Wealth Management
In an article for SmartAsset, Patrick Villanova CEPF covers a recent note from Schwab which discusses why this is a favorable time to purchase an annuity. It’s not entirely a contrarian position given that annuity sales hit record highs during the first-half of 2023 which saw a 28% increase from strong sales in the first-half of 2022.
Annuity sales tend to spike during periods of economic uncertainty and attractive rates. The last time there was a similar spike in sales was during the 2008 financial crisis. Currently, there is considerable uncertainty about the economic and monetary outlook while rates are at their highest level in decades. These purchases would perform especially well if inflation and rates return back to levels that were commonly experienced over the past couple of decades, while they would underperform if current conditions persist.
Currently, most fixed annuities are paying yielding between 6.5% and 7%, adjusting for various factors. In contrast, the yield on a high-quality corporate bond ETF is about 5%. However, the corporate bond ETF provides more upside in the event that bonds strengthen especially if rates normalize but have more downside if rates stay elevated or rise further.
Finsum: Annuity sales are at record levels in 2023 and offer more yield than corporate bonds. Here’s why they continue to remain a good buy according to Schwab.
Most advisors and investors are familiar with the benefits of diversification when it comes to asset classes. However, there‘s less understanding about the importance of risk factor diversification. In ETF Trends, Scott Welch CFA of Wisdom Tree Investments shares the importance of this concept, and why advisors need to intuitively understand it.
There are some parallels between asset class and risk factor performance and diversification. Both are nearly impossible to forecast especially on shorter timeframes. But over a longer period of time, certain conjectures can be made with confidence. For instance, there tends to be mean-reversion over longer time periods.
Last year exemplified the risks of not being sufficiently diversified in terms of factor risk, growth was crushed, while value outperformed for the first time in decades. Yet, this has nearly completely inverted in the first-half of 2023 due to the rollicking bull market in stocks linked to artificial intelligence. Thus, this demonstrates the importance of factor diversification and rebalancing, similar to what is done for asset classes.
Currently, one risk for investors overexposed to growth factors is valuations that are historically elevated. In contrast, value factor stocks are quite cheap from an absolute and relative basis. Thus, it could favor some rotation from growth to value once again.
Finsum: Asset class diversification is an elementary part of portfolio management and construction. Another important concept is risk factor diversification.
Until very recently, direct indexing was simply not an option for the vast majority of investors. This is because the strategy is quite tedious to execute and could become cost prohibitive in the previous era when commission-free trading and fractional shares were not available.
This is because the strategy requires creating an actual index within an investors’ portfolio. It’s now feasible and quite easy to do due to technological advances. Additionally, the real alpha in the strategy is created through routine tax loss harvesting.
This is an automated process where the portfolio is regularly scanned to sell off losing positions. Then, these losses can be used to offset capital gains elsewhere in the portfolio. Proceeds from the sold positions are then reinvested into stocks with similar factor scores to the ones that are sold in order to ensure integrity with the underlying index even if the holdings temporarily deviate.
Clearly, this strategy wouldn’t be tenable without cheap and/or free trading and fractional shares for smaller sums. In the previous era, the high volume of trades would offset any additional returns. Without fractional trading, smaller sums also would not be able to track the underlying index and not be able to invest in higher-priced stocks that comprise large portions of indices.
Finsum: Direct indexing’s proliferation is only possible due to 2 specific fintech breakthroughs - commission-free trading and fractional shares.
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In Kiplinger’s, Peter J. Klein, CFA and the founder of ALINE Wealth, discusses some downsides of investing in alternatives. Alternative investments include private equity, private credit, real estate, collectibles, etc., and it’s seen a surge of interest especially following its outperformance in 2022 while stocks and bonds saw double-digit losses. Additionally, accessibility has also increased due to regulatory changes and technology.
Over the next 5 years, the global market for alternatives is expected to nearly double from $9.3 trillion to $18.3 trillion. While many are focused on the potential for outperformance and diversification benefits, Klein points out some downsides that investors should consider.
Alternatives come with substantially less liquidity than investments in stocks and bonds which are liquid and transparent. In contrast, alternatives often require money to be locked up for long periods of time with a hefty fee to access it early. Many alternatives also come with ‘gates’ which mean that money can’t be withdrawn once redemptions reach a certain threshold.
Another consideration is that alternatives often require more complicated tax reporting. For many investors with smaller sums, this complication offsets any benefit in terms of additional returns. Further, there is no track record of alternatives outperforming over longer time frames especially when accounting for the additional fees. Short-term results may be skewed as the asset class outperforms due to the asset class becoming more accessible.
Finsum: Alternative investments have been gaining in popularity especially after strong performance in 2022. However, there are some drawbacks that should be considered.
LPL continues to add advisors with its recent addition of 4 advisors from Edward Jones who managed $410 million in assets and a Merril Lynch broker, J. Brendan Wood, with $130 million in client assets.
Wood is launching a solo practice - Wood Wealth Management - through LPL’s employee channel, Linsco. Previously, he had been ranked as one of the top #100 advisors in Massachusetts and worked as part of Foundation Management Group which managed $654 million in assets.
Linsco was created to appeal to wirehouse brokers who want more independence and want to build a business. It gives more flexibility but doesn’t burden advisors with administrative tasks. In June, another Merril broker with $315 million in assets moved to Linsco as well as the channel now counts 100 advisors in total.
In addition to Merril Lynch, LPL has had success in luring brokers from Edward Jones. 4 brokers and $400 million in assets moved to LPL’s Strategic Wealth Services unit and will operate as Omnia Wealth Group in Elkhorn, Wisconsin. Strategic Wealth Services offers support for marketing, compliance, and administrative tasks for a fee.
Prior to the latest move, 5 Edward Jones brokers had moved to LPL already this year. LPL is now the largest independent broker-dealer with 21,000 advisors while Edwards Jones is a full-service brokerage with 18,900 brokers.
Finsum: LPL Financial is the largest independent broker-dealer, and it continues to lure brokers from more established firms like Merril Lynch and Edwards Jones.
For Advisors’ Edge, Maddie Johnson discusses why fixed income ETFs have experienced strong growth in recent years, and why it should continue in the coming years. ETFs have been around for more than 30 years but have become ubiquitous in the last couple of decades.
Interestingly, the trend began with passive equity ETFs taking market share away from equity mutual funds due to offering lower costs and better returns over longer time periods. In the fixed income world, change was much slower but now we are starting to see fixed income ETFs outpace equity ETFs in terms of inflows. A major factor is that there are more options when it comes to actively managed ETFs. Additionally, investors seem to be favoring fixed income given an uncertain market environment and attractive yields.
In the first half of the year, fixed income ETFs had inflows of $160.1 billion which dwarfed the $52.8 billion of inflows in fixed income ETFs. A major recipient of inflows have been short-duration bond funds which offer yield close to 5% in many cases.
If the Fed does indicate that it’s ready to hit the ‘pause’ button rate hikes or actually start cutting then look for long-duration funds to start outperforming as investors look to lock in these higher levels of yield.
Finsum: Fixed income ETFs have seen the majority of inflows in 2023 due to an uncertain market environment and high levels of yield.