Ever since the Fed embarked on its tightening campaign starting in the early months of 2022, the real estate market experienced the most immediate impact due to rising mortgage rates negatively affecting home affordability.

Initially, publicly traded real estate stocks saw deep drawdowns while private real estate performed much better. Now, this gap is beginning to shrink as private real estate has been following public real estate lower. One factor is that it’s increasingly becoming clear that high rates are not going to disappear anytime soon due to the resilience of the economy and inflation. In fact, inflationary pressures seem to be reigniting given the recent strength in oil and auto workers striking.

In terms of when private real estate will bottom, some indicators to watch are an increase in transaction volume even at lower prices, a change in monetary policy, and increase in lending standards. Currently, all 3 are working against private real estate given that many markets are ‘frozen’ as sellers are unwilling to cut prices, while buyers don’t see many attractive deals at current yields. The Fed’s focus remains on stamping out inflation whether through further hikes or keeping rates ‘higher for longer’. Finally, lending standards are unlikely to loosen especially with so many banks struggling with balance sheet issues and/or an inverted yield curve. 

Finsum: Private real estate was immune to the weakness in public real estate for so long. Find out why this is starting to change.

Ben Hammer, the Head of Client Development for Vanguard, recently spoke to an audience of financial advisors about direct indexing. The asset manager clearly sees it as a major growth avenue especially as most advisors and investors remain unfamiliar with the concept and its benefits.

According to surveys of investors and advisors, the most appealing part of direct indexing is the potential tax savings which is not possible with traditional passive investing. By recreating indexes within an individual investors’ account, losing positions can be sold while stocks with similar factor scores are added in substitution to maintain consistency with the benchmark. Another benefit is customization as investors can adjust a portfolio’s holding based on their own situation, values, or preferences. 

Hammer also stressed that direct indexing wouldn’t be available to a wide swathe of the investing universe because of its cost and complexity. However, these issues have been solved by technology as trading costs have plummeted, while software handles the regular scans for tax loss harvesting opportunities and rebalancing.

Still, direct indexing is probably not necessary for most investors. It can be the perfect solution for those who want more tax savings and customization while retaining the benefits of passive investing. 

Finsum: At a recent conference for financial advisors, Vanguard’s Ben Hammer spoke about the evolution of direct indexing and its growth prospects.

For advisors, there are many benefits to working with high net worth clients. They have more investable assets and also tend to have a better grasp of what constitutes a fruitful advisor-client dynamic. Of course, there is intense competition to land these clients. Here are some tips to increase your chances of success.

The first step is to understand their needs and goals. It’s also important to be aware that these prospects have seen many sales pitches and tend to be quite savvy. Therefore, any approach should be transparent in terms of purpose and intentions. Instead of being vague, it’s more helpful to focus on a specific topic like retirement planning, charitable giving, tax strategies, succession planning, etc, where you can demonstrate your expertise. 

The second step is to remember what makes you and your practice unique and to focus on these differentiators. Having a specialization can help you stand out especially if the client is looking for that particular service. This can also help you come up with a message around your brand which communicates your value. 

The final step is to spend time and energy into making sure that your prospects are aware of your practice whether this is digital or analog. This means defining your ideal prospect and figuring out where they spend time and attention, physically and virtually.. 

Finsum: Getting a high net worth client has many benefits for advisors, but the landscape is quite competitive. Here are some tips to increase your chances of success.

A little more than 3 years ago, the SEC strengthened fiduciary rules with the passage of Reg BI, and this was also adopted by FINRA. According to a recent report from state regulators, brokerages are still struggling to comply with these new regulations.

In essence, Reg BI ensures that any recommendations made by a broker have to be offered impartially along with an explanation of any alternatives. The purpose of these rules is to ensure that there is no conflict between a broker and the client without necessarily imposing the full fiduciary obligation of RIAs. 

The North American Securities Administrators Association (NASAA) reviewed broker compliance efforts and found middling results especially given that 3 years have passed. Additionally, the SEC and FINRA have stepped up enforcement efforts this year.  According to the group, there remains room for improvement especially as many brokers remain uncertain about the rule and its application to products like annuities, leveraged products, private placements, or other alternative investment products. 

Many firms are creating their own protocols regarding compliance and spending more time on understanding their clients’ risk tolerance and goals before providing recommendations. However, the group also found that many brokerages are too lax especially when it comes to providing disclosures and alternative recommendations. 

FinSum: The North American Securities Administrators Association conducted an audit of brokerage to see how Reg BI compliance efforts are going. 

REITs are in the midst of another leg lower and have effectively wiped out their gains from May and July with a 9% decline over the past six weeks. Year to date, the sector is down by 7% while it was up as much as 9% at its highest point in the year as measured by the Vanguard Real Estate ETF. This follows even steeper, double-digit losses in 2022.

In recent months, the weakness of the long-end of the Treasury curve has hit all types of yield-generating assets like REITs and dividend-paying stocks. Fed fund futures markets are downgrading the chances of rate cuts in 2024 while extending the duration that rates will remain at these levels. There is even increased chatter about how the Fed’s terminal rate must even go higher in order to truly stamp out inflation.

It’s a double-edged sword for REITs as the bulk of the sector continues to deliver impressive financial results with defaults remaining low especially in areas with strong fundamentals like healthcare and industrials. Yet, the stocks are unlikely to rally as long as rates remain elevated at these levels even despite attractive yields.

