As financial advisors contemplate retirement or transitioning away from their practice, preparing their book of business becomes increasingly important. This preparation, sometimes called "cleaning up the book," is a strategic move to enhance the ultimate sale price of the practice and ensure the quality of care their clients will receive after they move on.

A typical client-level profitability analysis often uncovers a familiar pattern: the 80/20 Rule, where 80% of profits come from 20% of clients. However, at the lower end of the profit scale, some advisors discover that some clients are actually costing them money after they account for all expenses and lost opportunities of their time.

Such revelations are particularly significant for advisors seeking to transfer their practice to another organization. Top-tier firms, which prioritize client interests, are reluctant to acquire a practice with unprofitable accounts and certainly not at a premium.

This insight is crucial for advisors as it also allows them time to adjust the service set they provide their least profitable clients, thus improving the profitability of their practice. By doing so, advisors not only secure the well-being of their clients for the future but also justify a fair valuation for the practice they've worked hard to build.

Finsum: By starting early, advisors looking to transition out of their practice can improve their chances of a profitable succession by cleaning up their book of business.

Financial advisors have begun to embrace the concept of buffered ETFs. These specialty funds track equity indices, capping the potential upside, which pays for downside protection (the buffer) if the index experiences a decline.

While this concept has practical portfolio applications, these funds have another unique feature advisors should know about: they mature (and reset).

A buffered ETF has a stated cap and buffer that stays in place for a specific period, in many cases one year. This means the cap and buffer reset at the end of the period (at maturity). It also means that investors buying the ETF any time after the first day of the period should be aware of the remaining cap and buffer for that ETF for the rest of the period they bought within.

Here’s an example: let’s say a fund that caps its return for the year at 10% has already experienced a 5% decrease since the start of the period. An investor purchasing the fund at that point has a 15% cap for the remaining period – this is a good thing. The opposite is also true. Had the fund already experienced an 8% gain in the period, the buyer would only have the potential to gain 2% for the remainder of the period.

Finsum: Buffered ETFs have a unique feature that every financial advisor should know about: they have a maturity date when their upside cap and downside buffer resets.

Last year, US oil production increased by 1.8 million barrels per day according to the Department of Energy. It’s a major reason why oil prices are under $80 per barrel despite an assortment of reasons for it to be higher including OPEC production cuts, the ongoing war between Russia and Ukraine, and the conflict between Israel and Palestine. 

However, forecasts are showing that US production is expected to grow by a much smaller amount in 2024 due to inflationary pressures, consolidation, and a slowdown in rig activity. With a higher cost of production, less projects are viable, especially with oil prices at current levels.

So far, most of the reduction in drilling is expected to come from smaller, private producers, while larger, public producers are expected to continue with plans to increase production by an estimated 270,000 barrels per day. Yet, this is also less than last year’s increase of 900,000 barrels per day. However, forecasts indicate more robust growth in 2025 with new projects coming online. 

At the moment, US producers have the capacity to increase production in the event that prices rise more than expected and also cut if prices fall further. At the moment, the market seems to be near equilibrium as demand growth is expected to be slow in 2024 due to weakness in Europe and Asia. 

Finsum: Strong US production is one of the major reasons that oil prices are under $80 per barrel. However, production growth is expected to slow in 2024 before picking up once again in 2025. 

JPMorgan believes that when it comes to fixed income, active outperforms passive. The bank believes that the benchmark, the Bloomberg US Aggregate Index (AGG), is fundamentally flawed due to an antiquated design. It doesn’t provide sufficient diversification as it only captures just over half of the bond market. This is in contrast to equities, where passive indexes reflect a much larger share of the total market.  

This is because the benchmark was created in the 1980s where fixed income was dominated by Treasuries, agency mortgage-backed securities, and investment-grade corporate bonds. Now, there are many more types of fixed income securities that are not represented in the AGG. This also means more opportunities for active fixed income managers to outperform. 

Another fundamental flaw of the AGG is that borrowers with the most debt have the most weight. This means that passive fixed income investors have the most exposure to the companies with the most debt. In contrast, active managers can weigh their portfolios by factors that are more meaningful and relevant to long-term outperformance. 

JPMorgan’s active funds differ from the benchmark. Instead of short-duration Treasuries, it allocates more to short-duration, high-quality asset-backed securities as these have outperformed in 12 of the last 13 years. The bank also eschews securities that the benchmark is forced to own such as low-coupon MBS. In terms of corporate bonds, JPMorgan’s active funds prioritize quality. This is in contrast to AGG as 42% of its corporate bond holdings are rated BBB. 

Finsum: JPMorgan makes the case for why investors should choose active fixed income. It identifies a couple of fundamental flaws in the construction of the Bloomberg US Aggregate Bond Index.

The stronger than expected jobs report and inflation data have punctured the narrative that the Fed was going to imminently embark on a series of rate cuts. As a result, volatility has spiked in fixed income as the market has dialed back expectations for the number of hikes in 2024.

Investors can still take advantage of the attractive yields in bonds while managing volatility with the American Century Short Duration Strategic Income ETF (SDSI) and the Avantis Short-Term Fixed Income ETF (AVSF). Both offer higher yields than money markets while also being less exposed to interest rate risk which has led to steeper losses in longer-duration bonds YTD. 

SDSI is an active fund with over 200 holdings and an expense ratio of 0.33%. Its current 30-day yield is 5.2%. The ETF’s primary focus is generating income by investing in short-duration debt in multiple segments such as notes, government securities, asset-backed securities, mortgage-backed securities, and corporate bonds. 

AVSF is even more diversified with more than 300 holdings and has a lower expense ratio at 0.15%. It has a 4.7% 30-day yield. AVSF invests in short-duration, investment-grade debt from US and non-US issuers. The fund’s aim is to invest in bonds that offer the highest expected returns by analyzing a bond’s income and capital appreciation potential. 

Finsum: Recent developments have led to a material increase in fixed income volatility. Investors can shield themselves from this volatility while still taking advantage of attractive yields with short-duration bond ETFs.