Investors with over $250,000 are increasingly turning to separately managed accounts, allowing them to handpick municipal bonds with professional guidance. These accounts now hold $987 billion in assets, surpassing mutual funds, which hold about $769.7 billion.

This shift has significantly boosted business, with Franklin Templeton seeing a 50% increase in assets under management over the past year and a half. Lowering the minimum investment to $250,000 has made these accounts more accessible, though still beyond the reach of most Americans. 

However, advancements in technology are driving further accessibility, with potential for minimums to drop to $100,000 in the near future. With artificial intelligence breaking down barriers by making management for portfolio quicker to digest the minimums are bound to fall. 

Finsum: The SMA explosion is here to stay in the fixed income market and managers should watch the evolution. 

Over the last year, there has been an increase in the accessibility and availability of direct indexing solutions. Still, the category continues to be dominated by high net worth or ultra high net worth investors. According to Anton Honikman, the CEO of MyVest, there is about $400 billion managed by direct indexing strategies. He anticipates that the next stage of growth for direct indexing will depend on younger and less affluent investors. 

Initially, the primary advantage of direct indexing was that it allowed investors to extract tax alpha. He forecasts that as direct indexing becomes democratized over the next few years, providers and advisors will have to make some adjustments.

He notes that custodians will have to offer fractional share support for the technology to work for smaller investors, as implemented by Schwab and Fidelity, which now offer direct indexing to investors with lower minimums. 

Typically, there is some premium involved with direct indexing over investing in low-cost ETFs. Given the increase in ETF options over the last couple of years, he believes that it marginally erodes the use case of direct indexing for many investors. Over the longer term, he sees the direct indexing premium compressing in order to remain viable vs. a portfolio of low-cost, targeted ETFs. Further, he believes that the next wave of direct indexing will be driven by younger investors who want to align their portfolios with their values rather than optimize their tax situation. 

Finsum: At one time, direct indexing was only available to high or ultra high net worth investors. As it becomes democratized, here are some considerations for providers and advisors. 

Separately managed accounts (SMAs) are ascending in wealth management as they enable advisors to offer clients nearly unlimited options for customization and can lead to more efficient tax management. 

Another feature of SMAs is better economics in terms of aligning goals and incentives between both parties, especially compared to other structures. With SMAs, management fees are based on capital that is deployed rather than committed, which leads to better deal flow and attention from managers. There is also more ability to negotiate fees to incentivize long-term performance and foster more durable relationships. Further, SMAs can be set up to optimize the tax situation of individual clients.   

Overall, SMAs are gaining traction due to more flexibility and choice, which can lead to better outcomes in terms of performance and governance. The SMA agreement can also be adjusted if necessary, rather than having to create an entire new vehicle. 

For investors, SMAs also offer more protection and oversight beyond simply aligning incentives between investors and managers. More active and involved investors may prefer a non-discretionary SMA in which the investor approves each investment before capital is deployed. Additionally, investors get input into matters such as distributions, valuation, expenses, and reporting. 

Finsum: SMAs are rapidly gaining traction. Here are some of the advantages they offer investors and advisors.  

Unlike mutual funds or ETFs, personalized indexing permits harvesting losses at the security level, offering more opportunities for ultra-high-net-worth investors to capture additional tax advantages. Tax-loss harvesting involves selling an investment at a loss and reinvesting the proceeds into another asset, a key benefit of direct indexing. 

Direct indexing strategies involve selling stocks below their cost basis and instantly repurchasing correlated replacements to avoid wash-sale rule violations. Since investors own individual stocks in their portfolios, losses can be captured even when the index gains value. DI experts exemplifies this strategy by selling underperforming securities during market gains, using harvested losses to offset capital gains and taxable income up to $3,000 annually, with the option to carry over losses to future years. 

Maximizing tax alpha depends on the frequency of portfolio scans for harvesting opportunities, with daily scanning potentially improving after-tax returns by 1% to 2% or more. Commitment to direct indexing underscores its importance in tax-efficient investing. 

