As the year comes to a close, it presents an opportune moment for financial advisors to revisit strategies and offer valuable advice to clients. A timely topic is tax loss harvesting. And direct indexing is becoming a popular way for investors to accomplish this. Therefore, now is a great time to consider introducing the concept of direct indexing to your clients.

The Value of Tax Loss Harvesting

Tax loss harvesting is a technique that can reduce taxable income by selling securities that have incurred a loss. As we approach year-end, this tax-saving tactic may be appropriate for some of your clients, yet you need a convenient way to make these trades without upsetting their entire portfolio. Direct indexing allows you to accomplish this task.

Direct Indexing: No Longer Just for the Elite

Direct indexing, which involves buying individual stocks directly rather than through a fund, enhances the ability to tax loss harvest. While it's not a new concept, it's becoming more accessible to a broader range of investors. As author Medora Lee pointed out in her recent article in USA Today, "(direct indexing) was once mostly reserved for the affluent with at least $1 million to invest." But things are changing. "With better technology and zero- or low-commission trading now the norm, more people can use direct indexing."

Embracing the potential of direct indexing and tax loss harvesting is another way to demonstrate your value to your clients.

As recently reported by PlanAdviser.com, payroll giant ADP has collaborated with Morningstar to introduce a proprietary managed accounts product to their over 100,000 DC recordkeeping clients. Morningstar emphasized the complexities today's plan participants face in retirement savings, particularly given the backdrop of high inflation and market volatility, which can be especially challenging f or those employed by smaller firms.

Chris Magno, Senior Vice President and General Manager of ADP Retirement Services, underscored the sentiment, stating, "Every retirement plan, irrespective of its scale, deserves access to tailored advice on a large scale."

It's clear why the availability of managed accounts continues to spread. Historically, DC plans have often presented their participants with two primary investment avenues: self-managing their portfolios or selecting predefined options like target date or balanced funds. Managed accounts, however, introduce a third, more collaborative method. These accounts consider not only age and risk preferences but also additional factors, such as assets held by participants outside their 401(k).

Integrating managed accounts can enhance the bond between advisors and participants. Advisors typically play a pivotal role in defining the managed accounts program guidelines and engaging with participants opting for this route. For advisors yet to explore managed accounts, they are worth a closer look. They support the plan sponsor's objective of helping their employees reach a secure retirement while fortifying the advisor's rapport with participants.

Finsum: ADP and Morningstar launch a managed accounts product for DC clients, bridging traditional retirement savings methods with innovative solutions.

The Federal Reserve is clearly close to the end of its hiking cycle. Thus, there is more data dependency which is leading to big swings in the stock and bond markets following the release of economic data such as the CPI and the jobs report. According to Blackrock’s Rick Rieder, the CIO of Global Fixed Income, many market participants are making a mistake by over reacting and losing sight of the more durable and investable trends. 

There have been several instances of misleading data. For instance, the ISM hit a contractionary level of 48 in January of this year which led many to believe that a recession was imminent. This has proven to be incorrect as the economy is forecasted to expand by 2% on a real basis this year. Weakness in manufacturing has been more than offset by strong household balance sheets, wage growth, and growth in services.

Reider also believes that investors should temper their urge to make bold predictions for 2024 or the long-term given the number of unpredictable forces of a historical nature, impacting the global economy. There is a wide range of possible outcomes and major potential ramifications in terms of geopolitics and financial markets, so it’s important to not fall prey to short-term volatility.

Finsum: Blackrock’s Rick Reider shared why investors shouldn’t overreact to economic data even though this is the temptation with the Fed close to the end of its hiking cycle. 

Demand for annuities has soared along with rising rates. Owners of annuities, prior to 2021, would be very happy if they purchased variable annuities which increase along with inflation, while those with a fixed annuity would see the purchasing power of their income diluted by inflation.

Despite the risks, annuities are a great option for clients with low levels of risk tolerance and who value the certainty of having an income. The biggest benefit is for clients who don’t want to worry about not having enough income, or how the financial markets are performing. 

According to Kirsty Anderson, the pensions specialist at M&G Wealth, “An annuity gives absolute certainty. You know exactly how much income you’ll receive, and you’ll receive this for the rest of your life – unless you’re purchasing a fixed term annuity.” Currently, the average annuity rate is 6.7%. This is nearly 50% more than the average rate since the financial crisis. 

There is a wide variety of annuities to fit the needs of clients. Some options include varying durations, flexibility, and protection against inflation. Many clients will opt for a blended approach, when they use annuities to cover basic living expenses while keeping the remainder of their money invested in the markets. 

Finsum: Annuity sales are strong due to high rates and nervousness about the economy and inflation. Here are some considerations for annuities in retirement planning.

Natixis Investment Managers conducted a survey with CoreData Research of more than 11,000 global investors in March and April of this year. It found that individuals invested in portfolios overseen by professional asset managers had less stress, were more trusting of advisors, and more financially confident. 

Overall, the survey revealed that only 11% of model portfolio investors were stressed, while 23% of non-model portfolio investors were stressed. Additionally, 45% of model portfolio investors were confident about their finances while only 24% of non-model portfolio investors were. 

The survey also revealed that 78% of model portfolio investors saw volatility as an opportunity. In contrast, only 47% of non-model portfolio investors felt the same. 70% of model portfolio investors felt that inflation meant it was time to invest more, in contrast to 40% of non-model portfolio investors. 

For advisors, it’s particularly relevant that 97% of model portfolio investors trusted their financial advisors when making decisions in contrast to 73% of non-model investors who said the same. 

However, only 51% of wealth managers and advisory practices in the US plan to offer third-party model portfolios. 

The survey also revealed that model portfolios free up time for advisors by outsourcing portfolio management. This means more time for client services, financial planning, and prospecting. 

Finsum: Natixis conducted a recent survey about model portfolios. Here are some of the major findings.