Technology's allure is undeniable for financial advisors weighing a move to a new broker-dealer. Sleek interfaces, integrated apps, and workflow-reducing features promise efficiency and a world-class client experience. But while ease-of-use and functionality deserve scrutiny, a truly informed decision involves understanding the security, legal, and compliance capabilities of the prospective firm's tech.

Ask how client data is secured. What are the client-facing system's encryption standards, two-factor authentication, and access controls? Understand how the platform complies with industry regulations and data privacy laws. And most importantly, what happens if the lights go out? Does a comprehensive disaster recovery plan ensure business continuity and safeguard client assets even during outages or cyberattacks?

These may seem like technical minutiae, but your clients trust you've vetted these issues thoroughly when they follow you to your new professional home. Prioritizing security and compliance in your tech evaluation isn't just about ticking boxes; it's about safeguarding your practice's foundation and fostering the trust your clients deserve.

Finsum: Cybersecurity, compliance, and data privacy are key factors to consider when evaluating a potential broker-dealer’s technology.

Over the last couple of months, there has been an increase in the enforcement of Regulation Best Interest (Reg BI). Over the last year, the number of actions taken by the SEC and FINRA have substantially increased. It’s consistent with warnings from regulators that there would be a ‘more substantive’ period of enforcement and that Reg BI will be enforced ‘to the letter’.

Regulators want to see a more robust process to ensure supervision of brokers. The ultimate goal of Reg BI is to ensure that all recommendations are made in the clients’ best interests.  So far this year, there have been 22 FINRA enforcement actions after just 8 in 2022. Penalties are also growing in size as evidenced by an SEC settlement with Laidlaw and Company for $800,000.

Recent enforcement has also seen advisors having to pay back a portion of customers’ losses. This is a departure from precedent when firms were typically on the hook for compensation and indicates a serious commitment to deterring misconduct. 

In 2024, even more enforcement is expected given public comments from SEC and FINRA officials. They see enforcement expanding across all 4 pillars of Reg BI which include disclosures, care obligation, conflicts of interest, and compliance. 

Finsum: The SEC and FINRA are increasing enforcement of Reg BI. They are also looking to fine individual advisors and brokers for misconduct.

Schwab conducted a survey among its ETF-investing clients. Among the takeaways is that Millennial investors are quite partial to ETFs, relative to other generations. 37% of their portfolios are allocated to ETFs. 89% said ETFs were their investment vehicle of choice, while 25% of Millennials plan to increase their exposure to ETFs next year. 

Another interesting finding from the survey is that Millennials also have a strong interest in more personalized investment options. 88% said that they are somewhat or very likely to personalize their portfolios. 78% want their investment to align with their personal values. This is much higher than older generations. 

The survey also showed substantial interest in direct indexing among Millennials. This isn’t too surprising considering that 65% of Millennials said it’s extremely important to have more control over investments, 61% want greater ability to customize their investments, and 61% want their investment to be managed to optimize taxes. 

Currently, 87% of Millennials are familiar with direct indexing, an increase from 80% in last year’s survey. Additionally, 53% of Millennials are extremely interested in learning more about direct indexing, while only 34% of Gen X and 22% of Boomers feel the same way. 69% of ETF investors, not investing with direct indexing, said that they are likely to invest in one next year. For Millennials, 80% feel this way.

Finsum: Schwab conducted a survey among its ETF-investing clients. Among the findings, Millennials are partial to the asset class and also have strong interest in direct indexing. 

2023 has been a year defined by twists and turns that has defied the expectations of most market participants. Amid the tumult, alternative assets have been a source of resilience especially as the industry continues to evolve. According to Prequin’s Head of Private Equity Research Insights Cameron Joyce, the best opportunities are in private debt and secondaries.

In terms of various categories within the asset class, rising interest rates have been a major headwind for private equity. This has limited deal activity and exits, however there are indications that the climate could be improving as we head into 2024, while long-term investor demand remains strong. 

Similar to private equity, venture capital has also been hamstrung by tighter monetary policy in terms of exits and valuations. Real estate has also been negatively impacted by rising rates, resulting in a weaker fundraising environment and muted deal activity. It’s also become more challenging for mid-sized and smaller funds given that many investors are gravitating towards larger funds.

Private debt has been relatively strong due to its seniority in the capital stack and floating-rate structure. This has been increasingly important for companies given that banks have raised lending standards. For investors, private debt has been effective in terms of dampening volatility while delivering above-average returns. 

Finsum: Alternative assets performed quite well in 2023 amid a turbulent year for financial markets. Here’s a roundup of some of the key categories within the asset class.

At the onset of their careers, most financial advisors have big aspirations. Yet, many fail to realize their ambitions and plateau at certain levels. At each level, there are common obstacles that need to be overcome. 

The first phase is the hustle phase, when a lot of energy is expended to start building the business. During this phase, key steps to take are to invest in yourself by embracing discomfort and stretching beyond yourself to grow, build a capable team, get in the habit of giving out value without any expectations, find like-minded and supportive individuals to surround yourself on the journey, and embrace acting fast. Technology can also be leveraged to level the playing field.

The next phase is the surrender phase. During this, the major focus is on building a team and transitioning from being a solo operator. At some point, this becomes necessary in order to achieve more growth. It will require adopting a CEO mindset, focusing on key tasks while delegating others, and developing scalable systems. 

The final phase is the harmony phase. This is when you can step back with minimal interruption to the business. During this phase, the major focus is on aligning personal and professional goals, finding new avenues of growth by leveraging your team, investing in sustainability, instilling a culture, and embracing the flow. 

Finsum: Financial advisors go through phases during their careers that require different strategies and ways of thinking. 

