Vanguard, which is the second-largest ETF issuer, is planning to go all in on direct indexing. That is according to Tim Buckley, Vanguard CEO, as he was being interviewed on stage at the recent Exchange ETF conference. Buckley said that Vanguard looked at direct indexing years ago and started thinking about it. He stated, "What's a way that you could disrupt the ETF or the mutual fund? You always should be looking if there is a better way to do it." While direct indexing has existed for some time, it is typically only reserved for the "ultra, ultra, high-net-worth," according to Buckley. The CEO added "And we can see that … there's huge tax benefits for a lot of investors in using direct indexing." He said that the idea of creating portfolios that don't undermine people's retirement but let them invest in line with their values was something the fund firm found interesting. Instead of hoping that direct indexing would go way, Buckley said Vanguard decided to embrace it and "see if it is a better way to do something." He added, "And we'll find out over time. But we'll be investing heavily." The fund giant, which manages $2 trillion in assets across 81 US-listed ETFs, started its move into direct indexing in October of 2021, with its purchase of Just Invest and its direct investing platform, Kaleidoscope.

Finsum:According to Vanguard’s CEO Tim Buckley, the fund firm plans to go all in on direct indexing as there are huge tax benefits for a lot of investors.

With market volatility still a concern among clients, private equity firms are positioning themselves as an option for advisors looking to minimize the impact of volatility in their client’s portfolios. Steve Brennan, head of Private Wealth Solutions at Conshohocken, Pennsylvania-based Hamilton Lane, told Financial Advisor magazine, “A benefit to a private equity fund is that it is a long-term investment vehicle that gives an investor an extended period to invest their money and protect it from the turbulence of the markets.” Private equity proponents say that the lower volatility typically outweighs the negatives of private equity, including high fees and illiquidity. Brennan said “The time horizon for investors in the private markets is ... a much longer time period so you’re not seeing the volatility in the private markets that you would see in the public markets.” Alexis Weber, chief investment officer and founder of PM Alpha told the magazine that a client’s private equity allocation should be fluid. He suggested a range of 5% to 20%, but also cautioned advisors that it depended upon the client’s risk tolerance. He also mentioned that private equity can be a benefit to an advisor looking to distinguish themselves from their competitors. He stated, “Really having the right level of allocation to these instruments allows them to differentiate their services and their portfolio construction approach from other peers.”

Finsum:Private equity firms are positioning themselves as an option for advisors looking to minimize volatility for their clients as well as differentiate themselves from their peers.

Morgan Stanley’s new exchange-traded fund platform will focus on actively managed funds, with Anthony Rochte, global head of ETFs at Morgan Stanley, seeing a “significant uptick in active transparent fixed income purchasing.” Rochte told ETF.com at the recent Exchange conference in Miami that “There's no doubt active management is where we're focused in additional series of ETFs. At the core of Morgan Stanley Investment Management is active management; that’s what we do.” The financial services giant made its return to the ETF industry on February 1st with the launch of six Calvert ETFs, including an active ultra-short investment grade ETF. Rochte stated that the firm is looking to launch funds across its Calvert, Eaton Vance, and Morgan Stanley brands. More specifically, he stated, “In the next suite of products you could expect to see from us, the ETF platform would be active, transparent.” According to ETF.com data, $57.4 billion flowed into active products last year as passive investments were hammered by the markets. Active funds comprise $407.9 billion of the ETF market, with many financial professionals seeing that segment growing. Currently, there are 1,027 actively managed ETFs in the U.S. market. With Morgan Stanley looking to add to its product suite, transparent, fixed-income products are squarely in focus, according to Rochte.  

Finsum:With many financial professionals expecting the active ETF segment to grow, Morgan Stanley is looking to add to its product suite with a focus on actively managed transparent fixed-income funds.

With direct indexing continuing to gain steam, the strategy isn’t just for the ultra-wealthy anymore, according to two panelists at the recent ETF Exchange conference in Miami. According to Randy Bullard, global head of wealth management at Charles River Development, any investor with more than $150,000 can benefit from these custom portfolios. Bullard stated that “Today an advisor might use direct indexing for clients with complex and unique investment policy requirements, but in the future, direct indexing won’t be such a niche thing.” Ben Hammer, head of client development for Vanguard Personalized Indexing, agrees and said “personalized indexing” can benefit many investors. For Hammer, direct indexing is simple, “It’s an individual account that’s managed to track an index. The individual owns the securities, which gives them flexibility to do things that they can’t with a fund. For example, when individual stocks are down, the investor can tax-loss-harvest them to offset gains elsewhere in their portfolio.” Hammer also noted that direct indexing can give advisors an “additional edge“ in their business. He stated, “They can utilize this to really establish an excellent tax profile for a client that might have some complications or give them an extra bit of customization.” However, Bullard acknowledged that direct indexing right now is for equities, not other asset classes.

