As the year comes to a close, it presents an opportune moment for financial advisors to revisit strategies and offer valuable advice to clients. A timely topic is tax loss harvesting. And direct indexing is becoming a popular way for investors to accomplish this. Therefore, now is a great time to consider introducing the concept of direct indexing to your clients.

The Value of Tax Loss Harvesting

Tax loss harvesting is a technique that can reduce taxable income by selling securities that have incurred a loss. As we approach year-end, this tax-saving tactic may be appropriate for some of your clients, yet you need a convenient way to make these trades without upsetting their entire portfolio. Direct indexing allows you to accomplish this task.

Direct Indexing: No Longer Just for the Elite

Direct indexing, which involves buying individual stocks directly rather than through a fund, enhances the ability to tax loss harvest. While it's not a new concept, it's becoming more accessible to a broader range of investors. As author Medora Lee pointed out in her recent article in USA Today, "(direct indexing) was once mostly reserved for the affluent with at least $1 million to invest." But things are changing. "With better technology and zero- or low-commission trading now the norm, more people can use direct indexing."

Embracing the potential of direct indexing and tax loss harvesting is another way to demonstrate your value to your clients.

Separately Managed Accounts (SMAs) have been part of the investment landscape for several decades. However, a recent article from InvestmentNews.com suggests it's time for financial advisors to revisit the potential these accounts offer.

Driven by technological advancements, SMAs can now be highly adaptable, allowing for the development of customized investment strategies for a wide range of investor account sizes. This enables the alignment of investment approaches with specific investor objectives, such as tax management and adherence to Environmental, Social, and Governance (ESG) principles.

Finance industry heavyweights are recognizing this potential, with companies like AssetMark, LPL Financial, and Morningstar launching or significantly enhancing their SMA platforms in the past few years. Their initiatives underscore the growing appetite for bespoke portfolio strategies that resonate with today's savvy investors.

Highlighting this trend, Aron Kershner, Managing Director at Goldman Sachs, emphasized the modern appeal of SMAs. He described them as uniquely positioned to cater to "outcome-oriented" investors, whether they have philanthropic goals, are seeking an exit from a non-performing equity manager or are managing a highly concentrated stock position.

Given advancements in technology that have increased SMA's capabilities to align with investor's needs, advisors would be well-served to take a closer look at how they can use these accounts to serve their clientele.

Often, there is a mismatch between how an advisor spends his or her time, and what drives ultimate success for the practice. By embracing technology and model portfolios, advisors can free up more time to invest in activities that build their business such as client service, marketing, and prospecting.

Surveys show that client retention and satisfaction are ultimately linked to frequent communication. However, many advisors are spending a chunk of their time managing portfolios and researching investment ideas. In fact, some research indicates that advisor-managed portfolios underperform especially in more volatile markets. 

Now, there are increasingly more complicated and sophisticated investment options which increases the burden on advisors and further compromises client services. With model portfolios, advisors can outsource large parts of the process such as research, portfolio management, and onboarding while providing more options and better performance. 

By outsourcing this function, advisors can also reduce costs and create greater efficiencies. Model portfolios can also help in other areas such as tax management which is another priority for clients. By centralizing information, it can identify opportunities across portfolios and lead to a more personalized experience. 

Ultimately, model portfolios are a way for advisors to leverage technology to drive better outcomes for their clients and business while creating a more efficient practice.

Finsum: Model portfolios offer many benefits to advisors. The primary one is it frees up more time for client service. 

During Q3, there was a net outflow of $1.4 billion from renewable energy funds. Overall, there has been a 23% drop to $65.4 billion in total assets in renewable energy funds from the end of Q2. 

Renewable energy companies have underperformed due to high rates and rising costs which are compressing margins. Given that many of these companies have high multiples, they are more sensitive to rising long-term rates which makes future projected cash flows less valuable.

While there was a burst of enthusiasm around the sector following the passage of the Inflation Reduction Act (IRA), many stocks in the sector are down between 30 and 50% since then. For instance, the iShares Clean Energy ETF (ICLN) is down 39% since the IRA’s passage in August of last year.

Some of the issues they’ve faced include project delays, long timelines for permits in addition to the headwind of higher material costs and interest rates. As a result, many high-profile projects in Europe have been delayed or canceled due to these constraints. Another contributing factor for outflows out of the sector is that artificial intelligence has become the new ‘hot’ growth theme in 2023 with the theme attracting significant flows.

Finsum: Renewable energy funds experienced major outflows in Q3 due to a variety of factors. 

Yields on long-term Treasuries have broken out to 16 year highs. This has unleashed considerable volatility for bonds amid uncertainty about the economy’s trajectory and the Fed’s next move.

At the same time, many investors are looking to take advantage of this weakness and increase their exposure to the asset class especially with yields at such attractive levels. However, the current environment may be more suitable for active fixed income ETFs like the T. Rowe Price QM US Bond ETF (TAGG) rather than the typical passive options. 

Active managers have more freedom and flexibility when it comes to credit quality and duration, meaning they are able to take advantage of market inefficiencies. And, there are likely more inefficiencies in the current environment due to the cloudy economic and monetary outlook.

As an example, TAGG invests in investment-grade fixed income securities, including corporate and government debt and mortgage and asset-backed securities across all sorts of maturities. Additionally, TAGG still retains many of the benefits of passive strategies such as low costs and diversification. 

Finsum: The current environment is unusually uncertain and volatile for fixed income investors. Here is why active strategies are a better fit for the current environment.