New Change Brings Benefits to the Investment World

June 3, 2024

As someone who embraced change, Ben Franklin once said, “Without continual growth and progress, such words as improvement, achievement, and success have no meaning.” In a world that is constantly evolving, you will see significant changes in your lifetime and something that once seemed out of reach becomes the standard. Last week the investment world experienced an improvement in market efficiency with the transition to “T+1”.

What is T+1?

T+1 is an abbreviation referencing the settlement date of security transactions. When a security is traded (i.e. bought or sold), a price is agreed upon during the transaction or trade date “T”.  However, the transfer of cash and security ownership won’t take place for another business day or settlement date “+1”. For example, if a stock is sold on a Monday, cash and security ownership will not change hands until Tuesday (assuming it is not a holiday and markets are open). This is a big transition for U.S. markets after years of progress. After decades of operating at T+5, the U.S. markets moved to T+3 in 1995 and T+2 in 2017. 

Why the transition?

There are multiple benefits to shortening the settlement time. First, it helps lower risk throughout the financial system. Having a shorter trade settlement reduces the potential of default by other parties involved in the trade. Efficiency is also improved with a shorter settlement timeline. Similar to online shopping, trading is almost instant. Likewise, you still wait multiple days to receive your items. Previously, some assets had different settlement timelines. For example, if you were to sell a stock (T+2) and purchase a mutual fund (T+1), you wouldn’t be able to execute the trades on the same day. Now with a shorter and more consistent settlement period, investors can receive their securities quicker, transfer between investments without missing out on market exposure, and respond promptly to funding needs. 

What does this mean for investors?

The primary changes and benefits are happening behind the scenes. As the financial world continues to evolve, efficient markets will be essential in supporting investors goals. Having consistent settlement dates lowers barriers that may have prevented some money managers from including certain assets in client portfolios. Also, as we’ve experienced over the past decades, improved efficiencies help keep trading costs low and promotes liquidity in the financial markets. While the transition was executed smoothly for securities under our watch, we continue to look for ways to lower barriers and help you achieve your financial goals.  Reach out today and to review your portfolio. Your financial success matters to us.