Wealth Management
After a tough year for the markets, asset managers are bracing for cost-cutting in 2023. Revenues were down across the industry last year as falling markets hit both management and performance fees. In the U.S., total assets in mutual funds and ETFs dropped 17 percent between the start of 2022 and the end of October, according to data from the Investment Company Institute. This will force asset managers to cut costs and make tough decisions this year about how to grow. Some asset managers are predicting that the downturn will accelerate the shift by clients from mutual funds and brokerage accounts to other ways of investing, such as ETFs, separately managed accounts, and model portfolios. Martin Small, head of BlackRock’s US wealth advisory business and the firm’s incoming chief financial officer, told Financial Times, “Whenever there are super shocks in the market, people make big changes to their portfolios. This is when people do deferred maintenance. In U.S. retail markets, there is a move from brokerage accounts to fee-based advisory, which means more model portfolios and more ETFs.”
Finsum:After a tough year in the markets, some asset managers are predicting a shift towards model portfolios, ETFs, and SMAs for clients.
One of the big investment stories of 2022 was the failure of the 60/40 portfolio. Once a beacon of stability, the portfolio failed to provide safety last year as both the equity and fixed-income markets had negative returns. So, asset management firms are now suggesting higher alternative asset allocations to achieve greater diversification for investors. Daniel Maccarrone, co-head of global investment manager analysis at Morgan Stanley, said the following in research released by the firm, “Alternative strategies, such as those focused on hedge funds, private capital, and real assets, have long been appealing as a potential source of higher yields, lower volatility, and returns uncorrelated with stocks and bonds.” His research showed that adding alternative exposure to a portfolio may reduce volatility and potentially increase returns. Alternatives such as hedge funds, private debt, and real assets are less likely to be volatile since they are less subject to interest rate fluctuations. For instance, data from January 1, 1990, through December 31, 2021, showed that a portfolio of 40% stocks, 40% bonds, and 20% alternatives experienced annual portfolio volatility that was 88 basis points less than a 50% stock, 50% bond portfolio split. It also outperformed the 50-50 portfolio by 45 basis points annually.
Finsum:With the 60/40 portfolio failing to provide safety last year, asset management firms are recommending that investors include alternative allocations for diversification and lower portfolio volatility.
Investment advisor and banking solutions provider Save recently announced that it launched a savings product that is focused on ESG investing. The firm said in a recent press release that its "Market Savings program offers an option that provides a yield from iShares ESG Aware exchange-traded funds (ETFs) and other ETFs.” According to the press release, the ESG Market Savings portfolio aims to maximize environmental, social, and governance characteristics and exclude companies with certain practices. The release also said that since the launch of this ESG portfolio, about 10% of the people who have signed up for Market Savings have selected the Save ESG portfolio. Save Founder and CEO Michael Nelskyla said the following in the release, “Consumers are increasingly turning to ethical choices in all aspects of life including investments. We see it as our fiduciary responsibility to offer ethical investing through our Market Savings program for those consumers who seek these choices.” The Market Savings program on Save’s Savetech platform offers a yield that varies according to underlying market performance. It also noted that customer deposits are FDIC insured.
Finsum:Save announced that it launched an ESG Market Savings portfolio that aims to maximize environmental, social, and governance characteristics and exclude companies with certain practices.
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According to a recent study by Lincoln Financial Group, market volatility is pushing Americans to refine their financial goals this year. The study revealed that 88% of Americans said they see room to improve their overall financial wellness, while 71% are likely to set financial goals in 2023. The respondents said that inflation and market volatility has made preparedness a top financial priority. For instance, 56% said protection from risk is most important to them, 39% said their greatest money goal is protecting their family, and 26% said guarding their income was a top priority. While data is showing that inflation is beginning to slow, there are still real concerns over whether the U.S. economy could enter a recession this year. This has investors nervous. David Berkowitz, Lincoln Financial Network president, said the following in a statement, "Our research reinforced the importance of financial solutions that can help consumers navigate through market cycles and protect their loved ones. People are not only concerned about having enough to pay their bills, but also saving for retirement and preparing for the unexpected.” For example, 40% of respondents said that financial protection meant being able to comfortably pay for basic living.
Finsum:A recent study by Lincoln Financial revealed that market volatility and inflation are pushing a majority of investors to set financial goals this year to navigate the market uncertainty.
While investors remain spooked by market volatility, Goldman Sachs believes direct indexing may benefit from the volatility. In its recent Market Know-How report, the firm wrote, “Direct indexing involves purchasing the underlying shares of an index, rather than owning an index fund. This investment strategy prioritizes tax-loss harvesting, which builds tax savings through capital losses while attempting to keep tracking error tight to the benchmark. Tax-loss harvesting works not only in down years but also in up years, historically, as individual constituents can still see intra-year declines.” The firm also listed the benefits of direct indexing beyond the tax-alpha achieved from harvesting losses. For instance, the firm lists benefits such as the ability to liquidate concentrated stock positions, reduce active risk in portfolios, and help offset significant taxable events such as the sale of a business or real estate. These can all be achieved through building a “war chest of capital losses.” In addition, Goldman also wrote that “owning individual securities instead of an index fund allows investors to achieve these potential benefits while expressing preferences, such as sector tilts.”
Finsum:In a recent report, Goldman Sachs stated that direct indexing may benefit from market volatility since the strategy prioritizes tax-loss harvesting, and historically, tax-loss harvesting works in both up and down markets.
If advisors are looking to build out their practice, they should look no further than Millennials and Generation Z. That is according to Fidelity, which believes younger investors represent substantial, long-term wealth potential. According to a recent report from Fidelity Institutional, population and wealth are significantly shifting to the younger generations, who now collectively represent 47% of the U.S. population. These findings came from the Fidelity Investments 2022 Investor Insights Study, which included 2,490 investors who were 21 and older and had household investable assets of $50,000 or more. Fidelity also offered recommendations on how to approach younger investors. For instance, advisors should create an ideal profile of the young clients they would like to work with. They should also engage with the children of their current clients as a way to retain assets when wealth is transferred. Financial advisors can differentiate themselves by becoming a coach and elevating the client experience with frequent check-ins and establishing and monitoring financial routines. In terms of gathering clients, Fidelity recommends that advisors refine their social media strategy to capture their attention, while also telling younger prospects what they do for the community and the causes that they care about.
Finsum:According to a recent study by Fidelity, advisors should consider reaching out to Millennials and Generation Z as they offer substantial long-term wealth potential.