Finsum:According to two panelists at the recent ETF Exchange conference, any investor with over $150,000 in assets would benefit from direct indexing, as would advisors by providing them an “additional edge“ in their practice.

With direct indexing continuing to gain steam, the strategy isn’t just for the ultra-wealthy anymore, according to two panelists at the recent ETF Exchange conference in Miami. According to Randy Bullard, global head of wealth management at Charles River Development, any investor with more than $150,000 can benefit from these custom portfolios. Bullard stated that “Today an advisor might use direct indexing for clients with complex and unique investment policy requirements, but in the future, direct indexing won’t be such a niche thing.” Ben Hammer, head of client development for Vanguard Personalized Indexing, agrees and said “personalized indexing” can benefit many investors. For Hammer, direct indexing is simple, “It’s an individual account that’s managed to track an index. The individual owns the securities, which gives them flexibility to do things that they can’t with a fund. For example, when individual stocks are down, the investor can tax-loss-harvest them to offset gains elsewhere in their portfolio.” Hammer also noted that direct indexing can give advisors an “additional edge“ in their business. He stated, “They can utilize this to really establish an excellent tax profile for a client that might have some complications or give them an extra bit of customization.” However, Bullard acknowledged that direct indexing right now is for equities, not other asset classes.

Finsum:According to two panelists at the recent ETF Exchange conference, any investor with over $150,000 in assets would benefit from direct indexing, as would advisors by providing them an “additional edge“ in their practice.

Putnam Investments recently announced the availability of Putnam Sustainable Retirement Funds, a target-date series for the retirement savings marketplace. The suite invests in actively managed ESG-focused ETFs managed by Putnam. The funds implement a similar retirement glidepath philosophy as the firm’s other target-date offering, Putnam Retirement Advantage. The series offers vintages for every five years from 2025 through 2065, along with a maturity fund. The Putnam Global Asset Allocation team, which also manages Putnam Retirement Advantage, is responsible for the glidepath and both the tactical and ETF allocations of the Putnam Sustainable Retirement target-date suite. The series was developed in part to respond to the growing interest in sustainable investing within the defined contribution retirement market according to Steven P. McKay, Putnam’s Head of Global Defined Contribution Investment Only. Robert L. Reynolds, President, and Chief Executive Officer, of Putnam Investments, said the following as part of the announcement, “As the retirement marketplace continues to evolve and grow, there is tremendous appetite for meaningful product innovation that creates greater choice of offerings to help working Americans achieve their financial goals.” The funds will invest in ETFs across asset classes managed by the firm, including:

• Putnam Sustainable Future ETF (NYSE Arca: PFUT)
• Putnam Sustainable Leaders ETF (NYSE Arca: PLDR)
• Putnam ESG Core Bond ETF (NYSE Arca: PCRB)
• Putnam ESG High Yield ETF (NYSE Arca: PHYD)
• Putnam ESG Ultra Short ETF (NYSE Arca: PULT)
• Putnam PanAgora ESG Emerging Markets Equity ETF (NYSE Arca: PPEM)
• Putnam PanAgora ESG International Equity ETF (NYSE Arca: PPIE)

Finsum:Putnam recently announced the availability of Putnam Sustainable Retirement Funds, a target-date series that invests in actively managed ESG-focused ETFs managed by Putnam.

The case for model portfolios has never been better. Investment managers are expanding their model portfolio offerings while turnkey asset management platforms continue to grow. Since portfolio management is just one piece of a financial plan, why wouldn’t advisors want to take advantage of model portfolios to free up time to spend with their clients? However, some advisors have a reason for resisting this trend and insist on managing portfolios themselves. For instance, Ryan Johnson, managing director at Buckingham Advisors told InvestmentNews, “By managing our own portfolios, we’re adding value.” Johnson added that they feel they have a lot of control over the individual stock selection, especially when it comes to tax planning. Paul Schatz, president of Heritage Capital also mentioned control as to why he builds client portfolios from scratch. He stated, “Control is a huge driver.” Robert Steinberg, chief executive at RIA Blue Chip Partners told the magazine that they focus on individual securities since “clients are more involved, it’s easier to tax-loss harvest, they know what they own.” While a 2020 research report from InvestmentNews cited numerous reasons for outsourcing portfolio management such as freeing up time, some advisors still see portfolio management as a core component of financial planning. The report also listed the top reasons for not using a model portfolio such as investment research strength, flexibility, and cost.

