Wealth Management
Within asset management, active fixed income is in a growth boom based on a surge of inflows and new issuances to meet this demand. There are two secular components as ETFs continue to displace mutual funds as preferred vehicles for fixed income investing, and institutions and advisors become more aware and comfortable with the category.
And, a cyclical factor is the current market environment given the combination of attractive yields and uncertainty about the trajectory of monetary policy. These environments tend to favor active over passive strategies since active managers have more latitude in terms of credit quality and duration.
In recent months, we’ve seen a frenzy in terms of new issues with Vanguard and Blackrock introducing active ETFs that mirror their own active fixed income mutual funds. Now, Capital Group is joining the fray with the launches of the Capital Group Core Bond ETF (CGCB) and the Capital Group Short Duration Municipal Income ETF (CGSM). Asset managers are responding to demand for these products, or otherwise would lose market share to firms who provide ETF versions of popular mutual funds.
CGCB invests across the entire fixed income spectrum with a focus on capital preservation and generating income. CGSM invests in municipal debt that is exempt from federal taxes and typically short-duration.
Finsum: Capital Group is launching two new active fixed income ETFs which is a major trend in the asset management world.
The last decade has seen an intense war in the wealth management space with an assortment of winners and losers. While advisors are the biggest winners due to generous compensation packages, another big winner has been LPL which is now the largest independent broker-dealer with 21,000 advisors.
Part of LPL’s success has been its variety of offerings for advisors given that it has numerous options for incoming talent. This ranges from more structure to giving advisors independence and latitude to run their businesses as they see fit.
Maybe the best example of this is LPL’s Linsco channel which is designed for younger advisors. It was founded in 2019 and was seeded by the purchase of Allen & Co. which gave it assets under management (AUM) of $3 billion. Remarkably, Linsco now has an AUM of $21 billion and has recruited 49 teams to the group.
Its latest success is recruiting Raanan Pritzker who has been the top-ranked financial advisor at Fifth Third Private Bank over the last 12 years. This marks the first $1 billion+ team to join Linsco. Despite Priztker’s success, he chose to leave Fifth Third as he believes Linsco is better able to provide top-tier services and products to his wealthy clients.
Finsum: LPL Financial’s Linsco has been a massive success story as it’s gone from $3 billion in assets under management to $21 billion as of October 2023.
A financial advisors’ long-term success is closely connected to their ability to consistently land new clients. In order to do this, they must build a pipeline of prospects.
The key to a robust pipeline is consistent effort to make connections and build relationships. It can be challenging in the near-term as results may be inconsistent. The first step is to come up with a repeatable and sustainable prospecting strategy. The goal of your strategy is to simply create interest in your services and offerings. Part of this is to define your niche and target client. The strategy should also be something that you could do on a regular basis and ideally enjoy, since this a long-term game.
The next step is to get clear on what value you can provide. This requires some introspection about your core beliefs, convictions, and values. It can be helpful to step in your prospect’s shoes to understand their thoughts and emotions in order to figure out what would compel them to take action.
Finally, the best source of new prospects is through your existing, satisfied clients. Personal referrals remain the most effective form of prospecting and have the highest odds of turning into clients. There are many ways to ask for referrals. Some are direct and transparent, while some advisors prefer a more indirect approach.
Finsum: Building an effective pipeline of prospects is integral to success for every financial advisor. Here are some tips.
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Following poor performance in Q3, fixed income is struggling to start the new quarter. SImilar to Q3, the bulk of weakness is in long-duration bonds. This is evident with the iShares 20+ Year Bond ETF (TLT) which fell to its lowest levels since August 2007. Remarkably, TLT is now at levels prior to the entire bond bull market which began at the depths of the financial crisis as central banks embarked on more than a decade of ultra-easy policy to support the economy.
So far, TLT is down 13% year to date. It’s the largest fixed income ETF, and many investors’ preferred vehicle to get exposure to long-term Treasuries. There is some disagreement on the causes behind the move in long-term yields with some pointing to large amounts of Treasuries that will be auctioned off in the coming months to finance the federal government’s deficits. Others believe that the bond market is finally accepting the reality that inflation is now entrenched and that higher rates are here to stay.
Some with a longer-term view don’t see much unusual about the breakout in long-term yields given that this tends to happen when central banks embark on tightening policy. As a result, we are seeing the curve un-invert as the spread in yields between short-duration and long-duration bonds continue to shrink.
Finsum: TLT is the most popular fixed income ETF. It’s now at its lowest levels since 2007 as long-term Treasury yields break out to new highs.
It’s a challenging period for fixed income investors given uncertainties around the economic outlook and monetary policy. While some are making bold bets on whether inflation will perk up once again or the economy fall into a recession, CIBC recommends that investors embrace this period of ‘higher for longer’ by focusing on short duration and high quality bonds.
With this strategy, investors can take advantage of generous yields while shielding themselves from potential risks. In terms of the bank’s outlook, its base case remains a moderate slowdown and a mild recession. Yet, it believes that many of these risks have already been priced in which is one factor in its bullishness towards the asset class.
Due to recent data indicating a pullback in consumer spending, weakness in retail sales, and a slowdown in housing activity, the firm believes that recession is more likely than another period of spiking inflation. Further, credit card balances are rising, while excess savings from the pandemic have been basically depleted.
If this scenario were to materialize, inflation would likely trend lower which would give central banks more latitude to loosen policy and lead to price appreciation for fixed income.
Finsum: CIBC shared some thoughts on the economy and fixed income. It’s bullish on the asset class as it believes a mild recession is likely next year.
Direct indexing is the convergence of two developments. One is that we increasingly live in a world of customization and personalization whether it comes to our newsfeeds, food orders, playlists, etc. The other is that research continues to show that most investors are better off investing passively rather than actively managing their portfolios.
At first glance, there seems to be a contradiction between these two notions. However, direct indexing manages to thread the needle by retaining the benefits of passive investing such as diversification and low costs while also allowing for customization in order to account for an investors’ goals and needs.
For instance, a tech executive may have outsized exposure to the industry due to some compensation in the form of stock options. In their own portfolio, they may look to reduce exposure to tech in order to create more diversification and dampen risk.
Another benefit is that capital gains losses can be more effectively harvested with direct indexing. This means that if the tech executive were to sell some of their stock options, then the tax bill can be lowered by applying harvested tax losses from the direct indexing portfolio.
Finsum: Direct indexing provides many advantages compared to passive or active management. Here are some of the benefits.