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How investment dealers can get advisors to play a role in cybersecurity readiness – The Globe and Mail

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The key to reporting cybersecurity incidents successfully is ensuring that advisors know what to do in those situations – namely, escalating the incident quickly so that the right people can deal with it.

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As concerns about the digital security of Canada’s financial system continue to increase, regulators have introduced new rules requiring investment dealers to report any cybersecurity incidents. A big challenge is how those companies will get their investment advisors to be their eyes and ears on the ground.

In mid-November, the Investment Industry Regulatory Organization of Canada (IIROC) introduced mandatory cybersecurity incident reporting for its member dealers. They must inform the self-regulatory organization (SRO) of any cybersecurity incidents that disrupt their businesses in two ways. According to the rules, they must first “provide a preliminary description of the incident and steps taken to mitigate” its impact within three days. Then they “must provide a detailed investigation report, outlining the cause and scope of the issue, and steps taken to mitigate the risk of harm to investors and to the firm” within 30 days.

These new rules arrived just days before the Bank of Canada published its biannual Financial System Survey, in which senior experts who specialize in risk management provide their views on the resilience of Canada’s financial system. The danger of a large cyber incident ranked among the top three risks along with a general deterioration in the global economic outlook and a materialization of geopolitical risk events.

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Dealers rely heavily on everyone in the organization when responding to cybersecurity incidents, says Bradley Freedman, partner and national co-leader of the cybersecurity law group at Borden Ladner Gervais LLP in Vancouver.

“Cybersecurity and privacy are team sports because they require a co-ordinated response.”

Advisors are a part of that team. As they deal with clients and their sensitive information every day, they represent the front line in any cybersecurity-related effort, says J.R. Cunningham, vice-president of strategic solutions at Herjavec Group, a Toronto-based provider of cybersecurity products and services to enterprises.

“In a lot of other campaigns centered around awareness, ‘If you see something, say something’ is a great tagline,” he says.

Advisors have a responsibility to educate themselves about cybersecurity, says Irene Winel, IIROC’s senior vice-president of member regulation and strategy.

“It’s a matter of good service and good business practice for advisors to stay up to date.”

Ms. Winel points to several IIROC resources to help advisors spot and report suspicious incidents. These include a Cybersecurity Best Practices Guide, a Cyber Incident Management Planning Guide and a Cybersecurity Tips for Advisors webcast continuing-education course.

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At the same time, dealers themselves can be proactive in helping their advisors be aware of what to look for, Mr. Freedman says.

“An essential part of cyber risk management and privacy protection is education and training,” he says. “It can be done at a relatively low cost with significant return.”

Dealers can teach advisors what to watch out for without requiring them to be experts in technology-related matters, Mr. Cunningham says. They don’t have to be tech-savvy to understand what personally identifiable information means.

Dealers must make cybersecurity awareness training relevant to advisors, he adds. That means moving beyond dry lectures in an airless conference room and engaging advisors with practical exercises. In one increasingly common approach, companies send out fake phishing campaigns to test employees’ and contractors’ cybersecurity readiness. Companies can even gamify these exercises to help create a sense of healthy competition.

In many cases, it will be obvious to advisors immediately when they’ve done something wrong. “We’ve all had that lump in our throat after we clicked on a link and thought, ‘I shouldn’t have done that,’” Mr. Cunningham says.

The key to reporting cybersecurity incidents successfully is ensuring that advisors know what to do in those situations – namely, escalating the incident quickly so that the right people can deal with it.

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“If something doesn’t seem right, knowing who to call and who to engage at a given time is what’s really important,” Mr. Cunningham says.

Advisors – especially those who report their own mistakes – must feel confident that they won’t be punished. It’s up to executives to create an atmosphere of trust, Mr. Cunningham adds.

Dealers may even consider giving advisors an incentive to report any cybersecurity incident, he suggests. That can be especially useful when dealing with large networks of independent advisors. Mr. Cunningham often sees this in retail and restaurant franchises.

“They’ll say, ‘If you adopt our standards, maybe we’ll help underwrite your cyber insurance risk or we’ll pay for your cyber policy because we’re confident that if you follow our technical standards, you’re not going to be breached.’”

Dealers could also engage advisors as active cybersecurity partners by brokering cybersecurity services. An investment company could procure technology protection tools and offer them to advisors at preferential rates to help engage them in cybersecurity reporting practices.

At the end of the day, advisors will need to keep honing their skills as dealers innovate with new technologies and hackers get ever more dangerous, Mr. Freedman warns.

