Until recently, direct indexing has typically been applied for equities. Its benefits in terms of creating after-tax alpha and increased customization are well-known. However, advisors should also be aware that direct indexing can also be leveraged for fixed income portfolios, and it can be especially impactful for clients nearing retirement. 

Direct indexing with equities means that investors own the actual constituents of an index rather than a fund. This leads to opportunities for tax-loss harvesting and personalization. Similarly, direct indexing with fixed income means that investors own the actual bonds held by a fund which also allows for tax-loss harvesting and increased personalization.

These portfolios can be optimized based on desired characteristics of credit quality, duration, and maturity. Essentially, this creates a custom, bond ladder portfolio with various fixed income securities.

Research also shows that tax-loss harvesting has more potential benefits in a fixed income portfolio. This is because there are proceeds from maturing bonds and coupons that can be used for reinvestment or lowering a cost basis. Further, the bond ladder can also be optimized based on an investors’ tax rate and/or location, to maximize accretive, after-tax returns. 

Finsum: By now, most are familiar with direct indexing for equities. Now, we are starting to see it applied to fixed income portfolios where the benefits are possibly greater. 

One consequence of the outperformance of alternative assets in recent years is increasing democratization of the asset class. According to BNY Mellon, this trend is being driven by the need for higher long-term returns given longer life expectancies. Many governments, around the world, are changing guidelines to increase access to these investment options. 

Increasing access to alternative investments also fits with many governments’ ESG objectives. In turn, alternative asset managers are also working to structure their products to appeal to a different market.

The bank also recommends considering offering alternatives in retirement plans. Until recently, investing in alternative assets like private equity, private real estate, and hedge funds were limited to institutional and ultra-high net-worth investors. 

In the past couple of years, alternative assets have delivered positive returns in an environment where both fixed income and equities have struggled amid a hawkish Federal Reserve and raging inflation. Ideally, the asset class would lead to more resilient portfolios by reducing volatility and delivering non-correlated returns. 

Some drawbacks are increased complexity, higher costs, and reduced liquidity. The bank also adds that investors need to be educated about alternative investments in order to fully understand these products and take advantage of their benefits. 

Finsum: BNY Mellon sees continued inflows into alternative assets due to strong performance in recent years. It sees increasing democratization of the space and potentially even the inclusion of alternative investments in retirement plans. 

The number of new advisors is not keeping up with retirements and attrition. According to Cerulli, the number of new advisors only increased by 2,706 in the previous years. This is troubling given that the firm projects that nearly 110,000 advisors will be retiring over the next decade. 

This amounts to nearly 38% of all advisors and 41% of total assets. These numbers and trends highlight the need for the industry to do a better job of attracting and retaining fresh talent. The crux of the issue seems to not be recruitment but that there is a 72% rookie failure rate. Some recommendations are growing and nurturing a talent pipeline, better communication of the role and responsibilities of a financial advisor, and a more structured training program which entails ramping up responsibilities.

Ideally, newer advisors would start in roles focused on operations and improving the practice before shifting into a producer role. Cerulli recommends that seniors advisors’ team with new advisors and provide them with experience in engaging with clients and gathering assets before they transition to more independent roles. It notes that many advisors who build successful, long-term careers were the recipients of such mentorship and guidance at the start of their careers. 

Finsum: 2023 was another year of poor recruitment figures for the financial advisor’s industry. Here are some recommendations on improving the success rate of new advisors. 

Two ever-present risks for fixed income investors are credit risk and interest rate risk. Rising interest and default rates diminish the value of bonds and have to be considered especially with corporate bonds. 

However, some ETF issuers now offer corporate bond ETFs with less credit and interest rate risk such as the WisdomTree U.S. Short Term Corporate Bond Fund (SFIG). It currently offers a 4.76% yield and invests primarily in short-term, corporate debt with an effective duration of 2.47 years. It’s notable that SFIG can offer such generous yields despite investing in high-quality debt with over 44% of holdings rated AA or A. 

Another potential catalyst for SFIG is when the Fed cut rates later this year. Currently, there are trillions on the sidelines in money market funds and some of this would migrate to funds with higher yields like SFIG.

According to BNP Paribas, another reason to be bullish on investment-grade corporate bonds is due to lower issuance and structurally, higher inflows. It sees less of a case for capital appreciation given the flat yield curve and recent rally, but it believes that yields at these levels are sufficiently attractive.

Finsum: Corporate bond investors have to be mindful of credit and interest rate risk. Investors can mitigate these factors with an ETF that invests in high-quality, short-term corporate debt.

For investors with unhurried time horizons, patience holds untapped potential. Unburdened by short-term needs, they can explore long-term investments and cultivate portfolio diversification beyond conventional assets. Traditionally, accessing alternative strategies like private equity or direct ownership meant navigating high minimums and limited accessibility.

Enter interval funds, a unique bridge between open-ended and closed-end structures. Unlike exchange-traded closed-end funds, interval funds offer periodic redemption windows, providing measured liquidity while pursuing less-liquid assets. This opens doors to previously exclusive (and sometimes higher risk) strategies, such as real estate investments, infrastructure assets, and private credit.

By incorporating these diverse allocations, their advisors can enhance portfolio resilience and reduce correlation to traditional assets, bolstering overall risk management. Additionally, interval funds often carry lower minimums compared to direct alternatives, democratizing access for a broader investor base.

Naturally, interval funds come with unique considerations. Redemptions occur only during predefined windows, necessitating careful planning. Shares may trade above or below net asset value, impacting entry and exit points. Also, advisors and investors should carefully consider any fund’s management fee, complexity, and performance-tracking aspects during their vetting process.

Ultimately, interval funds offer a valuable tool for advisors to unlock diversification for clients with long-term investing horizons.

Finsum: Find out how financial advisors can take advantage of their clients’ longer time horizons by using interval funds to provide greater diversification.