Think recruiting for succession planning is a piece of proverbial cake? Well, ha!

That’s because, to the contrary, errors can be common, according to linkedin.com. So, how do you increase your chances of sidestepping them in the recruiting process aimed at such planning? 

A few tips:

• Assess your current and future needs
• Develop a talent pool and a succession plan
• Use objective and consistent methods
• Involve multiple stakeholders and perspectives
• Monitor and evaluate your results

Now, ask yourself: if your most essential employees bolted – and bolted today – would you be up the old creek – or do you have a successor who had the knowledge, training and skills to pay dividends and fill the void?

Workplace data’s all that and more, according to hr.nih/gov. It can abet your ability to visualize your workforce, such as, for instance, the volume of employees eligible to call it a day. Well, leveraging data, you can visualize representation of the workforce, which is a great way to gain support – not to mention – interest, in succession planning.

Here’s a suggestion: in the course or workforce discussion, strategic planning – and as you break bread over your mission -- provide your leadership with a summary of workforce data, complete with the snapshot. Doing so will reinforce how important workforce planning is.

The ‘why now’ and what’s to come for middle-office outsourcing

During the post-2008 financial crisis volatility, the popularity of outsourcing key middle- and back-office functions rose as asset managers saw the value of an outsourced operating model. We have recently seen how market volatility has created operational challenges for fund managers due to the COVID-19 pandemic and the subsequent instability in the banking system. As a result, there is a renewed need for real-time transparency into counterparty exposure, securities exposure and available liquidity. Demand is growing for ready-to-deploy technology and talent to mitigate the impact of market uncertainty on managers’ portfolios.

Market uncertainty also compels managers to look for ways to control costs and make them more predictable while creating scale. Internal middle-office teams are often regarded as a business expense, susceptible to high employee turnover and replacement costs. Technology savings are also a key factor driving middle office outsourcing, as managers recognize owning and maintaining best-in-class technology makes limited financial sense in the long run.

The demand for a more efficient exchange of information, coupled with cost control measures, has motivated asset managers to look at outsourcing.

Why Now? 

In its May 2023 Insights Report, Hedgeweek found the outsourcing trend is accelerating, with around 60% of hedge funds outsourcing back-office functions and 40% outsourcing the middle office. Some 34% of firms surveyed said they were planning to outsource more. There are three primary motivations:

1. Outsourcing allows firms to focus on their core competencies and securing the best possible deals. Moreover, working with a service provider brings specialized expertise in various asset classes and geographies, shortening the time to market for new product launches. Leveraging a service provider’s resources and expertise on key business strategies makes scaling in a dynamic market easier. 

1. Access to advanced technology without a costly in-house build-out. Not only is there no high upfront cost nor ongoing maintenance, but an effective middle-office service provider can also rationalize and connect data across multiple processes. A centralized data approach can bring efficiency gains and data integrity.

1. Outsourcing makes it easier to achieve scale while controlling costs. For firms in growth mode, increased acquisition activity, multi-jurisdictional operations, maintaining operational governance, data complexity and increased investor scrutiny are just a few challenges outsourcing helps address. 

What’s to come for middle-office outsourcing?

Outsourced operating models must have the flexibility to adapt to the changing business needs of managers. Today, firms are seeking support in such areas as:

• Lifecycle support across all asset classes, including publicly traded securities, complex fixed income such as bank debt and distressed debt, illiquid OTC derivatives, real assets and other static assets.
• Consolidated investment reporting and analysis to tell the “story” so managers can extract meaningful data quickly and easily.
• Investment-level forecasting, both in terms of liquidity requirements and scenario planning, to account for varying degrees of market uncertainty.
• CSDR and T+1 settlement requirements put pressure on managers to meet strict deadlines. Outsourcing to a provider with an automation infrastructure and effective post-trade processes will enable managers to accelerate their readiness.

The full lift-out vs. select activities 

As disruptions to day-to-day operations weigh on fund managers, many consider the benefits of a full lift-out of their middle and back-office operations systems and staff. In the full lift-out scenario, the most significant benefits to a firm are cost savings, scalability, immediate access to industry-leading expertise, and staff continuity. Any growing firm looking to get into new markets or reduce the cost of its operational infrastructure stands to benefit from a lift-out. Smaller managers, however, may find it easier to outsource selected operational activities. 

The ways hedge funds manage their operations is evolving. Many asset and fund managers have outsourced their back-office operations for years, but more are realizing many other functions can also be performed more efficiently by an external service provider – putting the middle office in the spotlight. Funds of all sizes want to focus on investing, not operations; outsourcing allows them to find this balance. 

