Fixed income markets have faced a major headwind over the last 21 months given the Federal Reserve’s aggressive rate hikes. Regardless, money poured into fixed income ETFs at a record pace even outpacing equity ETFs for the first time in history. Investors were willing to overlook poor, near-term performance due to attractive yields and a shaky economic outlook.

Now, this trend could accelerate further given that the Fed seems to be in the final innings of its tightening campaign, while concerns about valuation in equities linger. Therefore, many believe that the growth of fixed income ETFs relative to equity ETFs is not a blip, but the start of a multiyear trend. And, asset managers are responding with a bevy of new fixed income ETF launches.

Overall, inflows to fixed income ETFs are up nearly 10% compared to last year. Many are eager to lock in these elevated yields especially in areas with lower risk like Treasuries. Of course, the major challenge for fixed income investors is assessing if a pivot in policy will arrive imminently or are we due for a period of ‘higher for longer’. In the latter scenario, short-duration bonds will outperform, while long-duration will struggle. 

Finsum: Fixed income ETFs are seeing a surge in new issuances and inflows. Find out why many expect this trend to continue over the next few years.

John Olsen, the founder and president of Olsen Annuity Education and the author of ‘The Advisor’s Guide to Annuities’ recently spoke with ThinkAdvisor to share some insights on how advisors can sell more annuities. 

His advice is somewhat counterintuitive. He believes the ‘secret to secret to selling annuities is to give up on trying to sell annuities.’ This is because an advisor must always think about a client’s financial plan and not about potential product solutions. Instead, advisors should consider all financial products, including annuities, like tools to accomplish a job rather than the goal.

Therefore, an advisor’s task is to gain a complete understanding of your clients which includes their financial situation, personality, risk tolerance, lifestyle factors, health considerations, etc., to determine what ‘tool’ will be the most effective. He also believes that most of an advisors’ job is about understanding their clients’ emotions rather than quantitative factors.

Most financial plans fail because advisors don’t understand that emotions are ultimately what drive decision-making. And, a plan that doesn’t take into account these ‘soft’ factors is bound to fail as most decision-making is ultimately driven by emotions. 

Finsum: John Olsen, the founder of Olsen Annuity Education and one of the top annuity salesman in past years, shares some tips on selling annuities.

The efficient frontier is defined as the set of portfolios which maximizes expected return for a given level of risk. The theory was developed by Nobel laureate and economist, Harry Markowitz, and has become an integral part of modern portfolio theory. The most common application of the efficient frontier is to optimize the amount of diversification in each portfolio. 

Efficient frontier is used to figure out the ideal balance between returns and risk through the use of diversification. It’s based on historical data and correlations to calculate theoretical returns and ideal weightings in a portfolio. 

It can help investors figure out how much diversification is necessary given an individual’s risk tolerance. Greater diversification can dampen variance and risk while still maintaining the same level of long-term returns. 

Efficient frontier is used to construct model portfolios to ensure sufficient diversification and appropriate rebalancing. They can also help identify when the portfolio is getting diminishing returns from taking on risk. 

One drawback to the efficient frontier is that all of these calculations are based on historical data, and there is no guarantee that future returns will be similar to that of the past. It also assumes that returns follow a normal distribution, however this has simply not been the case in many years. 

Finsum: Efficient frontier is used by portfolio managers to determine the ideal balance between returns and risk. It’s an integral aspect of modern portfolio management theory.

2022 was a dismal year for rookie financial advisors as there was a 72% failure rate. In total, the number of new financial advisors grew by 2,579 which was barely more than the number of advisors who retired. 

Overall, there are 288,555 financial advisors in the US. A pressing concern is that the advisor workforce is rapidly aging. According to a recent report from Cerulli, 37% of advisors plan to retire over the next decade. This amounts to 106,264 advisors who will be exiting the industry.

At current growth rates, there is little chance of this shortfall being made up unless there is some radical change in training programs or recruitment efforts. Currently, 64% of new advisors are recruited through referrals. 

Financial services companies will have to broaden their horizons if they want to educate young people about this career path especially as the role has shifted significantly over the last couple of decades from focusing on stock-picking and investment management to goals-based planning.

For younger advisors, it constitutes a significant opportunity to gather clients and assets. For firms, it will likely be a major challenge and likely continue fueling the recruiting frenzy.

Finsum: It’s estimated that nearly 40% of financial advisors will be exiting the industry over the next decade. This will create major challenges and opportunities for players in the industry.

In a strategy piece for BNP Paribas, Daniel Morris and Olivier de Larouziere share some thoughts on the fixed income market and recent developments over the last couple of months which has resulted in them revising their outlook for the near and intermediate-terms.

