State Street Global Advisors is teaming up with Barclays’ research business to build and manage active products in systematic fixed income. While systematic equity strategies have been around for a while, the strategy is somewhat new to fixed income due to a lack of data. While most stock trades are easy to track, fixed-income trades are typically over-the-counter, with electronic platforms only handling a part of the business. This makes accessing and harvesting data in fixed-income markets more complex. However, that’s changing. Efficiency in the bond markets is increasing the viability of implementing systematic debt strategies. With fixed income, managers attempt to generate alpha through data analysis that uncovers asset mispricing, according to SSGA. This comes as the demand for systematic fixed income is increasing. According to a State Street survey of 700 investors, 91 percent of institutions are interested in using systematic fixed-income strategies over the next 12 months. The survey also showed that investors managing more than $10 billion were most interested in implementing these strategies using investment-grade and high-yield corporate securities.

Finsum: As demand for systematic fixed-income strategies heats up, State Street Global Advisors and Barclays are teaming up to build and manage active systematic fixed income strategies. 

According to a Bank of America Private Bank study, younger, wealthy investors are turning to alternative investments. Bank of America polled 1,052 high-net-worth investors with at least $3 million in investable assets from May to June 2022. The study revealed that 75% of high-net-worth investors between the ages of 21 and 42 don’t expect above-average returns from traditional stocks and bonds, with 80% of these young investors flocking to alternative investments. In fact, younger investors are allocating three times more to alternative assets and half as much to stocks than other generations. Alternative investments can include hedge funds, private equity, real estate, commodities, and structured products. The move to alternatives has most likely been triggered by concerns over losses in the stock and bond markets. There has also been an increase in advisors turning to alternative investments, according to a survey from Cerulli Associates. Based on that study, the top reasons for increased alternative allocations include reducing exposure to public markets, volatility dampening, and downside risk protection.

Finsum: Both young, wealthy investors and advisors are turning to alternative investments due to stock and bond losses and the need for downside protection. 

According to an index that measures Treasury market volatility, bond volatility is at a level not seen since the peak of the COVID market crisis in March 2020. This is a worrisome sign that the Treasuries markets, which are considered a safe haven for investors, are not functioning as they should. For context, the biggest one-day move for the benchmark 10-year Treasury in 2021 was 0.16. This year, there have been seven days with larger moves. Liquidity is evaporating, which has caused the soaring volatility. A Bloomberg index is currently showing that liquidity in the Treasury markets is worse now than in the early days of the pandemic, while implied volatility, measured by the ICE BofA MOVE Index is near its highest since 2009. This is coming at a time when Bloomberg News reports that the largest buyers of Treasuries, including Japanese pensions, life insurers, foreign governments, and US commercial banks, are pulling back at the same time. Even Treasury Secretary Janet Yellen has expressed concern about a potential breakdown in trading, saying that her department is “worried about a loss of adequate liquidity” in the US government securities market.

Finsum: A lack of liquidity and a pullback in large-scale treasury purchases has triggered volatility not seen since March 2020.

According to a new report from Cerulli Associates, more advisors will be adopting the use of model portfolios to better serve their clients and free up time to develop their businesses. In the latest Cerulli Edge—U.S. Advisor Edition, 4Q 2022 Issue, the firm noted that the industry’s steady transition toward a financial planning-oriented service model will be a major fact in the increased adoption of model portfolios. Cerulli expects advisors to increase planning offerings over the next year, with 82% of advisor clients receiving targeted or comprehensive financial planning services by 2023. The report also noted that insourcers, or those who either customize portfolios on a client-by-client basis or use practice-level resources to build a series of custom models, spend 18.5% (practice models) and 29.5% (customizer) of their time focused on investment management. If those advisors use model portfolios, it will allow them to reduce their time commitment to less than 10%. The report also notes that advisors that outsource their portfolio construction have clients, on average, that are roughly half the size of those that insource their portfolio construction. Cerulli also found a correlation between model users and younger and smaller advisory practices.

Finsum: A recent Cerulli report predicts an increase in demand for model portfolio outsourcing as the industry transitions to a financial planning service model.

FINRA has issued its first disciplinary action related to Reg BI. The regulatory authority levied a $5,000 fine and a six-month suspension on a broker for allegedly causing their client to pay tens of thousands in commissions on an account of less than $30,000. It is the first time FINRA has taken action against a broker for alleged violations of the SEC's Reg-BI fiduciary rule. Charles V. Malico, who worked for Network 1 Financial Securities at the time of the violation, accepted and consented to the agency’s findings without admission or denial. According to findings, between July 2020 and November 2021, Malico violated Reg BI when he recommended a series of trades in the account of a retail client that was considered excessive based on the customer’s investment profile. Therefore, his actions were not in the client’s best interest. Making matters worse, Malico allegedly recommended that his client buy and sell a security, only to repurchase the same security days or weeks later. FINRA was made aware of the broker’s conduct through a review of a customer-initiated arbitration. The arbitration, which is still pending, stemmed from a Dec. 6, 2021 customer complaint that alleged negligence, breach of fiduciary duty, and negligent supervision. 

Finsum: In its first disciplinary action related to Reg BI, FINRA levied a $5,000 fine and a six-month suspension on a broker for not acting in the best interests of his client.