To learn more about Middle Office outsourcing and SS&C download the whitepaper ‘Three Key Drivers of Middle Office Outsourcing’

2023 has seen a modest rebound for REITs despite rates continuing to move higher, no indications of an imminent Fed pivot, and a serious crisis in commercial real estate. One factor is that overall revenues have stabilized and balance sheets remain healthy. Another factor is that healthcare and industrial REITs are seeing revenue growth at a nearly double-digit rate despite the headwind of higher rates. 

During Q2 earnings season, funds from operations climbed 4.2% compared to last year’s Q2, totaling $20.6 billion. There is also no compromise in terms of financing with 79% of REITs using unsecured debt with 91% of overall debt locked in at fixed rates, meaning there is less sensitivity to rates. 

Another silver lining is that leverage ratios remain below 35% while the average term to maturity is close to seven years. In total for publicly traded REITs, the cost of capital is currently 4%. Given these financials, REITs are also better to take advantage of turmoil in real estate markets as they will be able to access financing at a lower cost of capital than private market operators. 

Finsum: Q2 earnings season is over. The much maligned REIT sector continues to see stable revenue growth and healthy financials despite a challenging environment. 

VettaFi announced that it would be acquiring EQM Indexes, a provider of custom thematic indexing specialists. It marks VettaFi’s second acquisition in the space as the indexing and ETF data provider continues increasing the amount and quality of offerings for asset managers. In April, it acquired ROBO Global Index suites.

EQM uses a quantitative approach to construct customized, niche indices for industries like e-commerce, rare earths, block chain technology, etc. Most of its customers are advisors and wealth managers who are based in North America, Europe, or Asia. 

Following the completion of the deal, VettaFi will have more than 300 indexes that comprise $19 billion in assets including ETFs and direct indexing products. The firm was founded in 2022 through a merger of various entities in the ETF data and indexing space.

Clearly, the firm believes that direct indexing has more room for growth. According to Brian Coco, VettaFi’s head of Index Products, “A great investment idea can often remain just that: an idea. But with a well-constructed index, great investment ideas can become great investments. Building custom indexes is something at which EQM has long excelled, and we are very excited to add EQM’s expertise to our index offerings.”

Finsum: VettaFi announced the acquisition of EQM Indexes, a provider of custom indexing solutions. It marks a continuation of the firm’s investment in the direct indexing space.

The economy and financial markets have faced potent challenges in 2023. These include concerns of an imminent recession, a hawkish Federal Reserve, stubbornly high inflation, a sputtering banking system, etc. Unlike last year, the price of oil hasn’t been a major headwind as it’s traded between $60 and $70 per barrel for most of the year. 

The situation is now changing as the front month contract for WTI crude oil settled above $90 for the first time this year. Higher oil prices are a negative for the economy and markets as it detracts from consumer spending and contributes to inflationary pressures. Until inflationary pressures fully recede, there is unlikely to be a change in Fed policy. 

So while there has been constructive news on the finaltion front regarding real estate and the labor market, the mild tailwind from lower oil prices is now becoming a headwind. For oil, the major catalyst is on the supply front as OPEC producers have been cutting production in anticipation of an economic slowdown. 

But, demand has been less impaired than anticipated even accounting for the weakening Chinese economy. Another factor supporting demand is that the US is a buyer of crude oil given the need to restock the strategic petroleum reserve. 

Finsum: Crude oil prices moved past $90 per barrel for the first time in 2023. Here are some of the reasons behind its recent strength.

For financial advisors who are serious about growth, the most effective strategy is to simply acquire another practice. Of course, this requires significant resources in addition to a well-thought out plan to integrate the new practice into the existing one. It also means making tough decisions when it comes to headcount, organizational structure, and management. Most importantly, there can be no compromise when it comes to the client experience on both sides of the ledger. 

Advisors should consider this possibility especially as it’s going to be a buyer’s market given that so many advisors are nearing retirement age. Based on research from Cerulli Edge, nearly 40% of advisors will be retiring over the next 15 years. Additionally, advancements in technology mean that overhead costs don’t necessarily have to meaningfully rise with an acquisition. 

According to Bill Williams, the president of acquisitions at Ameriprise, the most important step is to conduct proper due diligence to ensure that no regulatory issues arise, and there is no issue with the financials of the firm being acquired. He also says that a common mistake is to use an acquisition to solve a problem. Instead, the buyer must come from a position of strength which means that you have a thriving, profitable practice with a healthy culture. 

