Wealth Management
Having a steady source of income during retirement is a universal goal. According to a new research paper from Wharton, investors should consider a deferred income annuity product in their retirement accounts as this has shown to improve welfare for all groups when accounting for sex and education level.
Optimally, Americans would wait until they turn 70 before starting to receive Social Security payments, as it would lead to the biggest monthly check. Yet, most don’t for various reasons including a need for additional income, not wanting to work till this advanced age, and failure to plan properly.
One potential solution is a deferred income annuity which would allow prospective retirees to bridge the gap and create extra income in their 60s. This would increase the chances that they would be able to not claim benefits till age 70 and maximize income from Social Security.
These findings are especially relevant following the passage of the SECURE 2.0 Act in December 2022 which was created so employers would offer some sort of lifetime income payment option in 401(k) plans. The paper adds that options should also include a variable deferred income annuity with equity exposure in addition to fixed annuities.
Finsum: Ideally, retirees would be able to put off receiving Social Security payments until they are 70. One way to increase the odds of this are to include annuities in retirement plans to create income during interim years.
LPL Financial was higher following its Q4 earnings report which showed the company exceeding analysts’ consensus forecast. For the quarter, it generated $3.51 per share in earnings which topped estimates of $3.39 per share. Total revenue was up 13% to reach $2.6 billion, while advisor revenue was up 20%. It also added 256 net new advisors and now has a total of 22,660 advisors.
The results were strong across the board as it saw a 22% increase in total advisory and brokerage assets, reaching $1.35 trillion. Further, it brought in $25 billion in new assets in the fourth quarter, highlighting the firm’s success in growth via acquisitions and recruitment. Another source of growth has been enterprise, where LPL manages a wealth management platform for banks, credit unions, and other institutions. Recently, it was announced that LPL would become the brokerage and wealth management platform for Prudential Financial which counts $50 billion in assets and 2,600 financial advisors.
The firm is also looking to expand with the launch of LPL Private Wealth Management which intends to hire advisors as employees rather than as independent contractors. It believes its multi-channel approach is a differentiator and key to its success as it means the firm can appeal to all types of advisors.
Finsum: LPL reported strong Q4 and full-year earnings which exceeded analysts’ estimates and sent the stock higher.
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.
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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.
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.