The biggest surprise has been the resilience of the US economy in 2023 despite the Federal Reserve’s aggressive rate hikes. In essence, the odds of a ‘soft landing’ continue to tick higher as inflationary pressures continue to ebb in key areas. Recent weakness out of China is another indication that the global economy is decelerating, but it also has positive implications for inflation.

However, the Fed has not pivoted in terms of its policy given that inflation remains uncomfortably high in certain areas like services and wages. This, in concert with an economy that continues to expand, is the major reason why a Fed pivot is unlikely till sometime next year. 

BNP remains unsure about the terminal rate this cycle. But, it believes it will be higher than what they were forecasting a few months ago. One factor in this incorrect forecast is that the bank failed to account for the impact of higher government spending and large deficits which is also contributing to economic strength. 

Finsum: BNP Paribas shared its fixed income outlook for the rest of the year. Overall, the bank remains bullish but believes that any pivot in terms of Fed policy is not near. 

Social media can be a goldmine for financial advisors with a plan and system to consistently create content. However, it can also be a curse for advisors who don’t represent their practices properly or spend time and resources ineffectually.

In theory, social media gives an advisor the ability to reach thousands of users on various platforms, many of whom may be in the market for a financial advisor. It can also help you target prospects in your niche and customize content accordingly. For SmartAsset, Rebecca Lake CEFP shares some additional tips on effective content creation for social media.

The first goal is to create brand awareness through a presence on social media. This is the first step in the journey from gaining a social media follower, converting them to a prospect, and eventually a client. The next step is to use interactions on social media to build a following and deepen connections with existing clients and prospects. One strategy to do so is to run polls and ask questions of your followers to gain a deeper understanding of their perspective on various matters and spark thought and conversation.

Another important step is to do some research in order to understand where your ideal client spends time on social media. For instance, an advisor targeting younger clients may have better results on Tiktok or Instagram whereas a client targeting older clients would have more success on Facebook. 

Finsum: Social media is increasingly how advisors connect and communicate with clients and prospects. Here are some tips to increase your odds of success. 

The ‘why now’ and what’s to come for middle-office outsourcing

During the post-2008 financial crisis volatility, the popularity of outsourcing key middle- and back-office functions rose as asset managers saw the value of an outsourced operating model. We have recently seen how market volatility has created operational challenges for fund managers due to the COVID-19 pandemic and the subsequent instability in the banking system. As a result, there is a renewed need for real-time transparency into counterparty exposure, securities exposure and available liquidity. Demand is growing for ready-to-deploy technology and talent to mitigate the impact of market uncertainty on managers’ portfolios.

Market uncertainty also compels managers to look for ways to control costs and make them more predictable while creating scale. Internal middle-office teams are often regarded as a business expense, susceptible to high employee turnover and replacement costs. Technology savings are also a key factor driving middle office outsourcing, as managers recognize owning and maintaining best-in-class technology makes limited financial sense in the long run.

The demand for a more efficient exchange of information, coupled with cost control measures, has motivated asset managers to look at outsourcing.

Why Now? 

In its May 2023 Insights Report, Hedgeweek found the outsourcing trend is accelerating, with around 60% of hedge funds outsourcing back-office functions and 40% outsourcing the middle office. Some 34% of firms surveyed said they were planning to outsource more. There are three primary motivations:

1. Outsourcing allows firms to focus on their core competencies and securing the best possible deals. Moreover, working with a service provider brings specialized expertise in various asset classes and geographies, shortening the time to market for new product launches. Leveraging a service provider’s resources and expertise on key business strategies makes scaling in a dynamic market easier. 

1. Access to advanced technology without a costly in-house build-out. Not only is there no high upfront cost nor ongoing maintenance, but an effective middle-office service provider can also rationalize and connect data across multiple processes. A centralized data approach can bring efficiency gains and data integrity.

1. Outsourcing makes it easier to achieve scale while controlling costs. For firms in growth mode, increased acquisition activity, multi-jurisdictional operations, maintaining operational governance, data complexity and increased investor scrutiny are just a few challenges outsourcing helps address. 

What’s to come for middle-office outsourcing?

Outsourced operating models must have the flexibility to adapt to the changing business needs of managers. Today, firms are seeking support in such areas as:

• Lifecycle support across all asset classes, including publicly traded securities, complex fixed income such as bank debt and distressed debt, illiquid OTC derivatives, real assets and other static assets.
• Consolidated investment reporting and analysis to tell the “story” so managers can extract meaningful data quickly and easily.
• Investment-level forecasting, both in terms of liquidity requirements and scenario planning, to account for varying degrees of market uncertainty.
• CSDR and T+1 settlement requirements put pressure on managers to meet strict deadlines. Outsourcing to a provider with an automation infrastructure and effective post-trade processes will enable managers to accelerate their readiness.