Finsum:While model portfolios continue to gain steam among financial advisors, there are still some that prefer to build portfolios themselves due to control, adding value, and getting clients more involved.

According to data from the insurance trade association Limra, annuity sales hit $310.6 billion in 2022, surpassing the prior annual record of $265 billion, set in 2008. That year the U.S. was in the midst of the Great Recession, while the S&P 500 index lost 57% from its peak. In 2022, the S&P 500 posted its largest loss since 2008, ending the year down 19.4%. Since annuities hedge risks such as market volatility, they became quite popular last year with investors. Annuities also benefited from the Fed raising interest rates, which created a better return on investment. Plus, U.S. bonds, which typically act as a safe haven for investors when stocks falter, suffered their worst year on record last year. This left very few options for savers looking for safety and a return. Investors were especially bullish on fixed-rate deferred annuities. Total sales of fixed-rate deferred annuities last year hit $112.1 billion, more than double the sales from 2021. They also broke the prior annual record from 2002, when investors bought $80.8 billion, according to Limra data. Indexed annuities also had a record year, with sales of $79.4 billion, an 8% increase on its 2019 record. However, variable annuities, which are generally tied to the stock market, saw annual sales of just $61.7 billion, the lowest since 1995.

Finsum: With a volatile stock market, rising interest rates, and the worst year on record for bonds, annuity sales had a record year, with fixed-rate deferred annuities and indexed annuities also posting annual sales records.

Model portfolios have been gaining ground with advisors. Close to $350 billion in assets sat in model portfolios as of March 2022, according to a Morningstar report in June. That’s a 22% increase over the prior nine months. But how do advisors incorporate model portfolios into their business? In a recent article, ThinkAdvisor asked different advisors how models fit in their practice. Erik Nero, founder, and president, of First Step Wealth Planning LLC, thinks they are a boost to small firms. He uses them for close to all of his clients except the client portfolios that need more customization. Kyle Simmons, lead financial planner, at Simmons Investment Management uses his own model portfolio but warns advisors not to get attached to models, as clients can come in with legacy holdings and tax consequences. Jan Pevzner, principal, of Gotham Block LLC finds models to be a great starting point for a “generic client” as it can save you a lot of time. Jon Ulin, CEO of Ulin & Co. Wealth Management uses models in addition to comprehensive planning for clients, which isn’t typically provided by robo-advisors. Nate Creviston, manager of wealth management and portfolio analysis, at Capital Advisors, does not use model portfolios at all as they lack tax awareness and believes each client deserves a customized portfolio unique to their needs and goals.

Finsum: With model portfolios gaining ground with advisors, ThinkAdvisor interviewed several advisors on how models fit or don’t fit into their practice.

On Tuesday, the Securities and Exchange Commission announced its examination priorities for 2023. The agency said it is going to focus on Regulation Best Interest, ESG, the new marketing rule, and a host of other issues. When it comes to investigating Reg BI violations, the SEC will zero in on advisors’ recommendations on complex investments such as derivatives and leveraged ETFs, and high-cost and illiquid products such as annuities and nontraded REITs. According to the division, SEC examiners analyzing Reg BI will look at investment advice and recommendations, disclosures made to clients, the processes firms have in place for making best-interest recommendations, and the kind of factors that are considered in light of an investor’s profile, including their goals and account characteristics. The report stated, “Examinations may also focus on recommendations or advice to certain types of investors, such as senior investors and those saving for retirement, and specific account recommendations, such as retirement account rollovers and 529 plans.” The division will also be focusing on the SEC’s new marketing rule, which reached its compliance date last November after taking effect in May 2021. Examiners will be looking at whether advisors have adopted written rules and procedures that “are reasonably designed” to prevent rule violations. Several experts also believe that SEC examiners will expect firms to apply Reg BI standards to ESG recommendations.

Finsum:The SEC's Examinations Division released its annual Exam Priorities this week, detailing its areas of focus for 2023, which includes Reg BI, ESG, and the new marketing rule.