The U.S. Treasury Department is seeking to curtail the use of bespoke life insurance policies and annuities by wealthy individuals and families to minimize their tax obligations. The proposal is called "Limit Tax Benefits for Private Placement Life Insurance and Similar Contracts" is part of the fiscal year 2025 "Greenbook"

This proposal aims to reduce the tax advantages associated with private placement life insurance, private placement annuities, and certain variable life and annuity contracts. While few Greenbook proposals are enacted into law swiftly, their inclusion can significantly influence financial services lobbyists and advisors over time.

Issued annually as part of the president's budget proposal, the Greenbook has previously suggested limiting business-owned life insurance and similar arrangements. The new measure could potentially raise $140 million in 2025 and $6.9 billion from 2025 to 2034. Designed for high-net-worth individuals, private placement life insurance and annuities allow customization of benefits and investments, often to gain tax benefits rather than to offer mortality or longevity protection.

Finsum: This proposal could take years to come into law, if it even ever happens, but the landscape could get more progressive if Biden is re-elected. 

Investors are finding increasingly innovative ways to invest in private markets and interval funds are one of the latest trends developing in this area. Interval funds enable individual investors to commit to strategies that invest directly in private markets, while listed private equity ETFs invest in public firms offering private-market strategies. 

There has been a spike in interest for alternatives and uncorrelated assets, benefiting interval funds. High-net-worth investors now have access to private capital managers previously exclusive to pension funds and sovereign wealth funds, but accessing and managing the required capital remains a challenge. Private-market funds, including variously named private market access and opportunity funds, address this need and saw significant growth with 11 new products launched in 2022, a trend continuing in 2023. 

Although these funds offer unique advantages like access and diversification, they come with high costs, potential liquidity issues, and commitment periods that can lock up capital, necessitating careful consideration by investors.

Finsum: Liquidity lock up should be highly considered for these types of alts, and the current high rate environment can exacerbate this problem. 

Wealth managers rely on platforms such as broker/dealers and custodians, and over two-thirds have considered switching their current arrangements, though only 17.1% are actively planning to make changes by 2025 or 2026. 

More successful wealth managers are actually more likely to switch for better operational and business support. Key factors influencing platform choice include financial arrangements, operational support quality, and business development assistance, while personal relationships are less influential. 

Efficiency and negotiating favorable financial terms are critical, as is the ability to find ideal clients through referrals. Wealth managers should critically evaluate the claims of platforms, especially regarding business development support programs. Despite interest in changing platforms, inertia and other demands may prevent many from following through.

Finsum: While the relationship isn’t causal its worth pointing out that higher networth advisors are more active in thinking about their future relationships with their broker dealers.

Active bond funds are essential for a well-diversified investment portfolio, providing income and cushioning against market downturns. In 2022, bonds demonstrated their resilience, with most fixed income categories performing better than the broader stock market. However, bond values are inversely related to interest rate changes, so with rates projected to rise, focusing on short- to intermediate-term bond ETFs is advisable. 

Active bond ETFs, such as Pimco’s Active Bond ETF (BOND), offer diversified exposure and professional management, helping investors navigate volatile markets. If you want to shorten the duration Pimco’s Enhanced Short Matruaity Active ESG ETF (EMNT) might provide a more robust alternative with ESG exposure. 

Despite higher costs, active management can be beneficial, especially in uncertain economic conditions, making these funds a strategic addition to long-term investment portfolios.

Finsum: Duration risk is especially important in this current climate and because interest rates could fall quickly in the next year depending on the Fed’s decisions.

At the annual Milken Institute Global Conference, many expressed concerns that, as rates remain elevated, there is increasing liquidity risk for some borrowers. So far, robust economic growth has masked these underlying issues, but many borrowers would be vulnerable in the event of an economic downturn.

So far, default rates have remained low. Skeptics contend that this is due to amendments made to loan terms, leading to maturity extensions and payment arrangements. Ideally, these maneuvers would buy time for borrowers until monetary conditions eased. 

Yet, economic data has not been supportive of this outcome so far in 2024, leading to more stress for borrowers and concerns that defaults could spike. According to Katie Koch, the CEO of the TCW Group, “This cannot be extended forever. Eventually, those default rates will rise.” Danielle Poli adds, “It is going to be ugly. Many of these companies are burdened with excessive leverage, with holes in their covenants like Swiss cheese.”

Some investors sense opportunity as there has been an increase in bridge loans to borrowers, searching for liquidity. Oaktree Capital has reduced exposure to syndicated loans and raised cash levels to take advantage of any dislocations. In addition to bridge loans, there is also increasing demand for hybrid capital, which is in between senior debt and equity and provides liquidity and cash flow relief to borrowers.

Finsum: At the annual Miliken conference, Wall Street heavyweights warned that as rates remain elevated for longer, borrowers are getting more stressed and that a spike in defaults is looming.