Finsum: The frequency through which a portfolio can be scanned for tax-loss harvesting is making the case extremely compelling for direct indexing.

Becoming a Registered Investment Advisor (RIA) offers control, independence, and specialization opportunities regardless of client assets, but also entails assuming home office responsibilities. Competition can be tough however, with an average of 15.42 years in the industry, and must differentiate themselves, often requiring additional education like an MBA or by leaning on modern technology like AI. 

Leveraging technology is crucial for meeting evolving investor demands and streamlining operational tasks to focus more on client engagement. Research demonstrates that investors are overwhelmed with many financial products and face decision paralysis due to anxiety. 

RIAs can specialize in areas such as tax needs and goal-based financial planning, aligning with investor preferences. By adopting a flexible business model, RIAs can tailor services and remain competitive in the market. Automation of time-consuming tasks like trade execution and reporting can further enhance their ability to serve clients effectively.

Finsum: RIA’s need to lean into technology now more than ever to meet their clients’ needs and grow their business. 

In March, inflows into active ETFs reached a new monthly record of $26 billion. It’s somewhat counterintuitive given the strong performance of global equity markets, which tend to favor flows into passive funds. 

For the first quarter, total inflows into active ETFs reached $64 billion, a new quarterly record. YTD, 32% of ETF inflows have been into active ETFs, despite accounting for only 7% of total ETF assets. Based on the current pace, active ETF inflows should exceed $200 billion this year, a more than 50% increase from last year’s record of $130 billion.

A key factor behind the growth of active ETFs is a desire to reduce exposure to mega cap tech stocks, which account for an increasingly large share of popular market-cap, weighted indices. And this has only been exacerbated in Q1, with these stocks tacking on double-digit gains. 

Additionally, there are concerns that financial markets could get choppier given uncertainty around monetary policy and the economy. This is leading many market watchers to believe that we are shifting to a new market environment, which should favor lagging stocks and stock-picking strategies over passively holding indices. According to Noah Damsky of Marina Wealth Advisors, “We think a more active approach is appropriate as we anticipate more choppy markets with upcoming rate cuts by the Fed. We’re making active tilts in our portfolio to laggards such as health care, and over time we anticipate increasing exposure to utilities as rate cuts draw nearer.”

Finsum: Inflows into active ETFs reached new records in March and the first quarter. Active ETFs account for only 7% of total assets. So, it’s impressive and telling that 32% of ETF inflows were into active ETFs in Q1.  

Many investors may be looking to diversify their portfolios given recent gains in equities. While there are many options, leveraged index annuities can reduce portfolio risk while still offering some growth potential.  

Leveraged index annuities are typically bought upfront with a single payment. The interest earned on these products is not taxable until it is withdrawn, which also makes them an effective vehicle for saving.  

These annuities are leveraged to a major market index like the S&P 500. Interest is earned when the underlying index appreciates; however, there is no loss of principal in the event that the index suffers losses. 

The tradeoff is that interest earned on the annuity is capped depending on the terms of the annuity agreement. For instance, the maximum earnable rate of interest could be set at 12%. This means that in a year like 2023, when the S&P 500 was up 24%, the annuity owner’s earned interest would be capped at 12%. On the other hand, the annuity owner would have seen no loss of principal when the S&P 500 was down 19% in the previous year.  

This combination makes leveraged index annuities ideal for investors who want to diversify and de-risk their portfolios while still growing their wealth.

Finsum: Leveraged index annuities are a way for investors to reduce risk and increase diversification while still allowing for appreciation. 

Broadridge Financial Solutions, a financial technology infrastructure provider, expects total assets in model portfolios to exceed $11 trillion by the end of 2028. This would represent more than a doubling of assets over the next 5 years from $5.1 trillion at the end of last year. This forecast is slightly more optimistic than Blackrock’s prediction that model portfolio assets will reach $10 trillion over the next 5 years.

