Wealth Management
Financial advisors are flocking to independence. Some who switched to the RIA model, say it was a game-changer for their career, and they have gained an "entrepreneurial mindset" while creating lower-cost programs for clients.
This trend is widespread. Cerulli reports the RIA channel is experiencing the fastest growth in advisor headcount. The number of independent RIAs and advisors working there have grown steadily over the past decade. Advisors are seeking independence for several reasons. Clients demand lower fees, and RIAs allow advisors to deliver quality service at a competitive price. Wirehouses, on the other hand, are raising advisor costs.
One highlights of the RIA fee-based model is it has made RIAs a target for private equity firms. Cerulli predicts RIAs will control nearly a third of the market by 2027. Advisors like Harry Figgie see this as inevitable due to the open architecture, financial benefits, and equity-building opportunities offered by the RIA model.
Finsum: The RIA model has been made easier by the technological advancements in advisor space, and this trend might continue to ramp up.
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.
A recent study indicates that private credit investments fail to yield significant additional returns once fees are factored in. Despite the allure of higher potential returns, the study suggests that the added expenses associated with private credit largely offset any potential gains.
Researchers found that private credit funds typically charge higher fees compared to traditional fixed-income investments, which could erode investors' returns over time. This revelation challenges the notion that private credit offers superior returns, urging investors to carefully assess the costs involved before committing capital.
The study underscores the importance of transparency and due diligence in evaluating investment opportunities, particularly in alternative asset classes like private credit. Consequently, investors are advised to weigh the potential benefits against the associated costs to make informed decisions in their portfolios.
Finsum: Alpha can be sucked up by fees but the real draw of private credit would be the uncorrelated returns.
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Every day, 12,000 individuals from the baby boomer generation in the US turn 65, and by 2030, all baby boomers will have reached this age milestone. This demographic shift has led to a change in investment priorities, with baby boomers now seeking more protection-oriented financial products, such as annuities. Annuities offering downside protection and guaranteed returns have gained popularity over those promising high growth potential.
In 2023, the annuity market in the US saw record-high sales of $385 billion, largely driven by the demand for products with downside protection features. Fixed annuities and fixed index annuities, accounting for 67% of total annuity sales, have become the preferred choice, reflecting a significant shift from previous years. These annuities align with the risk preferences of baby boomers, offering market-linked returns while shielding investments from market volatility.
Fixed index annuities, in particular, provide an attractive option for retirees seeking stable income streams, combining potential market returns with downside protection. However, they come with limitations, including capped returns and surrender periods, necessitating careful consideration before incorporation into retirement plans.
Finsum: Demographic shifts have already had a major long-term impact on bonds, and now retirement concerns are shifting the landscape once again.
Separately managed accounts (SMAs) are ascending in wealth management as they enable advisors to offer clients nearly unlimited options for customization and can lead to more efficient tax management.
Another feature of SMAs is better economics in terms of aligning goals and incentives between both parties, especially compared to other structures. With SMAs, management fees are based on capital that is deployed rather than committed, which leads to better deal flow and attention from managers. There is also more ability to negotiate fees to incentivize long-term performance and foster more durable relationships. Further, SMAs can be set up to optimize the tax situation of individual clients.
Overall, SMAs are gaining traction due to more flexibility and choice, which can lead to better outcomes in terms of performance and governance. The SMA agreement can also be adjusted if necessary, rather than having to create an entire new vehicle.
For investors, SMAs also offer more protection and oversight beyond simply aligning incentives between investors and managers. More active and involved investors may prefer a non-discretionary SMA in which the investor approves each investment before capital is deployed. Additionally, investors get input into matters such as distributions, valuation, expenses, and reporting.
Finsum: SMAs are rapidly gaining traction. Here are some of the advantages they offer investors and advisors.
Becoming a Registered Investment Advisor (RIA) offers control, independence, and specialization opportunities regardless of client assets, but also entails assuming home office responsibilities. Competition can be tough however, with an average of 15.42 years in the industry, and must differentiate themselves, often requiring additional education like an MBA or by leaning on modern technology like AI.
Leveraging technology is crucial for meeting evolving investor demands and streamlining operational tasks to focus more on client engagement. Research demonstrates that investors are overwhelmed with many financial products and face decision paralysis due to anxiety.
RIAs can specialize in areas such as tax needs and goal-based financial planning, aligning with investor preferences. By adopting a flexible business model, RIAs can tailor services and remain competitive in the market. Automation of time-consuming tasks like trade execution and reporting can further enhance their ability to serve clients effectively.
Finsum: RIA’s need to lean into technology now more than ever to meet their clients’ needs and grow their business.