Wealth Management
Fixed income posted its worst quarterly performance in over a year as the market has been reducing odds of rate cuts, while increasing odds of additional hikes and extending its estimate of the duration of tight policy. This also led to the first quarterly decline in equities this year.
Yields on long-duration Treasuries are now at their highest level since 2007. Fed hawkishness is even neutering positive reactions to benign economic data as evidenced by the recent low PCE print. Fixed income was initially bid up, however this strength was sold into as most bonds finished the day unchanged. Some additional reasons may be the recent rise in oil which could handcuff the Fed from pivoting, huge supply of Treasuries hitting the market over the next couple of quarters, and uncertainty over the government shutdown.
In terms of fixed income performance, short-duration assets are outperforming, while long-duration assets are hitting new lows. Many strategists are now saying that yields will rise further with the 10Y going past 5%.
The contrarian case is that the Fed is close to the end of its tightening cycle and that the economy is finally starting to show signs of contraction. Thus, investors should buy on the dip to take advantage of these elevated yields.
Finsum: Fixed income and equities both performed poorly in Q3. For fixed income, here are some of the factors behind the weakness.
Ben Hammer, the Head of Client Development for Vanguard, recently spoke to an audience of financial advisors about direct indexing. The asset manager clearly sees it as a major growth avenue especially as most advisors and investors remain unfamiliar with the concept and its benefits.
According to surveys of investors and advisors, the most appealing part of direct indexing is the potential tax savings which is not possible with traditional passive investing. By recreating indexes within an individual investors’ account, losing positions can be sold while stocks with similar factor scores are added in substitution to maintain consistency with the benchmark. Another benefit is customization as investors can adjust a portfolio’s holding based on their own situation, values, or preferences.
Hammer also stressed that direct indexing wouldn’t be available to a wide swathe of the investing universe because of its cost and complexity. However, these issues have been solved by technology as trading costs have plummeted, while software handles the regular scans for tax loss harvesting opportunities and rebalancing.
Still, direct indexing is probably not necessary for most investors. It can be the perfect solution for those who want more tax savings and customization while retaining the benefits of passive investing.
Finsum: At a recent conference for financial advisors, Vanguard’s Ben Hammer spoke about the evolution of direct indexing and its growth prospects.
For advisors, there are many benefits to working with high net worth clients. They have more investable assets and also tend to have a better grasp of what constitutes a fruitful advisor-client dynamic. Of course, there is intense competition to land these clients. Here are some tips to increase your chances of success.
The first step is to understand their needs and goals. It’s also important to be aware that these prospects have seen many sales pitches and tend to be quite savvy. Therefore, any approach should be transparent in terms of purpose and intentions. Instead of being vague, it’s more helpful to focus on a specific topic like retirement planning, charitable giving, tax strategies, succession planning, etc, where you can demonstrate your expertise.
The second step is to remember what makes you and your practice unique and to focus on these differentiators. Having a specialization can help you stand out especially if the client is looking for that particular service. This can also help you come up with a message around your brand which communicates your value.
The final step is to spend time and energy into making sure that your prospects are aware of your practice whether this is digital or analog. This means defining your ideal prospect and figuring out where they spend time and attention, physically and virtually..
Finsum: Getting a high net worth client has many benefits for advisors, but the landscape is quite competitive. Here are some tips to increase your chances of success.
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A little more than 3 years ago, the SEC strengthened fiduciary rules with the passage of Reg BI, and this was also adopted by FINRA. According to a recent report from state regulators, brokerages are still struggling to comply with these new regulations.
In essence, Reg BI ensures that any recommendations made by a broker have to be offered impartially along with an explanation of any alternatives. The purpose of these rules is to ensure that there is no conflict between a broker and the client without necessarily imposing the full fiduciary obligation of RIAs.
The North American Securities Administrators Association (NASAA) reviewed broker compliance efforts and found middling results especially given that 3 years have passed. Additionally, the SEC and FINRA have stepped up enforcement efforts this year. According to the group, there remains room for improvement especially as many brokers remain uncertain about the rule and its application to products like annuities, leveraged products, private placements, or other alternative investment products.
Many firms are creating their own protocols regarding compliance and spending more time on understanding their clients’ risk tolerance and goals before providing recommendations. However, the group also found that many brokerages are too lax especially when it comes to providing disclosures and alternative recommendations.
FinSum: The North American Securities Administrators Association conducted an audit of brokerage to see how Reg BI compliance efforts are going.
Bringing home the bacon.
Before taking their talent to UBS Wealth Management, a five person Connecticut team was grinding, managing $700 million in Greenwich, according to a recent announcement, reported advisorhub.com. The team had been at Merrill Lynch.
Also bidding Merrill adieu was John Foley, who managed $340 million in client assets. He landed at RBC Wealth Management, the announcement indicated.
In terms of recruitment, it seems Merrill’s been a favorite target of UBS. That includes a group of 18 in Columbia, South Carolia. A total of $2.6 million was managed by the team.
In other industry activity, LPL Financial scored a group of finance advisors with $260 million in client assets, according to investmentnews.com. Specializing in retirement programs for schools, universities and hospitals, known as 403(b) plans, the group had previously been at Valic Financial Advisors Inc.
“We specialize in financial education and breaking down complex financial situations to a place where clients can better understand and be more comfortable with their decisions,” said financial advisor Angelo Burns in a statement. He’d been at Valic since 2011.
In the wealth management arena, direct indexing is one of the fastest growing areas and presents a unique opportunity for investors and advisors. Demand for these services is likely to grow due to more awareness of the benefits, desire to lower tax bills, lower costs, and easier implementation.
According to Cerulli Associates, direct indexing assets under management (AUM) are likely to grow at a faster rate than traditional categories like ETFs, mutual funds, and SMAs over the next five years and reach over $1 trillion by the end of the decade. Despite these bullish trends, less than 20% of advisors are familiar with the strategy and recommend it to clients.
For investors, the biggest appeal of direct indexing is the potential to lower the tax bill and use harvested losses to offset gains in other parts of the portfolio. Continued adoption and awareness at the investor and advisor level are likely to be the biggest growth drivers over the next few years.
Direct indexing is a form of passive investing except investors are able to access the increased customization and tax loss harvesting benefits of active investing. This is done by recreating an index in a personal portfolio with appropriate adjustments to account for an individual’s situation or financial goals.
Finsum: Direct indexing assets under management is on pace to exceed $1 trillion by the end of the decade. Here are some of the major growth drivers.