The full lift-out vs. select activities 

As disruptions to day-to-day operations weigh on fund managers, many consider the benefits of a full lift-out of their middle and back-office operations systems and staff. In the full lift-out scenario, the most significant benefits to a firm are cost savings, scalability, immediate access to industry-leading expertise, and staff continuity. Any growing firm looking to get into new markets or reduce the cost of its operational infrastructure stands to benefit from a lift-out. Smaller managers, however, may find it easier to outsource selected operational activities. 

The ways hedge funds manage their operations is evolving. Many asset and fund managers have outsourced their back-office operations for years, but more are realizing many other functions can also be performed more efficiently by an external service provider – putting the middle office in the spotlight. Funds of all sizes want to focus on investing, not operations; outsourcing allows them to find this balance. 

To learn more about Middle Office outsourcing and SS&C download the whitepaper ‘Three Key Drivers of Middle Office Outsourcing’

For Vettafi’s ETFTrends, James Comtois discusses some of the key advantages of direct indexing for investors, and why the category is expected to continue growing at a healthy clip over the next decade. In essence, it’s become increasingly evident over the past decade that investing passively and consistently in low-cost, diversified funds is the key to outperformance. Currently, there is $260 billion in assets managed via direct indexing with this figure expected to exceed $500 billion over the next decade. 

At the same time, society continues to evolve in a manner that serves consumers with content, products, and services that are customized to their taste. Concurrently, there has been technological innovation in the financial space that has resulted in drastic declines in the cost of stock trading and money management. 

Direct indexing is at the intersection of all these trends. It captures the best parts of passive index investing as it recreates an index in an investors’ account with some tweaks if necessary to reflect one’s personal values and beliefs or unique financial situation. It utilizes technological innovations to scan for tax loss harvesting opportunities which then can be used to lower an investors’ tax bill. Due to this factor, direct indexing strategies outperform especially in more volatile environments. 

Finsum: Direct indexing is one of the fastest growing areas in wealth management. Here are some factors behind its increasing popularity. 

Financial advisors have been leaving Merril Lynch at a steady clip over the past couple of years in search of greener pastures. Recently, David B. Ammerman and Sara E. Graham, who managed $353 million in client assets, left the firm to join Raymond James’ independent advisors division. He was ranked as the #37th best wealth advisor by Forbes this year and had been with Merrill Lynch since 1998.

Similarly, William Edward ‘Ed’ Winegar and Gregory W. Berg also left Merrill Lynch to join LPL’s employee brokerage unit two weeks ago. They are naming their new practice, Winegar Berg Wealth Management. The duo managed $205 million in client assets and generated $1.6 million in revenue last year. Both had been with Merrill Lynch since 2005.

This continues a trend of Merrill brokers leaving for Linsco which is LPL’s employee advisor channel. LPL continues to grow at an impressive rate, in part due to several affiliate options it offers for prospective advisors. Last month, it added about $800 million in client assets from Merril. Currently, LPL has 22,000 advisors, and it continues to take advisor and market share away from big banks and legacy providers of financial advice.  

Finsum: Merrill Lynch continues to see brokers leaving the firm. One of the firms seeing an influx of advisors is LPL which has a variety of offerings.

One of the biggest surprises of 2023 has been the resilience of the economy and inflation despite the Fed embarking on the most aggressive rate hike campaign in decades. For fixed income investors, it’s been a challenging environment. 

Inflows have been strong and sustained given higher rates and expectations that a recession was imminent. Yet, returns have been mixed especially with there being no change in the Fed’s stance despite some encouraging data on the inflation and economic fronts. Specifically, shorter duration bonds have outperformed, while longer duration bonds have underperformed.

According to Vanguard, it’s simply a case of short-term pain equating to longer-term gains. The selloff in fixed income will lead to higher returns over the intermediate and long-term while generating decent income for investors. Ironically, it’s an inverse of what we experienced over the past decade when bonds were in a decade-plus bull market due to the Fed’s dovish policies. In this environment, there was no value and limited income opportunities in the asset class. 

The firm recommends that investors have exposure to a mix of short and long-duration bonds. The factors that resulted in shorter duration outperformance are unlikely to continue especially given that the labor market is rapidly cooling and yields are at historically attractive levels. 

Finsum: Fixed income has been particularly challenging in 2023 due to the Fed continuing to hike rates. Here are Vanguard’s thoughts on how to navigate the market.