Finsum: While there are many growth strategies for advisors, acquiring a practice can supercharge growth. Here are some important considerations. 

The Bureau of Labor Statistics released the CPI report for August which showed a 3.7% increase in inflation which was above expectations of 3.6%. Core CPI came in at 4.3% which was in line with expectations.

It marks the third straight monthly increase in inflation as July saw CPI at 3.2%. Some of the factors contributing to this were a 5.6% increase in energy prices and a 7.3% increase in owners-equivalent rent. 

Initially, Treasuries weakened on the news as it incrementally increased the odds of another hike by the Federal Reserve. However, the fixed income complex was quickly bid up on the drop as market participants seem willing to look past the hotter than expected inflation data.

Two major components of the inflation report - housing and wages - are softening which spells relief for the market. Rents are already dropping in key markets, while recent labor market data shows that unemployment is ticking higher. Much of this data will take time to be reflected in the CPI. Thus, investors are willing to use the weakness to add to fixed income. 

Finsum: Fixed income was bid up despite a hotter than expected CPI report. This seems to be because investors are increasingly confident that inflationary pressures will continue to recede.

One of the biggest stories in the financial advisor recruiting world has been the exodus of advisors from Merrill Lynch to greener pastures. The big winners of these transitions have been LPL and Morgan Stanley. 

Last month, the Harris Rao Group, who is based in Phoenix moved to Morgan Stanley from Merrill Lynch. The team has a total of $630 million in client assets and generated $3.5 million in revenue last year. 

The group’s lead advisors are Christopher J. Harris and Nihaal M. Rao. Harris and Rao joined forces in 2005 and had been looking for a new home over the last couple of months. Both started their careers with Ameriprise Financial before joining Merrill Lynch in 2008. They were ranked #30 by Forbes in terms of wealth management teams.

According to sources, they wanted a place where there was less pressure to sell banking products and a more complete set of insurance products for their clients. Many of their clients are business owners, and they believe that Morgan Stanley offers better solutions for their needs.

Morgan Stanley also continues to aggressively recruit advisors and has been offering high-end deals to continue gathering assets. Over the last couple of months, they have landed just over $1.2 billion in client assets from Merrill Lynch. 

Finsum: Morgan Stanley continues to poach advisors from Merrill Lynch. The latest is a group from Arizona which produced $3.5 million in annual revenue.

Citigroup conducted a survey of 268 family offices to gather information on their positioning and thoughts on the current market. Overall, the family offices decreased exposure to equities while more than half increased their fixed income allocations. According to Citigroup, it was the most significant change in family office positioning since 2020. 

The bigger trend is that family offices are becoming more conservative given the challenging economic environment. In terms of their biggest concerns, they identify inflation, a hawkish Federal Reserve, and a spike in geopolitical tensions specifically around the US and China.

Currently, the average family office has 16% in fixed income, 12% in cash, and 22% in equities. Even within these allocations, they are focusing on areas with less risk. For equities, it means companies in traditional industries with positive cash flow and attractive valuations. For fixed income, it means a bias towards higher credit quality and shorter duration. 

In total, these family offices that were surveyed control more than $1 trillion in assets. Specifically, the family offices that are adding fixed income exposure have a cumulative total of $568 billion in assets. 

Finsum: Citigroup surveyed 268 family offices to find out their thoughts on the current market. More than half are increasing fixed income allocation and selling equities. 

BlackRock, the world’s largest asset manager with $2.4 trillion under management, is launching a new active fixed income ETF. This marks BlackRock’s 422nd ETF and the second active fixed income ETF to be managed by Rick Rieder, BlackRock’s CIO of global fixed income. 

The launch is also notable because the ETF is similar to its mutual fund offering, the BlackRock Total Return Fund. Both will invest its holdings into a diversified portfolio of fixed income securities. The ETF has an expense ratio of 0.34% while the mutual fund has a 0.45% expense ratio. Notably, the ETF will allow for intraday trading, offer more liquidity, and provide greater transparency of its holdings. 

This is a continuation of a larger trend. Active fixed income ETFs are taking market share from mutual funds and passive fixed income funds. Many asset managers are converting mutual funds into ETFs or dual offerings. 

The primary impetus is increasing comfort with the category from advisors and institutions. Additionally, active fixed income suits the current moment where there seems to be significant opportunity in the space, but headwinds linger due to a hawkish Fed and rising recession risk. The bet is that active managers are better suited to navigate this tricky environment. 

Finsum: Blackrock filed for another active fixed income ETF which is modeled after its very popular BlackRock Total Return Fund.