The Federal Reserve is clearly close to the end of its hiking cycle. Thus, there is more data dependency which is leading to big swings in the stock and bond markets following the release of economic data such as the CPI and the jobs report. According to Blackrock’s Rick Rieder, the CIO of Global Fixed Income, many market participants are making a mistake by over reacting and losing sight of the more durable and investable trends. 

There have been several instances of misleading data. For instance, the ISM hit a contractionary level of 48 in January of this year which led many to believe that a recession was imminent. This has proven to be incorrect as the economy is forecasted to expand by 2% on a real basis this year. Weakness in manufacturing has been more than offset by strong household balance sheets, wage growth, and growth in services.

Reider also believes that investors should temper their urge to make bold predictions for 2024 or the long-term given the number of unpredictable forces of a historical nature, impacting the global economy. There is a wide range of possible outcomes and major potential ramifications in terms of geopolitics and financial markets, so it’s important to not fall prey to short-term volatility.

Finsum: Blackrock’s Rick Reider shared why investors shouldn’t overreact to economic data even though this is the temptation with the Fed close to the end of its hiking cycle. 

Demand for annuities has soared along with rising rates. Owners of annuities, prior to 2021, would be very happy if they purchased variable annuities which increase along with inflation, while those with a fixed annuity would see the purchasing power of their income diluted by inflation.

Despite the risks, annuities are a great option for clients with low levels of risk tolerance and who value the certainty of having an income. The biggest benefit is for clients who don’t want to worry about not having enough income, or how the financial markets are performing. 

According to Kirsty Anderson, the pensions specialist at M&G Wealth, “An annuity gives absolute certainty. You know exactly how much income you’ll receive, and you’ll receive this for the rest of your life – unless you’re purchasing a fixed term annuity.” Currently, the average annuity rate is 6.7%. This is nearly 50% more than the average rate since the financial crisis. 

There is a wide variety of annuities to fit the needs of clients. Some options include varying durations, flexibility, and protection against inflation. Many clients will opt for a blended approach, when they use annuities to cover basic living expenses while keeping the remainder of their money invested in the markets. 

Finsum: Annuity sales are strong due to high rates and nervousness about the economy and inflation. Here are some considerations for annuities in retirement planning.

Natixis Investment Managers conducted a survey with CoreData Research of more than 11,000 global investors in March and April of this year. It found that individuals invested in portfolios overseen by professional asset managers had less stress, were more trusting of advisors, and more financially confident. 

Overall, the survey revealed that only 11% of model portfolio investors were stressed, while 23% of non-model portfolio investors were stressed. Additionally, 45% of model portfolio investors were confident about their finances while only 24% of non-model portfolio investors were. 

The survey also revealed that 78% of model portfolio investors saw volatility as an opportunity. In contrast, only 47% of non-model portfolio investors felt the same. 70% of model portfolio investors felt that inflation meant it was time to invest more, in contrast to 40% of non-model portfolio investors. 

For advisors, it’s particularly relevant that 97% of model portfolio investors trusted their financial advisors when making decisions in contrast to 73% of non-model investors who said the same. 

However, only 51% of wealth managers and advisory practices in the US plan to offer third-party model portfolios. 

The survey also revealed that model portfolios free up time for advisors by outsourcing portfolio management. This means more time for client services, financial planning, and prospecting. 

Finsum: Natixis conducted a recent survey about model portfolios. Here are some of the major findings.

High rates have severely impacted the real estate market. In terms of commercial real estate (CRE), higher rates mean that financing costs have risen, but more pain will come when they have to roll over debt in the coming years, assuming that rates remain elevated. 

According to Rich Hill, the Head of Real Estate Strategy & Research at Cohen and Steers, Head of Real Estate Strategy & Research, REITs are in a much better position to handle these stresses than the larger CRE market. 

Many REITs have delivered their balance sheets with 86% of debt fixed for around 6 years which means there is much less exposure to interest rates than other CRE operators and investors. Additionally on the aggregate, REITs have a loan to value of 35% which is quite conservative relative to historical standards. 

So far, high rates have had a muted impact on earnings, about 1.4%, making it more of a mild headwind. Thus, valuations for REITs have become quite attractive, while they remain on strong footing fundamentally, especially in relation to the broader CRE market. As a result, Hill notes that valuations for REITs have stabilized, while private valuations continue to move lower. 

Finsum: High rates are leading to significant amounts of stress for parts of the commercial real estate market; however REITs have been less affected so far. 

Succession planning is increasing in importance given the aging of the industry. Succession planning is essentially a plan for the business beyond an advisors’ involvement. It’s also a contingency plan in the event of an unforeseen event. Currently, less than 30% of advisors have a firm succession plan in place. Here are some options when it comes to succession planning.

The first option is an internal transfer of clients and assets to the next generation. It requires both parties to agree upon a value for the practice. The drawback is that often there’s a large gap in this assessment. However, the upside is that the transition for clients has much less friction.

The next option is to sell the practice to an aggregator or integrator. These firms specialize in acquiring RIAs and are often funded by private equity. Typically, this involves giving up control of the business, meaning that the successor has less upside and control due to ownership being diluted. 

Another option is to sell directly to a strategic buyer, which is often another financial institution or financial advisor practice. This entails some sort of transition period to merge operations, employees, and clients. It requires carefully choosing a successor and ensuring that the culture of the two firms can mesh. 

Finsum: Succession planning is increasingly important for clients. Here are some of the most common types of succession plans.