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“This is a permanent state of being for the foreseeable future. Organizations have to be on guard. They have to invest in people, processes and technologies to manage cyber risks and to protect the privacy of personal information.”

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Consider Volatility And Investment Returns To Improve Retirement Savings – Forbes

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COVID-19 has brought unwanted drops in the value of many people’ s retirement account balances. Some people had a similar experience during the Great Recession of 2008 and 2009. If you are like most people, you do not like seeing your balance up one day and then significantly down the next. Some ups and down are to be expected, but is there a way to avoid big fluctuations? The short answer is no, but understanding different types of returns may help you avoid some of the bigger ups and downs.

Often when people are making investment choices, they do so based upon historical investment returns. Typically, they are presented with a great deal of information, including returns for the last three months, one year, three years, five years, 10 years and since inception. But what does it all mean? And does any of it indicate a greater accumulation of investment returns on top of savings?

If you’re saving for a future goal, then the accumulated balance will be more important to you than the investment returns alone. This article will show you that volatility is likely more important than your investment returns. In fact, the biggest threat to growing your retirement balance is volatility, i.e., the market’s up and down movement, or variance.

Consider the hypothetical chart above that illustrates both return and volatility. Let’s assume our investor makes an initial deposit of $100,000 and makes no further additions. Now, let’s look at scenarios of “flat returns,” a portfolio with little volatility and one with higher returns and higher volatility.

In Year 1, we see what we likely would expect from each. The “flat return” returns 10%, the “lower volatility” portfolio returns 30% and the “higher return and higher volatility” portfolio returns 43%. The highest balance, $143,000, comes from the latter. It is $33,000 more than the “flat return” account and $13,000 more than the “lower volatility” portfolio. You may even be saying, “I’m glad I picked the financial advisor that got me 43% versus the one that got me 10% or the one that returned 30%.”

The next year, even though both the “lower volatility” and “higher volatility” decreased in return, they are still significantly higher than our “flat return” of 10%. However, seeing the return decrease by 20 percentage points in the “lower volatility” and 30 percentage points in the “higher volatility” may have you scratching your head or wondering what might happen next.

In Year 3, as you might have feared, the “lower volatility” portfolio decreased to a -10% return and the “higher volatility” to a -23%. That means the “flat return” portfolio produced the highest balance. In fact, the “higher return and higher volatility” portfolio is now in third place. Hopefully, seeing those reduced returns did not cause you to jump ship and look for a new investment or sell everything to cash and wait out this negative time.

In Year 4, the portfolios rebounded and now the “higher return and higher volatility” portfolio is once again the highest return. However, if we skip to the sixth year, we see that our “flat return” is once again in first place and the “higher return and higher volatility” is once again in third place. Now skipping down to the Year 11, we see that the “flat return” is once again in first place and our “higher return and higher volatility” portfolio is not keeping pace with either of the other two.

Which rate of return are you tracking?

From an average return perspective, the “flat return” portfolio average is 10%, as you would expect. The “lower volatility” portfolio average is 10% as well. However, it’s easy to see that the ride was quite a bit bumpier than for the “flat return” account. The “higher return and higher volatility” portfolio had a higher return by 1.36 percentage points, yet that did not help the accumulated balance. Before this exercise if I had told you that the average return on your investment would be 11.36%, would you have guessed that your account balance would’ve been lower than the balance for a 10% flat rate average return?

From an annualized rate of return perspective, we see a different story. The “flat return” continues to be 10%, but for the others, the volatility shows up in this year by year rate of return. In the annualized return, we are looking at the actual returns generated rather than the average return. And we can see that the “higher return and higher volatility” portfolio balance was lower by than 10% compared to our “flat return” portfolio.

Before you Google “flat return” portfolios, please note that the last time an investment advisor was able to deliver that, it was deemed a Ponzi scheme run by Bernie Madoff.

If you’re like most investors, you react to your accumulated value rather than the average rate of return, annualized rate of return, or standard deviation. (Simply put, standard deviation is a measure of variance. It says that if you take the average return and add the ± standard deviation, you will find that two thirds of the time the returns fall within that number.)

Takeaway

When looking at investment returns, it is important to know what kind of rate of return you’re looking at. Are these average or annualized rates? What is the standard deviation? While not always a perfect predictor of the future, at least this information will give you some idea of what to expect. What’s most important is that you keep focused on your end goal, not your rate of return. You’re looking for an accumulated balance that achieves your goal. Rather than chase returns, you will be better off focusing on the steps you can control to accumulating the balance you need for a comfortable retirement.

