Blackrock is one of the leading providers of model portfolios. Currently, the asset manager is overweight megacap tech stocks. It sees strong earnings momentum and growth upside in addition to resilient balance sheets. These companies are more insulated from high rates as they aren’t reliant on bond markets for financing. 

The stock market rally in 2023 has been defined by a handful of stocks, powering the indexes higher. In contrast, smaller stocks and the broader market have struggled. Many analysts have cited this divergence as one reason to question the durability of recent stock market gains. 

YTD, the Nasdaq 100 is nearly 40% higher due to strong gains from companies like Nvidia, Meta, and Tesla. In contrast, the S&P 500 is up 14%. Currently, Blackrock’s model portfolios have about $100 billion tracking these stocks. This is particularly significant as the entire model portfolio asset base is estimated to be $4.2 billion. 

According to Tushar Yadava, a strategist with Blackrock’s Multi-Asset Strategies & Solutions group, Blackrock has been mostly overweight equities this year, although the firm did briefly go underweight in the spring of this year, following the regional banking crisis. Earlier in the year, it anticipated that the stock market rally would eventually broaden out, but this hasn’t happened yet.

Finsum: Blackrock is overweight megacap tech in its model portfolios as it favors companies with earnings momentum and strong balance sheets. 

New financial advisors face some daunting challenges such as learning the industry, getting their licenses, and building a book of business. Last year, headcount in the industry only grew by 2,579 advisors with a failure rate of more than 72% for rookie advisors. 

This highlights the succession crisis that is facing the industry. Over the next decade, it’s estimated that 37% of all advisors, representing 39% of total assets, will be retiring. And among this group, 26% have no succession plan in place. While this is a major challenge for the industry, it’s an opportunity for savvy advisors.

For firms, some strategies to improve rookie advisor retention is through a structured training program. Firms will have to invest in developing and retaining their own in-house talent rather than the previous growth model of recruiting advisors from competitors. 

Another constraint for firms looking to boost their recruitment efforts is that currently most new advisor recruiting is through word-of-mouth referrals. However, these types of informal methods will certainly overlook many qualified candidates outside of these networks. Therefore, firms must be more proactive in educating young people about this potential career path. 

Finsum: The financial advisor industry is facing a challenge as many senior advisors are nearing retirement, while recruitment of new advisors has been lacking.

Companies with large amounts of debt approaching maturity are tapping the private credit industry for financing that may not be available through public markets. The latest example is PetVet, a veterinary hospital operator owned by KKR, which is looking to refinance more than $3 billion in loans. Other recent examples of companies include Hyland Software, Finastra, Cole Haan, and Tecomet which have raised a cumulative amount of $10 billion in the past few months. 

With private credit, companies are able to bypass traditional banks and access billions in loans. This is being facilitated by a surge of inflows into the asset class which is leading to funding for takeovers and to refinance debt. 

Another factor supporting the growth of private credit has been weakness in the syndicated loan market, where banks arrange financing and then sell the loans to other investors. Given that over the next 3 years, $350 billion of leveraged loans are set to mature, private credit will continue to be a necessary intermediary especially for companies with higher debt loads.   

Typically, private credit investors earn between 5 and 7% above benchmark rates which comes in at between 10.5% and 12.5%. In contrast, the average yield on B rated corporate bonds is 9.2%. 

Finsum: Private credit is playing an increasingly important role when it comes to providing financing for companies. Here are some of the major factors behind this shift. 

The most effective form of prospecting is asking clients for referrals, yet 88% of financial advisors fail to do so. The simple reason is that most advisors feel too uncomfortable and don’t want to affect their existing relationship with clients. 

However, this fear must be overcome if an advisor is serious about growth. According to Brett Van Bortel, the director of consulting services at Invesco Global Consulting, the reluctance is counterintuitive as more than 85% of new business comes from referrals from existing clients. 

Van Bortel recommends advisors frame their request as an opportunity for the clients to help their friends and family with high-quality financial advice rather than as a favor for the advisor. The same principle applies to establishing fruitful relationships with centers of influence who often refer high net worth clients with complex issues. 

Centers of influence include other professionals like lawyers and CPAs. According to DeVoe & Co., 17% of new clients and 23% of new assets come from these referrals. They are looking for expertise and help in solving a problem. It can often take a long time to develop these relationships and build enough trust, but these efforts can yield steady long-term returns.

Finsum: A key source of growth for financial advisors is client referrals. Yet, many advisors are reluctant to ask their clients for referrals. 

Advisors can use direct indexing to optimize their clients’ portfolios, reduce tax bills, and offer more customized solutions. It also offers an opportunity for an advisor to differentiate themselves and increase their appeal to high net worth prospects with specific needs.

Direct indexing offers more flexibility and solutions than traditional passive investing while retaining the major benefits. One example is that it can be used to reduce concentrated stock positions in a manner that can offset capital gains taxes and help lead to a more diversified and balanced long-term portfolio.

With direct indexing, tax losses can be harvested and set aside. This effectively turns them into assets which isn’t possible with investing in index funds. It could be especially of value to clients expecting a future financial windfall who are interested in proactive steps to reduce the future tax burden. 

Indices can also be modified to offset a large allocation to a specific stock or sector in another part of the portfolio. For instance, someone who works in the tech industry with a large number of stock options may not want tech exposure in their personal portfolio. 

Advisors can start this conversation with prospects by discussing matters like future windfalls, concentrated positions, reducing capital gains taxes, and more personalized solutions.

Finsum: Direct indexing is a way to optimize clients’ portfolios especially those with large capital gains taxes, concentrated positions, and expectations of a future financial windfall.