Wealth Management
In an article for Axios, Dan Primack discussed some of the competing pressures faced by CalPERS CEO Marcie Frost. CalPERS is America’s largest public pension system and has more than $440 billion in assets under management.
Currently, Frost is facing pressure from conservatives and liberals about ESG investing. Conservatives see it as a ‘tax’ to accomplish liberal policy goals, while liberals are pushing legislation in the California state legislature that would bar investing in publicly traded fossil fuel companies.
Frost is against such limitations, however she is a supporter of ESG and sees it as key criteria in evaluating investments. As an example, she cited CalPERS’ significant commercial real estate investments in coastal and urban areas whose value could be impacted by climate events.
Her priority is to fulfill the pension obligations for Californians which she considers more important than ESG factors. She said she would pursue investments that would generate healthy returns regardless of ESG factors but would use her standing as an institutional shareholder to push the company in a more ESG direction.
By banning fossil fuels, CalPERS would not be able to play a role in helping fossil fuel companies transition for the future. However, Frost does expect the legislation to pass.
Finsum: CalPERS CEO Marcie Frost is facing competing pressures from liberals and conservatives over ESG investing.
In an article for AdvisorHub, Steven Brod of Crystal Capital Partners discussed how alternative investing options are increasingly important when it comes to financial advisor recruiting. He believes that having a robust alternative investing platform is essential for small and mid-size wealth management firms to successfully recruit advisors.
Alternative investments have exploded in popularity following the poor performance of stocks and bonds in 2022. These investments typically provide increased diversification and the potential for higher returns.
An effective alt platform will give advisors access to all sorts of strategies and the requisite technology to manage these investments. Interest in alternative investing is especially high among the younger demographic so not having a sufficient platform could repel advisors with such clients.
Some examples of offerings include hedge funds, private equity, private credit, SPVs, and venture capital. Overall, the platform should offer a broad variety of investing strategies and tools to evaluate these options from a quantitative and qualitative perspective. The final step is to ensure that there is an alignment of interest between the platform, advisor, and clients.
Finsum: Alternative investing is exploding especially among younger, entrepreneurial advisors. Here is what to look for in a good alt investing platform.
In an article for VettaFi’s Modern Alpha channel, Nick Peters-Golden discussed the outperformance of active fixed income funds in the first quarter of 2023. The entire sector has had strong performance since the end of last year primarily due to decelerating inflation, rising recession odds, and the banking crisis.
As a result, fixed income ETFs saw $52 billion of inflows in the first quarter which is more than 60% of the total $80 billion in ETF inflows. Within the fixed income ETF universe, active bond funds have outperformed as they have been able to take advantage of market volatility and concentrate on shorter-term maturities which have outperformed.
One example is the Kingsbarn Tactical Bond ETF which invests across the credit and duration spectrum in global bond ETFs and Treasuries. This is an outperformer among active bond funds with a 6.2% return YTD. Another outperformer is the First Trust TCW Securitized Plus ETF which invests primarily in mortgage-backed securities that are comprised of private securities and government-sponsored debt. This fund is up 5.2% YTD.
Finsum: Active fixed income funds have outperformed in 2023 and been the recipient of the bulk of ETF inflows.
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In an article for iShares, Karen Veraa CFA discussed the opportunity in fixed income ETFs, following the selloff in bonds last year. She notes that assets migrated to the space as investors wanted to reduce risk in their portfolios while taking advantage of attractive yields.
Due to the Federal Reserve’s low rate policies over the last decade, bonds were overvalued and offered paltry yields. This contributed to weakness in the asset class in 2022. But, conditions are turning more favorable as inflation has peaked, recession odds are climbing, and Fed fund futures showing increasing chances of a Fed easing cycle commencing sometime in the second-half of the year.
While the crisis among regional banks is contributing to economic worries, the ‘flight to safety’ into bonds and fixed income ETFs was an indication that the asset class offers diversification benefits.
Another reason to like fixed income ETFs is that opportunities to earn income are substantially higher. Between 2013 and 2021, the only place to earn more than 4% income was with riskier high-yield and emerging market debt. Now, over 70% of fixed income securities are yielding more than 4%.
Finsum: Fixed income ETFs are particularly attractive at the moment given increasing economic worries and generous yields across the sector.
In an article for ETFTrends’ Direct Indexing Channel, James Comtois shared some thoughts from Vanguard executives about direct indexing. In essence, the company sees it as having a bright future and offering significant benefits in the terms of tax-loss harvesting.
With traditional ETFs, investors aren’t able to reap the benefits of tax-loss harvesting. However, direct indexing allows investors to get the benefits of an ETF like diversification and low costs, but they can also sell securities at a loss to offset taxable gains in profitable securities. Subsequently, the sold securities can be replaced with securities that have similar factors to maintain diversification.
These benefits also compound with more frequent scans. So, daily or weekly scans will lead to better outcomes than monthly or quarterly scans. Previously, there were constraints to more frequent scans as an advisor couldn’t monitor portfolios so frequently. But with automated, direct indexing strategies, these services are available to a wider swathe of investors. Overall, more frequent scanning can add between 20 and 100 basis points to a portfolio.
Finsum: Direct indexing offers specific benefits to investors especially when compared to investing in ETFs.
In an article for SmartAsset, Rebecca Lake CEPF discussed the importance of a workable retirement plan for financial advisors. Many advisors spend their careers helping their clients achieve their financial goals, so they can retire in peace. Yet, they don’t apply the same diligence to succession planning for their own practices.
Instead, advisors should think about the ultimate outcome they want for their business and then work backward to create a plan to achieve that goal. Of course, the plan needs to have some flexibility built in as circumstances can change. But, an end goal is essential to ensure that all of your efforts translate into ultimate success.
The next step is to have a rough estimate of the net worth of your business. This will help you understand how much your practice would generate in the event of sale. In tandem with this, advisors should also ensure that their personal financial planning is on track in terms of retirement planning, disability insurance, life insurance, budgeting, etc.
Following this, you should be transparent about your succession planning with clients and employees or anyone else who could be potentially impacted. Employees want to have some sort of clarity about their careers and potential roles, while clients want to be reassured that they will be in good hands with a new management team.
Finsum: Succession planning is an essential step for financial advisors especially as these decisions will have a major impact on clients and employees.