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Sunday, 10 September 2023 05:54

Understanding the ‘Efficient Frontier’

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.


Sunday, 10 September 2023 05:52

Shifting Narratives for Fixed Income in 2023

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. 


Thursday, 07 September 2023 16:51

Content Creation Tips for Financial Advisors

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. 


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. 


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