpenAI model in the financial industry to provide a disclaimer informing them that AI is being used and its limitations. OpenAI’s usage policies also say that OpenAI’s models are not fine-tuned to provide financial advice.
Meta did not immediately return a request for comment, and Anthropic didn’t immediately have a comment.
Inflation has given millions of people new access to certain investments earmarked for the wealthy — and consumer advocates argue that’s not a good thing.
Americans must generally be “accredited” to invest in private companies and investments such as private equity and hedge funds.
That accredited status is a consumer protection issue: To qualify, households must meet certain requirements — like a minimum net worth or annual income — which helps ensure they’re financially sophisticated and can sustain the risk of loss from private investments.
Over 24 million U.S. households — about 18.5% of them — qualified as accredited investors in 2022, the Securities and Exchange Commission said in a report issued Friday.
That’s an increase of about 8 million households from 2019, the last year for which the SEC published an estimate. That year, 13% of households qualified.
The increase is “largely due to” inflation, the SEC said.
Individuals can generally become accredited by having a $200,000 annual earned income, or $300,000 for married couples. Individuals or couples can also qualify with a total $1 million net worth, not including the value of their primary residence.
However, those financial thresholds aren’t pegged to inflation. They stay the same even as wealth and incomes naturally grow over time — meaning more people have gradually become accredited over the years.
Indeed, the thresholds haven’t changed since their creation in the early 1980s. In 1983, just 1.5 million households — 1.8% — qualified as accredited investors, according to SEC data.
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Most Americans will join the ranks of accredited investors in coming decades if the financial thresholds remain unmoored from inflation: By 2052, nearly 119 million households would qualify — or about 66% of them, the SEC said.
“The pool keeps increasing,” said Micah Hauptman, director of investor protection at the Consumer Federation of America, a consumer advocacy group. “If we don’t do anything, the standard will be rendered meaningless.”
If the financial standards had been indexed to inflation since the 1980s, a married household would need a roughly $3 million net worth or a $911,352 joint income to be accredited in 2022, the SEC said. Just 5.7% of households — about 7.4 million — would qualify, according to its data.
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Private investments differ from their publicly available counterparts.
Public investments include ones with which most households are familiar, such as the stocks and funds available for purchase on a stock exchange. Generally, anyone can buy them.
Private investments let people invest in companies that aren’t listed on a public exchange.
Some argue that private investments should be available to a broader pool of investors due to benefits such as higher average returns.
Private equity returns, for example, have outperformed the S&P 500 stock index by 1% to 5% on an annualized basis since 2009, according to a 2021 report by Michael Cembalest, chair of market and investment strategy for J.P. Morgan Asset & Wealth Management.
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Others argue that private markets are less transparent, with information about companies and funds less readily available to many investors, and carry additional risks.
“Without information, you have no ability to value the company to make an informed investment decision,” Hauptman said. “You’re investing blind.”
Private investments are also generally illiquid, and investors should be prepared to lock up their money for maybe 10 years in some cases, said Paul Auslander, a certified financial planner and director of financial planning at ProVise Management Group in Clearwater, Florida. That longer holding period could make them riskier for some investors, he said.
“It’s like any other investment,” Auslander said. “You have to read the fine print and make sure you know what you’re investing in.”
Aside from inflation, trends like the move toward 401(k) plans and away from pensions have contributed to the swelling ranks of accredited investors over time, according to the SEC.
About 85 million people actively participated in 401(k)-type plans in 2020, about three times the number in 1982, the SEC said. Such private retirement savings is included in calculations of net worth.
The pool keeps increasing. If we don’t do anything, the standard will be rendered meaningless.
Micah Hauptman
DIRECTOR OF INVESTOR PROTECTION AT THE CONSUMER FEDERATION OF AMERICA
The shift from pensions may have also “created investor protection considerations” that weren’t present in the early 1980s, according to the SEC. That’s because the responsibility for investment decision-making shifts from employers to individuals, who may lack the experience to appropriately manage investment risk, the SEC said.
There would be about 5 million fewer accredited investors in 2022 if retirement savings were omitted from the net-worth calculation, the SEC said.
BEIJING — Alibaba Group CEO Eddie Wu is taking over the top role at the company’s Taobao and Tmall e-commerce business, replacing Trudy Dai in the Chinese internet tech giant’s latest management shakeup this year.
Dai, who is one of the 18 cofounders of Alibaba, will assist in establishing an asset management company, according to an internal letter from Alibaba Chairman Joe Tsai seen by CNBC.
Alibaba’s announcement Wednesday comes after Wu replaced Daniel Zhang as the group’s CEO in September.
Wu has been chairman of Taobao and Tmall Group since May 2023.
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The e-commerce business that once propelled Alibaba to success has run into challenges with rising competitors such as PDD, while consumption growth in China remains sluggish.
PDD’s U.S.-listed shares have gained more than 80% so far this year, driving the company’s market capitalization higher than Alibaba’s. In contrast, the company founded by Jack Ma has seen its shares fall by about 14% year to date.
Contributing to a recent decline in Alibaba shares was news last month that the company had scrapped plans to list its cloud business due to U.S. restrictions on exports of advanced chips to China.
Alibaba in March had announced a massive restructuring into six units, paving the way for individual stock listings, especially for its cloud business.
Wu became acting chairman and CEO of Alibaba’s Cloud Intelligence Group in September after Zhang abruptly left the business unit.
“Eddie’s leadership of both Alibaba Cloud and [Taobao and Tmall Group] will ensure total focus on, and significant and sustained investment in, our two core businesses of cloud computing and e-commerce, as well as enabling TTG to transform through technology innovation,” Tsai’s letter said.
“Soon, we will empower a new cohort of management leaders who have developed fundamental skillsets and experience from the bottom up.”
Dai “accomplished” the company’s mission regarding Taobao and Tmall, and her new role in the asset management company would allow her to “play to her strengths,” the letter said.
During Alibaba’s latest earnings call in mid-November, the company said it planned to monetize its non-core assets and noted it had $67 billion on its balance sheet in equity securities and other investments.
Tsai’s letter did not provide details on those non-core assets.
