Displaying items by tag: technology

Traditionally reserved for the wealthy, direct indexing has become more widely accessible thanks to technological advancements. This investment strategy involves owning the individual stocks in an index such as the S&P 500, which allows investors to sell off underperforming stocks to generate tax losses—a technique known as tax-loss harvesting.

 According to Frec, a direct-indexing startup, a simulated S&P 500-based portfolio could boost after-tax annual returns by more than 2% over a decade, compared to an ETF, assuming a tax rate of 42.3% and excluding advisory fees. 

Firms like Charles Schwab, Vanguard, and Fidelity now offer direct-indexing services with various account minimums and fee structures, lowering the entry barrier for average investors. With the market for direct indexing expected to reach $825 billion in assets by 2026, this approach is set to become increasingly popular among a broader range of investors.

Finsum: Computing power has drastically driven down the costs of Direct Indexing allowing more investors to gain its tax alpha. 

Many financial advisors are understandably uneasy about artificial intelligence (AI). Like any new technology, there will be considerable opportunities for those who can properly leverage and implement it. 

However, it’s also important to understand its limitations, as it lacks human intuition and the ability to understand and respond to a client's deeper, emotional needs. Instead, AI can be thought of as a way to enhance an advisors' capabilities and can be quite useful in areas such as fraud detection, estate planning, and tax strategies. Additionally, many advisors are already using technology that has elements of AI, especially for making forecasts and future projections. 

AI excels at tasks that require pattern recognition, optimization, and identifying trends. This means that it has applications in multiple areas such as prospecting, marketing, and planning. For example, estate planning is an area where AI is having a positive impact, as documents can be more quickly and easily understood by advisors and clients. It can also be used to streamline the process of updating documents based on notes taken from previous client interactions. 

Overall, AI is like previous technologies in that it can potentially help advisors gain more leverage, increase productivity, and result in more time spent on value-added activities. With financial advice, it can be particularly useful in terms of increasing responsiveness and personalization on a larger scale. 

Finsum: Artificial intelligence will affect nearly every industry and change how businesses operate. Here is how financial advisors should be thinking about this technology. 

On January 10, the SEC approved 11 spot bitcoin ETFs. Vanguard quickly made the decision to not offer a bitcoin ETF. The decision has been met with resistance from customers. Recently, CEO Tim Buckley provided more insight into this decision, given that this has been a constant source of inquiry.

Overall, the firm doesn’t believe that bitcoin is a suitable investment option for a retirement plan, given the asset’s volatility and speculative nature. Buckley also rejects the notion that bitcoin is a 'store of value’, pointing to its severe declines in the past and correlation with equities. For example, bitcoin dropped from $69,000 to $16,000 between 2021 and 2022, while the S&P 500 was down 21% during this period from peak to trough.

Buckley added that he doesn’t believe that Vanguard will offer a bitcoin ETF until something significantly shifts in the asset class. In contrast, Vanguard only invests in asset classes with underlying cash flow. With equities, this refers to the future earnings of a company. For bonds, it can be calculated through a bond’s coupon and principal. Since bitcoin has failed to function as an effective ‘store of value’ and generates no cash flow at the moment, it remains purely a speculative asset, which makes it inconsistent with Vanguard’s principles and ethos. 

Finsum: Vanguard is not offering a bitcoin ETF, unlike many of its major competitors. CEO Tim Buckley shared why bitcoin is more of a speculative asset and unfit for long-term investing. 

Gary Gensler, the chairman of the Securities and Exchange Commission (SEC), spoke recently at the Investment Adviser Association Compliance Conference. In a Q&A session with reporters, he remarked that there were no current plans to modify or update Reg BI. Instead, the agency’s focus is on ‘examining for and enforcing against’ Reg BI.

In later remarks, he addressed its approach towards predictive data analytics. He believes this is a gray area, and the SEC wants to ensure that there are no conflicts of interest within newer technology that utilize behavioral prompts and nudges. Of course, this topic is even more germane given the increasing use of artificial intelligence (AI) powered applications. 

Gensler wants to ensure that there are no loopholes to bypass the fiduciary rule. Many in the industry contend that this rule is a backdoor expansion of Reg BI and that current regulations were sufficient. 

Previously, Gensler had spoken that the new technology enables practices to micro-target consumers with products and content. While this can help advisors grow their business, he believes this communications channel needs to be regulated as well to ensure that these business interests are not placed above the clients’. 

Finsum: At a recent conference, SEC Chair Gary Gensler pushed back that there was a backdoor expansion of Reg BI due to the predictive analytics rule. The rule mandates that predictive technology that communicates with clients must also follow the fiduciary rule.

Growth has consistently outperformed value since the Great Recession. For a while, this was attributed to the Fed’s dovish policies, however this has now continued even during this period of substantially higher rates. 

There are some indications that investors should consider rebalancing between value and growth to maintain diversification, since they may be overexposed following growth’s significant outperformance over the past year. In reality, the opposite is happening as inflows are heavily skewed towards technology. 

Over the past year, net inflows into technology ETFs amounted to $18 billion which is nearly equivalent to net outflows in all other sector ETFs. This is also exacerbated by the massive size of the largest 7 technology companies which have become dominant in market-cap weighted indices. 

Another reason to consider value is that it would likely outperform in adverse market conditions given lower multiples and less froth. This could be a prudent choice for investors who are on the sidelines but wary of risks like a recession or inflation. 

Additionally, value tends to do well following periods of froth in markets. For instance, value outperformed in the years following the bursting of the dotcom bubble and the frenzy in equity markets during the pandemic. If valuations revert to the mean, then it could also set the stage for a value renaissance. During these periods, the best performing stocks tend to produce high levels of free cash flow relative to their market caps while maintaining strong balance sheets. 

Finsum: Value underperformed growth by a significant degree over the past year, continuing the prevailing trend of the last decade. Here’s why investors should consider increasing exposure to value ETFs.