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Nationwide Talks About Puerto Rico’s Fiscal Crisis, Local Expansion Plans

By on October 26, 2016

SAN JUAN — For Michael Karalewich, CEO of Nationwide Planning Associates, a broker-dealer, Puerto Rico residents need financial advice more than ever, as the local market faces increased litigation, strained client-adviser relationships and contracting investment operations.

“Most firms on the island that had been operating and created their own products, these products have suffered staggering losses and resulted in numerous customer complaints in arbitration cases,” he said in reference to the commonwealth’s recent debt and fiscal woes.

The firm’s founder & VP, Michael De Pol, noted how investors in Puerto Rico have “been burned,” and badly. “I see this almost as a perfect storm because not only did you have all these local banks create products with local securities that were sold, but on top of that, in many cases, they used leverage, or margin. One thing is to make an investment and find out it went down 70% in value, but when you add margin on that, you can go negative,” said De Pol, who along with Karalewich visited the island this week to inaugurate the firm’s new offices in San Juan.

Michael Karalewich, CEO of Nationwide Planning Associates

Michael Karalewich, CEO of Nationwide Planning Associates

He went on to explain how the lack of diversification—incentivized by local tax laws that led down a “path of least resistance” to invest almost exclusively in local products—is partly to blame for the blow the island’s debt crisis has landed on local investors.

“There was no regional, geographic diversification. Everything was here. That was the biggest mistake. And then you have the poor performance of the investments,” De Pol added.

As for Karalewich, recent events have led to a change in investor habits on the island, particularly over tax concerns. “What they realize is that the tax issue that they were so concerned about—paying extra tax—isn’t an issue when you lose 80% of your principal,” he said.

Ties to the island

As the firm seeks to insert itself in the Puerto Rico market, Karalewich explained how Nationwide would establish trust first. “We really want to connect with the communities,” he said, as the firm goes after perspective on what is going on locally “to understand as much as we possibly can, so when we make decisions, we have input from people on the island.”

That would include “professional networks” such as the one Nationwide already has with Bonistas del Patio—a Puerto Rico creditor group comprising local bondholders and led by former Government Development Bank President Jorge Irizarry.

“We met over the summer, in New York City, and then came down and met [Irizarry] again…. He basically helped me shape my perspective, and we exchange messages periodically and I know he’s available. We definitely wanted to align with an organization like [Bonistas del Patio],” noted Karalewich, adding Universal Life President José Benítez as “another key relationship” he has on the island.

The Nationwide CEO also spoke about the firm’s relationship with the Puerto Rico Financial Institutions Commissioner’s Office (OCIF by its Spanish acronym), and stressed the need to provide the entity with more resources to carry out its oversight role. “I think they are understaffed, they are overwhelmed, I think their heart is in the right place, but without knowing the full history of what happened, I think the big banks might have influenced how that organization was ran and that has to change,” he commented.

Eyeing long-term stay

“We wouldn’t be here if we didn’t want to build a long-term strategy. We believe there are brighter days ahead for investors,” Karalewich stressed, adding that Puerto Rico is the firm’s fastest-growing segment.

The firm arrived in the local market in 2009 and currently operates five branches in Mayagüez and San Juan. Out of the firm’s 100 associated individuals, 27 are on the island. To the tune of a $250,000 investment, the firm inaugurated this week its facilities in Hato Rey.

Founded in 1992 and based in New Jersey, Nationwide is “an independent, full-service broker dealer” registered with several regulatory entities, such as the Securities & Exchange Commission and the Financial Industry Regulatory Authority. It currently has $2.5 billion to $3 billion in assets under management, which are kept in Pershing—a subsidiary of the Bank of New York Mellon that is also used by Santander and Oriental Bank.

Karalewich said people don’t usually understand what a broker dealer is. It oversees individuals who are licensed to offer securities to the public, and acts “like a hub,” in charge of making sure securities laws and regulations are followed by its associates.

“We are very different than the banks. The banks have multiple conflicts of interest within their business model…. Our business model is an independent model where we don’t create our own products,” said the chief executive, vowing that Nationwide’s advisers are well-experienced and highly vetted before being allowed to join the firm.

During a roundtable with the local press, both Karalewich and De Pol made their case for Nationwide as a legitimate option for Puerto Rico residents who have lost confidence in investing their savings.

“We are kind of fortunate in a sense being new to the marketplace and our business model, since we don’t create or manufacture these products, we don’t have the litigation that a lot of these companies have on their books. That’s an advantage for us because we’re OK talking freely with clients; we didn’t cause the clients to lose value on their portfolios,” Karalewich said.

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