Companies with large amounts of debt approaching maturity are tapping the private credit industry for financing that may not be available through public markets. The latest example is PetVet, a veterinary hospital operator owned by KKR, which is looking to refinance more than $3 billion in loans. Other recent examples of companies include Hyland Software, Finastra, Cole Haan, and Tecomet which have raised a cumulative amount of $10 billion in the past few months. 

With private credit, companies are able to bypass traditional banks and access billions in loans. This is being facilitated by a surge of inflows into the asset class which is leading to funding for takeovers and to refinance debt. 

Another factor supporting the growth of private credit has been weakness in the syndicated loan market, where banks arrange financing and then sell the loans to other investors. Given that over the next 3 years, $350 billion of leveraged loans are set to mature, private credit will continue to be a necessary intermediary especially for companies with higher debt loads.   

Typically, private credit investors earn between 5 and 7% above benchmark rates which comes in at between 10.5% and 12.5%. In contrast, the average yield on B rated corporate bonds is 9.2%. 

Finsum: Private credit is playing an increasingly important role when it comes to providing financing for companies. Here are some of the major factors behind this shift. 

The most effective form of prospecting is asking clients for referrals, yet 88% of financial advisors fail to do so. The simple reason is that most advisors feel too uncomfortable and don’t want to affect their existing relationship with clients. 

However, this fear must be overcome if an advisor is serious about growth. According to Brett Van Bortel, the director of consulting services at Invesco Global Consulting, the reluctance is counterintuitive as more than 85% of new business comes from referrals from existing clients. 

Van Bortel recommends advisors frame their request as an opportunity for the clients to help their friends and family with high-quality financial advice rather than as a favor for the advisor. The same principle applies to establishing fruitful relationships with centers of influence who often refer high net worth clients with complex issues. 

Centers of influence include other professionals like lawyers and CPAs. According to DeVoe & Co., 17% of new clients and 23% of new assets come from these referrals. They are looking for expertise and help in solving a problem. It can often take a long time to develop these relationships and build enough trust, but these efforts can yield steady long-term returns.

Finsum: A key source of growth for financial advisors is client referrals. Yet, many advisors are reluctant to ask their clients for referrals. 

Advisors can use direct indexing to optimize their clients’ portfolios, reduce tax bills, and offer more customized solutions. It also offers an opportunity for an advisor to differentiate themselves and increase their appeal to high net worth prospects with specific needs.

Direct indexing offers more flexibility and solutions than traditional passive investing while retaining the major benefits. One example is that it can be used to reduce concentrated stock positions in a manner that can offset capital gains taxes and help lead to a more diversified and balanced long-term portfolio.

With direct indexing, tax losses can be harvested and set aside. This effectively turns them into assets which isn’t possible with investing in index funds. It could be especially of value to clients expecting a future financial windfall who are interested in proactive steps to reduce the future tax burden. 

Indices can also be modified to offset a large allocation to a specific stock or sector in another part of the portfolio. For instance, someone who works in the tech industry with a large number of stock options may not want tech exposure in their personal portfolio. 

Advisors can start this conversation with prospects by discussing matters like future windfalls, concentrated positions, reducing capital gains taxes, and more personalized solutions.

Finsum: Direct indexing is a way to optimize clients’ portfolios especially those with large capital gains taxes, concentrated positions, and expectations of a future financial windfall. 

LPL Financial topped analysts’ estimates for Q3 earnings despite a slight 3% decline in earnings. It also reported a strong quarter in terms of recruiting and asset growth. It also laid out its growth plan for the future which involves expanding its capacity to serve all types of advisors. 

LPL added 462 advisors on a quarterly basis and 1,360 on an annual basis. It attributed this growth in part to its new affiliation models and to boosting its offerings to serve a wider variety of advisors. CEO Dan Arnold remarked that LPL’s goal is to eventually be able to compete for all 300,000 advisors on the marketplace.

Q3 was LPL’s best quarter for asset growth since Q2 of last year when it added $43.5 billion. In Q3, the firm added $31.2 billion in assets with $12 billion from Bank of the West and Commerce. However, the company believes that its current growth is higher quality and more durable.

Richard Steinmeier, managing director of business development, said “We are strengthening in the way that individual advisors and groups of advisors are choosing to come to [LPL] in a much more material way even than Q2 2022.” 

Finsum: LPL Financial reported strong Q3 results in terms of recruiting and asset growth. The firm has ambitious growth plans for the future. 

According to a report conducted by Hearts & Wallets, high net worth (HNW) investors are favoring separately managed accounts (SMA) over mutual funds. The report surveyed 6,000 people. About 22% of US households were invested in an SMA, which is a significant gain from 13% in 2020. In the same timeframe, mutual fund ownership increased from 38% to 39%. 

Among HNW investors with investable assets of $3 million or more, SMA ownership went from 22% in 2020 to 41% in 2022. In terms of portfolio allocation, SMAs climbed from 22% in 2020 to 29% last year. 

At one time, mutual funds were the only way for retail investors to get access to many markets and the expertise of portfolio managers. Now, there are a multitude of products that offer these features, often with more liquidity and lower costs. 

One reason for the growing popularity of SMAs is that they are becoming more affordable and now require lower account minimums. Another factor is the growing interest in personalized investing which is more easily facilitated with SMAs rather than mutual funds. For instance, an investor passionate about protecting the environment could avoid fossil fuel companies in their holdings. 

Finsum: Separately managed accounts are gaining traction among high-net-worth investors and are displacing mutual funds.