Wealth Management
ESG is increasingly becoming another front in the political battle between Democrats and Republicans. Over the last decade, ESG has been embraced by many asset managers and has been used to encourage corporations to evaluate decisions beyond just finances and consider environmental, social justice, and governance implications. This has led to a pushback among conservatives who are opposed to corporate activism and want a return to when investors and companies focused on financials.
It culminated with legislation passing in many red states that bars asset managers from considering ESG factors when making investment decisions with state funds. The same battle has raged at the federal level. In a Reuters article, Daniel Wiessner covers the Biden Administration’s filing to toss a lawsuit from a consortium of 25 Republican-led states which is looking to uphold the Trump Administration's ban on socially conscious investing by employee retirement plans.
The ruling would impact retirement plans of nearly 150 million Americans, representing $12 trillion in assets. According to the Department of Justice and the Biden Administration, retirement plans should consider ESG factors in addition to financial information due to their impact on a company’s long-term health.
Finsum: Republicans are looking to fight back against ESG investing. In turn, the Biden Administration is looking to toss a lawsuit from Republican states which would ban ESG investing for employee retirement plans.
In an article for the Institute for Management Development, Maude Lavanchy discusses the opportunities and risks of venture capital (VC). It’s not surprising that interest in alternative investments has increased following 2022 when both stocks and bonds posted negative, double-digit returns.
As a result, institutions and asset managers are increasing the amount that they allocate to alternatives and specifically, venture capital. Typically, venture funds focus on early-stage, high-growth companies. This obviously comes with considerable risk but also the potential to generate significant returns. These funds do tend to have higher costs and fees with much less liquidity
Historically, VC has outperformed stocks and bonds. Between 1987 and 2022, VC had an average return of 59% compared to 15.9% for the S&P 500 and 6.8% for Treasuries. Two caveats are that venture returns tend to be quite volatile, and returns will be lower as more capital enters the ecosystem, leading to higher valuations and more generous terms for startups.
So, VC is most appropriate for investors that have a long time horizon and are OK with the lack of liquidity in exchange for the increased diversification and returns.
Finsum: VC is seeing renewed interest in 2023 due to its outperformance relative to stocks and bonds in addition to diversification benefits.
Financial markets are breathing a sigh of relief following an agreement between Democrats and Republicans to raise the debt ceiling and avoid a default. Not surprisingly, equity markets are reaching their highest level since last summer, and stocks are now up more than 20% from last October’s lows.
However, one consequence is that a major wave of Treasuries is expected to hit the market in the coming weeks as the US Treasury looks to replenish its holdings since the Treasury reached its limit on borrowing in January.
According to Wall Street, there is expected to be issuance of $400 billion in June and $500 billion between July and September with a cumulative total of $1.3 trillion by the end of the year. Some are warning that this could lead yields to modestly push higher and reduce overall market liquidity for equities and fixed income.
Others are more sanguine and believe that this new supply will be absorbed by money market funds who are looking to move money out of repo facilities and into longer duration Treasuries.
Another variable that could impact Treasury demand is whether the Fed will continue hiking rates or has the hiking cycle truly ended. The latter scenario would be more beneficial for fixed income, while the former would crimp demand.
Finsum: Financial markets are recovering strongly from the debt ceiling agreement, but an onslaught of Treasury supply could have a major impact on fixed income markets.
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In an article for GoBankingRates, financial advisors shared some of their top tips for onboarding new clients. While every client has unique circumstances and their own goals and definition of success, there are still some universal rules that apply for effective financial planning.
One of the first tips is to understand a clients’ cash flow with a full accounting and understanding of each dollar that goes in and out. This is the first step in any sort of effective financial planning. Only once this is complete does it make sense to move onto other components of planning like investments or an estate plan. Cash flow analysis tends to be tedious for advisors and clients, but it creates a solid foundation and is necessary for success.
Another tip is to gain clarity around financial goals in the short and long-term. This creates a roadmap and rules that will lead to better decision and behavior. For most clients, their success comes down to more effectively managing their finances and increasing allocations to savings and investing.
Finally, plans should be written down and frequently read and revised. Having a written plan leads to increased compliance especially in terms of sticking to a budget and an investment plan regardless of market conditions.
Finsum: Onboarding clients is a delicate mix of universal processes and customized service. Here are some tips from advisors on more effective onboarding.
Model portfolios have seen rapid adoption over the past decade as it allows advisors greater flexibility and resources to grow and manage their practices. In an article for Schroders, Gillian Hepburn discusses the growing demand for white labeling model portfolios that in some cases involves increased customization.
For many advisors, the appeal of white labeling is to show their clients that they remain involved with the investment management process. However, there are some complications to white labeling and important considerations for advisors.
For one, it undermines the primary advantage of model portfolios which is to tap into the investment expertise and resources of asset managers so that advisors can spend more time with clients on financial planning. In the case of customized portfolios, advisors still have to ensure that portfolios are being rebalanced, results and trades are being reported, and regulations are followed.
Advisors should also think about what value is being generated by white labeling and whether clients are being charged extra fees. With increased regulations and the fiduciary rule, there needs to be a firm value proposition for clients to justify placing them in a white labeled model portfolio with higher fees.
Finsum: Many advisors are looking to whitelabel model portfolios. However, this comes with certain considerations and may lead to additional complications.
Tony Davidow, the Senior Alternatives Strategist at Franklin Templeton, recently penned a piece for the firm’s Beyond Bulls and Bear blog about how alternative investments are seeing renewed interest, and how they can help portfolios reduce volatility and increase income and growth prospects.
2022 was the first year in the past century that stocks and bonds were both down double-digits. And, the last time that both asset classes had negative returns was in 1931 and 1969. Of course, 2022 was a unique year as the global economy battled with rising rates, spiraling inflation, growing recession risk, and a myriad of geopolitical threats.
It was quite painful for most investors and advisors whose portfolios are in stocks and bonds. But, it’s led to a surge in interest for alternative investments. Many outperformed in 2022 and led to reductions in portfolio volatility while helping boost portfolio income and serving as a more effective inflation hedge.
Until recently, many alternatives were only available to large institutions. However, access to these investments has been democratized due to technology and regulatory changes. Therefore, advisors should be open to these investments especially if economic and market conditions continue to be challenging.
Finsum: Following the events of 2022, advisors and investors should consider including alternative investments in their portfolio given their ability to reduce volatility and boost income.