Footnote

This chart was a collaborative effort with Chuck Self, Chief Investment Officer of iSectors. This data does not directly reflect any specific portfolio strategy, nor is this an endorsement of the use of any iSectors investment strategies.

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What Happens To Your ESG Investment When Money’s Tight For Others? – Forbes

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No matter your age, you invest for only one reason: to accumulate wealth. Anything else is charity.

Not that there’s anything wrong with charity (and faith and hope and all those other good things). Charity puts food on other families’ tables. Investing—good investing, smart investing, successful investing—puts food on your family’s table. And if you’re really good, smart and successful at investing, you can accumulate enough wealth to put plenty of food on both your family’s table and other families’ tables.

So-called “ESG”-based investing is treated seriously by many, including, judging from the many investment products touting their ESG affinity, many investment firms. Some even argue ESG-based investing produces more favorable investment returns than traditional financial-based investing. This may be true, if only for a very financial-based reason.

Any product that hits its groove attracts investors. When Apple

AAPL
tore off its corporate suit and “changed everything” with the iPod (then the iPhone, then the iPad, and, pretty much, the i-anything), its stock took off. Hot products produce hot companies which leads to hot stocks.

All good, smart and successful investors pay attention to consumer demand. It doesn’t matter if those consumers are retail or business, a product that suddenly emerges into “must have” status means sales. For the company doing the selling, that means profits. For investors, profits mean favorable returns.

It’s as easy as that. Find a product boosted by surging demand, then ride that wave.

Right now, ESG-based investing is just such a product. As a result, it’s easy to confuse the story with the finances.

While environmental, social and governance (the “ESG” in ESG) may not appear to have a direct impact on revenues and profits, they very well may.

“Many investors have been raised in a society that has become increasingly aware of a variety of risks that affect the environment and social behavior & well-being and financial outcomes for companies,” says Robert ‘Bob’ Smith, CIO and President of Sage Advisory Services in Austin, Texas. “They have also come to understand the importance of good corporate governance, disruptive product innovation, and creative approaches to resource or time management. All of these elements are identified, evaluated, and beneficially highlighted through the effective ESG risk assessment application in the investment process.”

You can easily imagine how this zeal for ESG-based investing suggests companies might profit from selling ESG-based products. These products can range from organic foods to electric cars.

It’s not just actual products. To establish an ESG appeal to its entire product line, a company might take actions that align themselves with causes positioned to show support for ESG issues. Of course, investing in these “ESG-affiliates” does pose some risk.

“In some cases, we see statements from companies making products that when you make your purchase from them the company will donate funds to an ESG cause,” says Stephen Akin of Akin Investments, LLC in Biloxi, Mississippi. “In the event the company doesn’t follow through on those donations, then buyer’s remorse will set in and turn the young consumer away from the product they once loved.”

It’s not just failure to follow-through on philanthropic promises that can hurt companies. Changing definitions of acceptable behavior can resurface decades-old statements that cause one to cringe in today’s society. Endorsing the wrong political candidate or belonging to the wrong political party can lead activists to call for a boycott of an otherwise upstanding “good citizen” company.

“Any sort of scandal, however minor, can set off a firestorm of negative press for a company,” says Kathleen Owens, of Aurora Financial Planning & Investment Management LLC, in the San Francisco Bay Area. “Companies are boycotted for what a company executive Tweeted, board members are pressured to resign if they mis-speak. Groups of people have become very organized in coordinating a pushback on a company that they are displeased with.”

The greatest risk when it comes to ESG-based investing, however, lies in the greatest risk to ESG-based products. It’s one thing to be a good story stock, but that story has to be implementable.

“Younger consumers may desire to purchase products that align with their ESG goals, even if they are more expensive,” says Ryan Brown, partner at CR Myers & Associates in Southfield, Michigan. “If, however, those products are not as readily accessible to purchase, as easy (or easier) to use or will promote that goal in a truly scalable way, younger purchasers will likely shy away from them.”

Worse for higher cost ESG-based products is the awful reality of economics can come down hard, especially when the economy heads south.

“Younger generations are becoming increasingly skeptical and frugal after witnessing the 2008 financial crisis and recent coronavirus market drop,” says Brown. “If you’re asking them to spend more money on a product that they could otherwise purchase in a cheaper, generic version, that product best be able to accomplish those goals in a material fashion. You don’t see many Generation Z individuals driving a Tesla

TSLA
(yet).”