Finsum: REITs are in the midst of another leg lower and falling to new annual lows due to an uptick in inflationary pressures and the Fed coming out more hawkish than expected.

One of the consequences of tighter monetary policy is to curtail housing demand by squeezing affordability. As a result, all sorts of housing activity has cooled such as mortgage applications, new home construction, renovations, and house flipping. While there are all sorts of losers, it’s presenting an opportunity for many private real estate funds who are finding a buyer’s market.

 These funds raise money with multi year holding periods so are less affected by the change in the funding environment at least in the short and intermediate-term. Another factor in the real estate market is that many regional banks are pulling back from extending credit given their balance sheet concerns. Overall, it’s a risk for the broader economic outlook but a unique opportunity for private real estate investors.   

And, more money is being allocated to real estate - public and private. In the first-half of the year, 43% of institutions surveyed, increased their allocation to real estate by an average of 76 basis points. Sovereign wealth funds also increased real estate exposure from 6.9% to 7.9%. In terms of geography, private real estate continues to be dominated by North American investors.

An informed consumer is an…. Yep; you get the idea

That brings us to direct indexing, which yields a host of benefits for investors, according to avaloninvest.com. By toting a firm grasp of directing indexing’s concept, what can investors do? Why, make informed decisions about their portfolios and the most of their returns, that’s what.

Meantime, preferences and goals are always nice and with direct indexing, investors can customize their investments based on both of those elements. Not only that, investors can leverage direct indexing to generate exposure to specific companies within an index. That can come in especially handy among investors who believe deeply in specific companies or sectors.

Investors are opting more and more for direct indexing to spark customized portfolios, according to etftrends.com.

Delving a bit deeper, with direct indexing accounts, such as, for example, Vanguard Personalized Indexing, which offers screens and tilts. They allow advisors to customize the portfolios of their clients, not to mention positions advisors – on the behalf of their clients -- to request custom options.

“You can help clients express environmental, social, and governance (ESG) or socially responsible investing (SRI) preferences,” according to Vanguard. “You can tilt their portfolios toward stocks with certain characteristics like momentum or value, known as factors.”

Bringing home the bacon.

Before taking their talent to UBS Wealth Management, a five person Connecticut team was grinding, managing $700 million in Greenwich, according to a recent announcement, reported advisorhub.com. The team had been at Merrill Lynch.

Also bidding Merrill adieu was John Foley, who managed $340 million in client assets. He landed at RBC Wealth Management, the announcement indicated.

In terms of recruitment, it seems Merrill’s been a favorite target of UBS. That includes a group of 18 in Columbia, South Carolia. A total of $2.6 million was managed by the team. 

In other industry activity, LPL Financial scored a group of finance advisors with $260 million in client assets, according to investmentnews.com. Specializing in retirement programs for schools, universities and hospitals, known as 403(b) plans, the group had previously been at Valic Financial Advisors Inc.

“We specialize in financial education and breaking down complex financial situations to a place where clients can better understand and be more comfortable with their decisions,” said financial advisor Angelo Burns in a statement. He’d been at Valic since 2011.

In the wealth management arena, direct indexing is one of the fastest growing areas and presents a unique opportunity for investors and advisors. Demand for these services is likely to grow due to more awareness of the benefits, desire to lower tax bills, lower costs, and easier implementation.

According to Cerulli Associates, direct indexing assets under management (AUM) are likely to grow at a faster rate than traditional categories like ETFs, mutual funds, and SMAs over the next five years and reach over $1 trillion by the end of the decade. Despite these bullish trends, less than 20% of advisors are familiar with the strategy and recommend it to clients. 

For investors, the biggest appeal of direct indexing is the potential to lower the tax bill and use harvested losses to offset gains in other parts of the portfolio. Continued adoption and awareness at the investor and advisor level are likely to be the biggest growth drivers over the next few years.

Direct indexing is a form of passive investing except investors are able to access the increased customization and tax loss harvesting benefits of active investing. This is done by recreating an index in a personal portfolio with appropriate adjustments to account for an individual’s situation or financial goals. 

Finsum: Direct indexing assets under management is on pace to exceed $1 trillion by the end of the decade. Here are some of the major growth drivers.

Picking the right niche can really help an advisor differentiate themselves in a crowded market to create a unique brand. Typically, a niche means that an advisor is focusing on a particular demographic such as a particular profession or demographic. But, it can also refer to advisors who specialize in specific areas such as financial planning or alternative investing.

Specialization can lead to more knowledge and expertise. It’s also likely that prospects will seek an advisor out who has more experience in their area of interest or need. In terms of the best niches, one strategy is to specialize in a particular stage of the planning process.

Nearly everyone’s most important financial goal is to prepare for retirement. Therefore, retirement planning is an evergreen niche for advisors and also where they can be most impactful. This involves becoming well-versed about various retirement plans and options. Ultimately, it’s about helping retirees and prospective retirees have the best quality of life. 

Another possible niche is to focus on younger clients. This would involve being digitally savvy and understanding their needs and goals with a major emphasis on education around personal finances and investing. Many younger clients also stand to inherit money from older generations given the country’s demographic realities.

Finsum: Picking the right niche is an important decision for every advisor. Here are some tips on picking the right niche and some examples.