You have probably seen a half dozen headlines in the last six months (at least) that point to a mainstream financial firm buying out a new fintech platform for their custom/direct indexing technology. There has been extreme demand for custom, tax-efficient, solutions for portfolios that give the flexibility, formally reserved for the ultra-wealthy, for much lower initial investments. The biggest advantage is tax alpha which is generated by reducing taxable liabilities through loss harvesting. However, that was really only possible with extremely high net worth as the active management was just too costly. Firms like BlackRock, JPMorgan, and Vanguard have snatched up DI solutions for other reasons as well such as ESG which gives much more flexibility to their clients.

Finsum: The race for low fee/ low initial investment DI is on, but its shape will change as the goldilocks solution has yet to be found. 

Recession, inflation, and interest rate volatility are reaching 40-year high levels of risk which has investors changing things up and ditching the 60/40 portfolio split. Whatever risks investors thought were present in their portfolio 6-months ago are drastically different today. Investors desperately need to re-allocate and re-balance that risk to a more suitable set of investments for the second half of 2022. Investors should look to more alternative investments because there is high-interest rate volatility. In fact, the US has dropped into a recession in over 75% of tightening cycles since the great depression. Generally, these tightening cycles increase the correlations between bonds and equities and hurt the cushion bonds normally bring.

Finsum: Advisors need to think outside the box to prepare for volatility in this cycle. 

Financial Advisors are spread thin when it comes to the services they provide and are increasingly turning to outsourcing the investment management practice to concentrate on client relations. Many advisors are being increasingly tasked with tax planning and strategy, estate planning, lifestyle management, charitable planning, and college funding and need to free up time for these activities. On top of that RIAs need to actually grow their clientele which means they need to utilize portfolio construction technology like model portfolios to build on their clientele. A good tip to look for when searching for an outsourcing provider is if they provide high-frequency analysis for you and your clients.

Finsum: Models are a great way for advisors to leverage technology while upping contact with their clients. 

Investors are flocking to active ETFs in search of more market alpha amid the volatility. Pickers' performance has been especially effective in high volatility, and Muni bonds are another great option. Outflows have been consistent from Muni bonds since 2021 but that tide is starting to turn as yields rise and investors need an inflation cushion. Moreover, their high credit scores and tax advantages are extremely attractive to high net worth investors. One option is Avantis Core Municipal Fixed Income ETF (AVMU) which is an active muni investment fund. The fund has a pretty low expense ratio (0.15%), and they also believe it can outperform in a rising yield environment.

Finsum: Yields are beginning to look more attractive, but remember how much of that is built-in inflation.

The SEC has proposed rule and form amendments that, would require additional disclosures regarding environmental, social, and governance (ESG) investment practices by RIAs, registered investment companies, and business development companies. The SEC also proposed rules to extend the 80% investment policy requirement in Rule 35d-1 under the Investment Company Act to any registered fund with a name that suggests it focuses on ESG factors. These proposed rules are aimed at helping investors navigate the endless array of ESG investing options. There is currently no tailored rule for ESG investing and the proposed rules would require consistent ESG-related disclosures about ESG products and services. Disclosures will include how a firm evaluates ESG factors and or how it achieves its stated ESG objectives. Advisors and funds will now need to take any necessary steps to prepare for these ESG-related disclosure requirements.

Finsum: The SEC proposed regulations on how advisors and funds label their ESG strategies should provide investors with consistent and reliable information on ESG products and services.