Until a couple of decades ago, investors had few options when it came to asset classes. Since then, there has been an increase in the number of investable asset classes including REITs, commodities, currencies, etc. Yet so many of these have failed to provide sufficient diversification, especially during down markets.

Investors should consider fixed annuities as they offer capital protection guaranteed returns, and income regardless of market conditions. Thus, they are a way to generate income during retirement and also increase the resilience of portfolios. 

Unlike fixed income, fixed annuities do not fluctuate in value depending on interest rates or other factors. Fixed annuities always have a positive, guaranteed return. When evaluating their portfolios, investors should consider market risk, credit risk, longevity risk, and liquidity risk. 

A fixed annuity reduces a portfolio’s market risk due to there being a guaranteed return and no risk of loss of principal. It also leads to lower credit risk given that annuity providers have superior credit ratings. Longevity risk is also reduced given that annuities provide payments for life. There is a tradeoff in terms of liquidity risk as money invested in an annuity is not easily accessible.

Finsum: Fixed annuities can lead to more resilient portfolios. Although there is a tradeoff in terms of liquidity, it can reduce a portfolios’ market, credit, and longevity risks. 

There was strength across the board in fixed income following an inflation report that continued last month’s cooling trend and a dovish FOMC meeting. The yield on the 10-Y was 27 basis points lower, while the yield on the 2-Y dropped by 36 basis points. 

The November CPI report showed a monthly gain of 0.1% for the headline figure which was in-line with expectations and a slight increase from last month’s unchanged print. Core CPI came in at 3.1% on an annual basis which was consistent with expectations. Overall, the report indicates that inflation continues to moderate and is getting closer to the Fed’s desired levels.

While fixed income rallied following the CPI, the rally accelerated following the dovish FOMC meeting and press conference. The Fed held rates steady but surprised markets as it now expects 3 rate cuts in 2024. It also downgraded its 2024 inflation forecast to 2.4% from 2.6%. 

In his press conference, Chair Powell affirmed progress on inflation and noted that the economy was slowing in recent months especially from Q3’s rapid pace. He added that high rates were negatively impacting business investment and the housing market. Markets jumped on his remark that further rate hikes were ‘not likely’ although possible if necessary. 

Finsum: Treasury yields were sharply lower following a soft CPI report and dovish FOMC meeting. Stocks and bonds were bought higher as the Fed is now forecasting 3 rate cuts in 2024. 

A sizzling rally in stocks and bonds is leading investors to scoop up ETFs. In November, the iShares 20+ Yr. Treasury Bond ETF (TLT) was up 9.9%, while the Morningstar Global Markets Index, a gauge for global equities, was up 9.2%. 

The major driver of the rally is increased optimism about interest rates given positive news regarding inflation while the economy continues to avoid a recession. This means the biggest gains were found in interest-rate sensitive sectors which have been among the most battered since the Fed embarked on tightening policy early in 2022. 

There were also $110 billion inflows into US ETFs with $77 billion going into equities and $31 billion into fixed income ETFs. This was a 1.6% increase from last month and total ETF flows should easily exceed $500 billion, setting a new record. Fixed income ETFs saw a 2.2% growth rate on a monthly basis and inflows are up 14.3% compared to last year, exceeding equities’ growth rate of 5.6%. 

Active ETFs continue to grow and account for $21 billion of inflows. YTD, total inflows are $116 billion which exceeds $90 billion in 2022. Some areas of growth in the segment are alternative assets and inverse funds. 

Finsum: 2023 is set to be a record year in terms of ETF inflows. Fixed income ETFs and active funds are two of the biggest areas of growth. 

High yield bond ETFs are seeing a surge of inflows as risk appetites reignite. In November, US-listed high yield bond ETFs had $10.8 billion of inflows which surpassed the previous record of $8.6 billion in April of 2020. The inflows in November were enough to offset the $8.7 billion of outflows in the previous 3 months. Globally, there was $127.5 billion of inflows into ETFs which was the highest amount since December 2021.

There was strength across certain parts of the fixed income complex as investment grade corporate bond ETFs saw $10 billion inflows which is the most since January. In contrast, Treasuries saw their lowest levels of inflows since January 2022. There was a sharp decline from the $30.4 billion inflows in October to just $4.3 billion in November, a reflection of the U-turn in sentiment. 

According to Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the Emea region, “Investors have cash to put to work, and if the assessment of the investment environment is better than expected, that dry powder can be put to work.” Another factor is that retail investors have many more low-cost options when it comes to high yield ETFs which seem like an ideal vehicle to take advantage of a ‘soft landing’ scenario which should be bullish for the asset class. 

Finsum: High yield ETFs saw a surge of inflows in November. Here are some of the reasons why the category should benefit from a soft landing. 

Direct indexing has been around for 30 years but was once only accessible and viable for ultra-high net-worth investors. Now, technology and lower transaction costs have made it available for a much wider swath of investors who are able to benefit from direct indexing’s tax-loss harvesting and customization abilities.

Interestingly, the strategy is finding particular favor among millennial investors who are interested in tax optimization and personalization which are not possible through traditional passive investing. Advisors can customize holdings in a way that reflects a client’s values and preferences such as prioritizing ESG criteria or adjusting a portfolio based on a client’s risk profile. Holdings can also be customized to account for a clients’ unique financial situation, which is also not possible through investing in ETFs or mutual funds. 

For advisors, it presents an opportunity to differentiate themselves in a competitive landscape by offering personalized and optimized solutions. Direct indexing is likely to continue growing as it’s becoming increasingly available through many online brokerages and wealth management firms. It’s also consistent with many younger investors’ desired preference to have their personal holdings reflect their values and beliefs. 

Finsum: Direct indexing is growing at a rapid pace, and it’s finding favor with Millennial investors due to its tax optimization and personalization.