High net-worth clients may be facing a major issue due to the upcoming expiration of the 2017 tax cuts after 2025. This will mean the expiration of higher federal gift and estate tax exemptions. The exemptions, which encompass tax-free caps on gifts during life or at death, will be $13.6 million per individual or $27.2 million for spouses in 2024 but will be cut by 50% in 2026. 

This will mean that many more high net-worth clients will be impacted by the estate tax. And, this is the time to begin planning around this new reality given that many estate tax planning strategies take months or even more than a year to implement. 

Some married couples can take advantage of the current higher levels of exemption by removing assets from their estate via lifetime gifts. According to Robert Dietz, the national director of tax research at Bernstein Private Wealth Management in Minneapolis,“The reality is you have to give away more than half to see any benefit from the gift in terms of the exclusion going away.” And for clients uncomfortable making these gifts now, they can keep control of their assets by opening a trust. 

Finsum: The expiration of the 2017 tax bill means that high net-worth clients will have to grapple with much lower exemptions on tax-free giving. 

Thanks mainly to a blend of enhanced technology, lower trading costs, and a growing appetite for personalized investment strategies, direct indexing may become a term as common with investors as mutual funds and ETFs. A recent article in USA Today highlights this trend, and when a broadly read news source such as this writes about a subject, it’s usually a clear sign it has begun to resonate with the masses.

So, what is driving this surge in popularity? The answer lies in the convergence of investor preferences and improved platform capabilities. While investors are always keen on the potential for total return, they also seek flexibility, cost efficiency, and favorable tax treatment—benefits that direct indexing is uniquely positioned to provide.

Direct indexing allows investors to tailor their holdings to reflect personal values or strategic preferences, such as ESG considerations or specific sector exposures. Moreover, the tax optimization potential of direct indexing allows for more efficient management of capital gains taxes, a feature particularly attractive to savvy investors looking to maximize their after-tax returns.

As direct indexing becomes more widely adopted by advisors and platforms, we’ll watch with interest to see if this investment approach moves from the domain of the affluent and the institutional to the everyday investor.

Finsum: Direct indexing's spread to lower account balances could make it as popular a product type as mutual funds and ETFs.

Since the yield on the 10-year inched above 5% in October, we have seen a relentless rally in Treasuries. According to Bank of America, this rally is due to the increasing likelihood of an upcoming Fed rate cut and is just getting started. It eventually forecasts the 10-year yield falling another 200 basis points based on historical precedent of dramatic declines in yield during the interim period between the Fed’s final rate hike and first rate cut. 

There have been five hiking cycles since 1988. Each saw a major rally in Treasuries once the hikes were complete. The largest decline was 163 basis points, while the average decline was 107 basis points. The drop in yields tended to abate once the Fed began cutting rates. This cycle Bank of America sees the 10-year yield dropping to 2.25% by May 2024 which is when the first hikes are expected to take place. 

Such a decline in Treasury yields would have major implications for other asset classes as well. The researchers also warned that this prediction could be impacted by ‘lingering inflationary pressures. Interestingly, the bank’s strategists have a different outlook as they expect the 10-year period to end next year at 4.25%, which indicates minor change from current levels. 

Finsum: Bank of America shared historical research which shows that the 10-year yield tends to experience weakness during the interim between the Fed’s final hike and its first rate cut. 

There is increasing signs of a turnaround in the bond market given compelling valuations, attractive yields, and indications that the Fed is done hiking rates. While many investors will instinctively look to move into passive fixed income funds, active fixed income offers some specific advantages. 

Over the last decade, active fixed income managers have outperformed their benchmark more than 75% of the time even after taking all fees into account. According to Joseph Graham, the Senior Managing Director, and Head of the Investment Strategist Group at Lord Abbett, this is due to several unique factors which make the fixed income market inefficient.

The primary reason is that institutional fixed income investors such as banks, insurance companies, and central banks make decisions based on non-economic factors such as regulations or market stability. This can distort pricing and create opportunities for savvy managers. 

Another inefficiency is that benchmarks are weighted by the amount of debt outstanding. This means that borrowers with considerable amounts of debt are overrepresented. Similarly, indices often have constraints around size and maturity, creating opportunities for alpha around these under-owned securities. Asset managers with teams that specialize in a particular niche are particularly well-suited to discovering such pricing discrepancies.

Finsum: Active fixed income has outperformed passive fixed income funds. Some of the reasons that the fixed income market is inefficient are because many market participants have non-economic incentives and indices are skewed to overrepresent borrowers with considerable amounts of debt. 

Commercial real estate (CRE) has been in the crosshairs due to a combination of cyclical and secular factors. However, there is a wide dispersion in the sector with some areas facing perilous times like offices and retail, while others continue to experience strong fundamentals like industrial, multi-family, and tech infrastructure.

The biggest cyclical threat is the Fed’s interest rate hikes which have increased the cost of capital, especially with so many borrowers looking to refinance in the coming months and years. Adding to this is that many regional banks are dealing with impaired balance sheets due to falling bond prices and have reduced lending activity to minimize risk. This means that capital is more expensive and harder to access. Another concern is if the economy falls into a recession this could lead to a spike in defaults, downward pressure on rents, and an increase in vacancies. 

Operators in the space must adapt to these new realities rather than wish for a return to the previous era, when low rates and steady economic growth fueled a long bull market. Some recommendations for owners and investors in the space are to upgrade properties, find new capital sources, spend on technology for greater efficiencies, invest in sustainability, and adjust accommodations for hybrid work arrangements. 

Finsum: Commercial real estate (CRE) has faced major struggles over the past couple of years. Yet, there is a wide dispersion in space with some areas continuing to have strong fundamentals while others are in a much more vulnerable position.