Wealth Management
Regulators are looking to get more aggressive about enforcement of Regulation Best Interest (Reg BI) which was passed in 2020. Regulators are particularly focused on sales practices to ensure that fiduciary standards are followed according to a Thomson Reuters article by Richard Satran.
Reg BI mandates that recommendations are offered with impartial advice and explanation of alternatives, including to competing firms. Along with the SEC, Reg BI has also been adopted by the Financial Industry Regulatory Authority (FINRA).
One challenge for firms and regulators is that automated monitoring of transactions to ensure compliance is lacking. According to Parham Nasseri, VP in product and regulatory strategy at compliance software developer InvestorCOM, Inc: “Putting the risk assessments into a surveillance system for Reg BI compliance involves significantly more challenges than the kind of monitoring that systems have done in the past.”
New elements to monitor include conflicts of interest, customer profiles, costs, alternative investments, and other client-specific factors. Along with the technological challenges, firms will have to comply with new exam requirements to comply with new sales practice rules.
Finsum: Reg BI was passed in 2020 but regulators were slow to begin aggressive enforcement given the pandemic. This is changing and firms will be forced to rapidly update sales practices, training, and monitoring.
Given increasing volatility in financial markets, it’s not surprising that many investors are feeling nervous. According to Corebridge President Bryan Pinsky, annuities are one option for investors to reduce the volatility in their portfolios and prevent them from making rash decisions. His perspective was shared in an article by Allison Bell for ThinkAdvisor.
Corebridge Financial is ranked third in terms of individual annuity sales at $20 billion and was previously known as AIG Life & Retirement. He believes that negative emotions during volatile markets often lead investors to sell low and buy high.
In terms of his thoughts on the current market, he said that the doubling in the yield of the 10-year Treasury note in 2022 was historically unprecedented. It’s also resulted in annuities paying out higher rates which has led to a surge in demand for these products.
He says that the elevated market volatility since the end of 2021 have validated the use case for annuities. He also doesn’t believe it’s too late to seek downside protection and that annuities can be an integral part of any retirement portfolio with recommended allocations between 10% and 30%.
Finsum: According to Corebridge’s Bryan Pinsky, market volatility has proven why annuities are an essential part of any investors’ financial plan. Additionally, he believes that buying conditions for annuities remain attractive.
Until recently, customized portfolios were only available to high net worth individuals. But, this is now changing due to the advent of direct indexing which is giving these tools to a much wider swathe of investors according to an article from Michelle Lodge.
Direct indexing allows investors to have more control over their money while still allowing them to benefit from the positives of indexing such as diversification, tax efficiency, and low costs. This will allow their investments to better reflect their life situations, values, and convictions.
It’s particularly useful for those with outsized exposure to a company or an industry or those with a large base of taxable assets. For instance, a tech employee with a large number of shares and stock options could use direct indexing to purchase the S&P 500 but reduce exposure to technology stocks.
According to BlackDiamond Wealth CIO Ken Nutall, “We have two main use cases: clients who have an old portfolio of appreciated assets but want to migrate to another strategy of tax efficiently, or [those who] work at a bank and don’t want any more bank exposure in their portfolio.”
Finsum: Direct indexing is one of the fastest growing areas of wealth management. It gives investors the benefits of index investing, while allowing customization to help clients achieve their financial goals..
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Over the last two months, there has been a 15% increase in the asset base of biodiversity funds according to an article by Natasha White of Bloomberg. This is a relatively new segment of the ESG market which saw a 150% increase in the number of funds last year.
Overall, biodiversity is a fraction of the overall ESG market with combined assets of $2.9 billion. To compare, the overall ESG market is estimated to have $41 trillion in assets. The largest biodiversity funds are from Northern Trust, Axa Investment Managers, and Lombard Odier. All three are based in Europe, where there is a more defined regulatory environment.
One catalyst for the asset class was the agreement at the COP15 summit in December of last year, where the Global Biodiversity Framework was signed by nearly 200 nations, with the intent to mobilize $200 billion annually to preserve and maintain biodiversity.
A challenge for the nascent fund class is the lack of standardized data on biodiversity which means there is disagreement on best practices and assessing impact. A larger issue is that many experts believe that the tradeoff between earning financial returns and maximizing biodiversity is too steep and thus can only be attained through public policy.
Finsum: Biodiversity funds have seen a 15% increase in assets over the last two months and a sharp boom in formation over the last couple of years. While there is agreement on the importance of preserving biodiversity, there are doubts whether it can be attained while generating positive returns for investors.
There is no magic solution when it comes to growing your client base as a financial advisor. Instead, you should adopt a variety of strategies which include understanding your strengths as a financial advisor, defining your ideal client, developing a branding strategy, and pursuing effective partnerships.
Rebecca Lake, CEPF, wrote an article for SmartAsset on how to expand your client base. First, she counsels that advisors should not make the mistake of sacrificing quality of service in the pursuit of adding more clients. Advisors should always ensure that they are providing adequate attention and services to clients to ensure retention and loyalty.
Next, advisors should get clear and specific on their ideal target client in order to construct an effective marketing plan. They should also consider the ideal type and mix of services that would appeal to this audience.
Another source of client growth is by leveraging your existing client base and asking for referrals. This can be highly effective as people are more willing to trust personal recommendations, but the request must be made tactfully. Finally, branding is an essential element to differentiate yourself from other financial advisors. Once you settle on your brand, keep it consistent.
Finsum: Financial advisors can grow their client base by picking a specific niche, developing a consistent brand, form partnerships with other professionals, and targeting your ideal client.
There is no question that investing in low-cost mutual funds or exchange-traded funds that mirror a benchmark index is a popular strategy to potentially reduce the impact of fees on a portfolio. In fact, many of these passive index strategies have often outperformed more costly actively managed funds. However, while tax efficient, they are unable to fully take advantage of short-term market volatility, according to Neale Ellis and Matthew Michaels of Fidelis Capital. On the other hand, direct indexing has become an attractive alternative to a portfolio of low-cost funds and ETFs, and unlike owning a mutual fund or ETF, an investor directly owns a basket of individual stocks that tracks a designated benchmark index. The strategy also allows greater flexibility during periods of volatility to selectively harvest losses while still closely tracking the benchmark. This is due to the fact that individual equities tend to see much higher volatility than a diversified mutual fund or ETF. This increases the opportunity for tax loss harvesting. Realizing losses in a portfolio can offset capital gains, which creates tax savings. Failing to harvest those losses during periods of short-term volatility could lead to lower results, essentially leaving money on the table.
Finsum:While passive index ETFs are tax efficient, they are unable to fully take advantage of short-term market volatility, which is something that direct indexing can do.