Model portfolios are increasingly being utilized by financial advisors as the industry shifts to a greater focus on planning and client service vs. investment management. In addition to freeing up valuable time and resources for advisors, research has also shown that they tend to outperform, especially during volatile markets, and lead to greater client satisfaction.

For asset managers, model portfolios are a source of growth for ETFs. Currently, 63% of model portfolio assets are in equities, with 32% in fixed income. ETFs comprised 51% of assets in model portfolios, compared to 26% for mutual funds. According to Andrew Guillette, Broadridge’s VP of Global Insights, “We expect ETFs to continue to take share from mutual funds inside model portfolios, driven primarily by their attributes as low-cost and tax-efficient portfolio-building blocks.”

Finsum: Broadridge Financial is forecasting that model portfolio assets will more than double over the next 5 years. It’s expected to drive growth for various asset managers’ ETFs and help advisors focus on client service and building their practices. 

It’s an opportune time for younger financial advisors. Many older advisors are nearing retirement, and we are on the precipice of a generational wealth transfer from baby boomers to millennials. However, this doesn’t negate the significant challenges and obstacles faced by new advisors, given their high failure rates. Here are three tips from established advisors to increase the odds of success.

According to Timothy Smith, the founder and CEO of Aurora Private Wealth, rookie advisors need to get used to rejection. He believes that advisors need to develop intangible qualities like perseverance, determination, and discipline in order to successfully build a practice. Further, advisors should have a genuine desire to help people feel in control of their financial lives.

Tammy Haygood, a private wealth advisor at RBC, is an advocate for not using jargon and believes that advisors should be able to explain concepts in clear and simple language. This can only be achieved by having a comprehensive understanding of the material and concepts. She also insists that authenticity is key in order to build trust and form long-term relationships with clients.

Nate Lenz, the co-founder and CEO of Concurrent, believes that younger advisors should seek out mentors. He sees financial advice as an ‘apprenticeship’ business. With the right mentor, advisors can quickly become competent and knowledgeable in multiple areas, such as planning, investments, closing deals, and client service. In this vein, he strongly believes that younger advisors should prioritize experience over other factors like compensation.

Finsum: There’s a lot of difficulty and struggle for advisors at the beginning of their careers. Here are some tips from established, successful advisors on how rookie advisors can maximize their chances of success. 

Morgan Stanley expanded its ETF lineup with the introduction of the Eaton Vance Total Return Bond ETF (EVTR) and the Eaton Vance Short Duration Municipal Income ETF (EVSM). The bank is joining many of its peers in converting fixed income mutual funds into active fixed income ETFs. 

EVTR focuses on seeking total return through diversified investments in fixed-income securities, including corporate, municipal, U.S. government, and asset-backed securities. EVTR is actively managed and has an expense ratio of 0.32%. Its holdings have an average duration of 6.5 years and an average yield of 4.4%. 

EVSM aims to provide investors with tax-exempt current income by predominantly investing in municipal securities with a short-term focus. The fund has a net expense ratio of 0.19%. The average duration of its holdings is 1.75 years, with an average yield of 4.7%.  

Both funds were originally highly ranked mutual funds, with EVTR's predecessor, MSIFT Core Plus Fixed Income Portfolio, achieving a ten-year track record in the top decile, and EVSM's precursor, the MSIFT Short Duration Municipal Income Portfolio, ranking in the top third of its category over five years.

With these additions, Morgan Stanley now offers 14 ETFs in the U.S. and has more than $1 billion in total assets, despite introducing its first ETF early last year. Like many other asset managers, Morgan Stanley is looking to capitalize on increased demand for ETFs and active fixed-income strategies. 

Finsum: Morgan Stanley is joining many of its peers in converting mutual funds into active ETFs with the launch of the Eaton Vance Total Return Bond ETF and the Eaton Vance Short Duration Municipal Income ETF.