It’s not just the coronavirus market drop, it is the impact the pandemic has had on certain sectors in the marketplace. This is particularly acute for those just entering the job market in states that have had trouble re-opening. Can those people, (in many ways the target market for ESG-based products), afford to pay for the luxury of supporting their favorites causes? And, if they can’t, what kind of financial impact will that have on the companies that sell those products?

“COVID-19 may put a damper on younger people spending according to their beliefs,” says Derek Horstmeyer, an Assistant Professor of Finance at George Mason University’s School of Business in Washington, D.C. “For those that are newly unemployed or have faced pay cuts it is now more difficult to pay extra for a good that aligns with their belief.”

Finally, what happens if we discover the appearance of ESG altruism is just that—an appearance, not a reality?

“The answer to this question may lie in a research project that one of my students just did,” says Michael Edesess, Adjunct Associate Professor, Division of Environment and Sustainability at Hong Kong University of Science and Technology. “She surveyed a couple of hundred subjects (mostly young and college-age) about their feelings about the ‘greenness’ of five different fashion brands. She found, surprisingly, little or no correlation between their beliefs in their greenness and their proclivity to buy them. Upon direct questioning of a few of the participants in the survey, she found that their preferences about other features of the products overwhelmed their preferences about their greenness. They may say they prefer green products, but when it comes down to it, they just want them to be stylish.”

Fashion, perhaps, provides the key to successful ESG-based investing. Fashion brands occupy a long spectrum from “bargain-basement” to “luxury.” Good, smart, and successful companies sell brands along that entire spectrum. Those companies with sustainable marketing strategies understand that you cannot sell luxury items using the same techniques that sell bargain-basement products. The same holds true for production and distribution systems.

Business models differ for high-margin products and low-margin products. At this point, ESG-based products appear to be high-margin products. Successful ESG-based investments will therefore be in companies that show they can implement a high-margin product business model.

Otherwise, if they’re dependent on consumers’ willingness to continue to pay a premium for ESG, they may be in for a dreadful surprise the next time we hit a broad-based recession.

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Rivian closes $2.5B investment round – Green Car Congress

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Rivian has closed an investment round of $2.5 billion. The financing was led by funds and accounts advised by T. Rowe Price Associates, Inc. Rivian has developed and vertically integrated a connected electric platform that can be flexibly applied to a range of applications including the company’s adventure products as well as B2B products such as the Amazon last-mile delivery vans.

The Rivian R1T pickup. Photo credit: Jeff Johnson.


Rivian has developed and vertically integrated a connected electric platform that can be flexibly applied to a range of applications including the company’s adventure products as well as B2B products such as the Amazon last mile delivery vans.

Participants in this investment round include Soros Fund Management LLC, Coatue, Fidelity Management and Research Company, and Baron Capital Group. Existing shareholders Amazon and funds managed by BlackRock also participated.

We are focused on the launch of our R1T, R1S and Amazon delivery vehicles. With all three launches occurring in 2021, our teams are working hard to ensure our vehicles, supply chain and production systems are ready for a robust production ramp up. We are grateful for the strong investor support that helps enable us to focus on execution of our products.

—Rivian Founder and CEO RJ Scaringe

No new board seats have been added, and additional details about this investment are not being disclosed at this time. The investment announcement is Rivian’s first in 2020. In 2019:

  • In February, Rivian announced a $700 million funding round led by Amazon.

  • In April, Rivian announced that Ford Motor Company invested $500 million and that the companies would collaborate on a future program.

  • In September, Cox Automotive announced its $350 million investment in Rivian, complemented by plans to collaborate on logistics and service.

  • In late September, Rivian announced it was developing an electric delivery van for Amazon utilizing Rivian’s skateboard platform and that 100,000 of these vans had been ordered with deliveries starting in 2021.

  • In December, Rivian closed an investment round of $1.3 billion. The financing was led by funds and accounts advised by T. Rowe Price Associates, Inc. with additional participation from Amazon, Ford Motor Company and funds managed by BlackRock.

Rivian’s launch products, the R1T and R1S, deliver up to 400+ miles of range and provide a combination of performance, off-road capability and utility. These vehicles use the company’s flexible skateboard platform and will be produced at Rivian’s manufacturing plant in Normal, Ill., with customer deliveries expected to begin in 2021.

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