Wealth Management
In an article for ETF.com by Michelle Lodge, she examines whether success in portfolio management is a matter of skill or luck. According to survey results from S&P Dow Jones, there is little connection between good choices made by a manager and portfolio performance.
According to Craig Lazarra, the Director of Index Investment Strategy at S&P Dow Jones, “Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods.”
According to the research, investors are better off with low-cost, diversified ETFs. Additionally, success in terms of picking stocks and ETFs is not repeatable. Additionally even in a poor year for passive funds, 51% of active managers still underperformed their benchmarks in 2022.
Another piece of evidence cited is that managers who outperformed in the first half of the last decade, failed to outperform in the second-half of the decade. The same dynamic appears with active fixed income managers with no indication that success in one year is likely to repeat in subsequent years.
Finsum: Research shows that active fixed income and equity outperformance is unlikely to repeat in following years.
2022 was one of the worst years in memory for fixed income amid raging inflation and a hawkish Federal Reserve. Yet, conditions are much more favorable for the asset class in 2023 given a slowing economy and decelerating inflation. In an article for TheStreet’s ETF Focus channel, David Dierking discusses why short-term fixed income ETFs are a compelling option.
While, it’s likely that the Fed is done raising rates for now, the resilient economy and labor market mean that rates are likely to stay ‘higher for longer’. This favors fixed income with shorter maturities as investors can take advantage of high yields.
ALready, we are seeing this manifest as short-term bond ETFs were the recipient of 21% of net bond ETF inflows in Q1, even though they only account for 8% of the fixed income universe by total assets.
Additionally, many investors treat short-term bond ETFs as a cash equivalent given that they are extremely liquid, while paying generous yields. In fact, Fed policy is essentially encouraging this trade given the extremely inverted yield curve and rally in long-duration fixed income since March of this year.
Finsum: Short-term fixed income ETFs are seeing major inflows this year and are an intriguing option in the current market environment.
Compared to the first quarter of 2022, recruitment of financial advisors in Q1 2023 is down 16%. This shouldn’t be too surprising given the recent turmoil in the banking sector, concerns that the economy could tip over into a recession, and much of corporate America in belt-tightening mode. Devin McGinley in a piece for InvestmentNews dug into what the rest of the year should bring and highlighted some notable under the radar trends.
It will be interesting to see the fallout from the regional banking crisis as it may compel some advisors to leave. For instance, many First Republic advisors have already or are expected to leave the firm following JPMorgan's takeover of the beleaguered bank.
One bright spot has been growth in the RIA and independent broker-dealer space. In the first quarter, 261 advisors joined RIAs, while broker-dealers added 234 advisors which indicates that both are growing at a similar pace to last year.
Clearly, the data shows that overall recruitment of financial advisors has slowed. While there could be a burst of activity with advisors leaving regional banks, the bigger story is the continued growth of RIAs and broker-dealers.
Finsum: The recruitment environment for financial advisors has changed in 2023, but there is no change in the pace of growth for RIAs and broker-dealers.
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Elizabeth O’Brien covered the optimism among bond investors that a change in Fed policy could result in a major rally for the asset class in a Barron’s article. Current fed futures odds show that the market sees a more than 90% chance of the Fed pausing at its next meeting. And given recent inflation and economic data, it’s likely that the Fed has seen sufficient progress to shift its focus to financial stability over combating inflation.
Therefore, it could be an opportune moment to invest in high-quality bonds with longer maturities. These bonds are yielding about 5% which is nearly double what they averaged during the past decade.
While some believe that the economy is weakening enough to compel the Fed to cut rates by the end of the year, others believe this is a more typical cycle and that the Fed will likely be on hold for an extended period of time.
Since 1990, the average pause between hiking and cutting cycles has been 10 months. The typical behavior is that fixed income rallied in anticipation of cuts but volatility picks up until the cuts actually begin, leading to a healthy tailwind for the sector.
Finsum: A major catalyst could be emerging for fixed income given that the market expects the Fed to pivot at its next FOMC meeting in June.
In an article for GoBankingRates, Andrew Lisa shared some thoughts on the best way to onboard new clients. The first thing is to understand that a financial advisor needs to be an independent and trusted professional for the client, similar to a doctor or lawyer.
While each individual client has unique personalities and circumstances, there are still some universal principles and guidelines that you can introduce to your clients. This will help communicate your philosophy and value proposition, while creating momentum towards your clients’ goals from Day 1.
One suggestion is to start with understanding their cash flow. This means understanding every dollar that is coming in and going out. For every financial goal, this is the starting point. Additionally, you can get your clients started on tracking income and expenses to get a better understanding of cash flow.
Related to this, the next step would be to establish clear goals for the short-term and long-term. The nature of goals could differ based on a clients’ circumstances and age. Finally to increase the odds of success, the plan needs to be put into writing. This increases the chances that the plan is followed and daily decisions are aligned with long-term goals.
Finsum: Every client is unique, but there are still some common onboarding steps that advisors can take to introduce them to your practice and philosophy.
In an article for AdvisorPerspectives, Jack Van Dyke of Russell Investments shared some strategies for advisors to attract high net worth investors with direct indexing.
For most advisors, most strategies or tactics to grow their practice revolve around generating additional revenue from existing clients or adding new high net worth clients. And, the key to accomplishing these goals is to have a unique and differentiated offering.
Direct indexing fits the bill as it can help reduce a clients’ tax bill, retain the benefits of indexing, and allow for effective customization. While most advisors are aware of this innovation, they have not yet begun offering it to clients.
Therefore, it’s essential to start the conversation with your prospects and clients. Van Dyke recommends that advisors begin by asking questions to determine whether direct indexing is a good fit for them. These include whether or not they are expecting a large windfall in the future, their current tax liabilities from investments, and whether they have a concentrated stock position.
These questions are effective conversation starters that you can transition into a discussion about why direct indexing can help them reach their financial goals while giving them more control over their financial destiny.
Finsum: The key to a financial advisory practice is to grow their business and/or increase revenue per client. Direct indexing is one way that advisors can achieve these goals.