Wealth Management
In an article for ETFTrends, James Comtois laid out the 2 major benefits provided by direct indexing as opposed to investing in index funds. Until recently, direct indexing was only available to ultra high net worth investors. Now, it’s increasingly available to a wider swathe of investors.
Direct indexing allows investors to gain the benefits of index investing such as low costs and diversification but allows for greater customization and reduction of taxes. With direct indexing, tax losses are harvested on an interim basis and can be used to offset gains.
According to Morningstar, about $260 billion has moved into the category as of the end of 2022. And, this trend is only expected to strengthen in 2023.
According to Morningstar, “Investing directly in the underlying stocks of an index in lieu of a mutual fund or ETF tracking the same benchmark allows for individually tailored tax management.” Another factor cited is that it allows investors to modify indexes based on their specific values to account for environmental, social, or governance factors. Additionally, investors can prioritize any specific factor they want to emphasize such as value or growth.
Finsum: Direct indexing has seen massive growth over the last couple of years as it’s become increasingly available to a wider clientele. Two major benefits are a lower tax bill and increased customization.
In an article for InvestmentNews, Jeff Benjamin reported on Morningstar’s decision to allow competing model portfolios from other asset managers on its proprietary platform for wealth advisors.
So far, model portfolios from BlackRock, T. Rowe Price and Clark Capital are being introduced to the platform which was launched a year ago. In a statement, Morningstar Wealth president Daniel Needham noted, “This is an important milestone in the strategic evolution of the U.S. Wealth platform.”
It’s expected that model portfolios from other asset managers like Fidelity will also be added over the coming weeks. Morningstar sees the addition of more model portfolios as a way to help advisors scale their businesses given the decline in the number of advisors, while the demand for advice continues to increase.
The company believes that advisors need to outsource portfolio management in order to better serve clients. Additionally, asset managers operating model portfolios have significantly more resources than advisors.
Surveys show that advisors spend about 18% of their time on managing investments. However, investment performance is not the biggest factor when it comes to client retention. Therefore, integrating model portfolios into their practices can lead to more success for advisors.
Finsum: Morningstar is introducing model portfolios from asset managers onto its platform. It sees model portfolios as important tools to help advisors grow their practices.
According to Russell Investments, the outlook for active fixed income looks quite attractive in 2023. They see opportunities to outperform benchmarks due to market and trading inefficiencies, index construction, and a volatile macro environment due to the lack of clarity around the Fed’s hiking schedule.
Compared to active equity funds, they see more opportunity for alpha in active fixed income for a variety of reasons. A major one is that fixed income indices are constructed with thousands of securities, often with different durations, coupons, and covenants. For astute managers, this can create opportunities to uncover value especially amid rating changes, new issues, and rebalancing by indexes.
Another favorable factor is that many participants in the fixed income market are not focused on maximizing returns. Instead, there are forced buyers of fixed income due to capital requirements like insurance companies and banks. Further, central banks remain active in these markets as well, and they telegraph their intentions well in advance.
Finally, there are simply more inefficiencies in fixed income as the vast bulk continue to be traded over-the-counter which leads to less price transparency and wider bid-ask spreads.
Finsum: Russell Investments sees opportunity for investors in active fixed income funds due to more inefficiencies, less transparency, and more opportunities to uncover value..
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In a recent Bloomberg article, Katherine Greenfield discussed the growing popularity of triple-leveraged bond ETFs. It’s somewhat surprising given that the bond market is coming off its most volatile year in 2022 in decades given the challenges posed by rising rates and sky-high inflation.
Further, bond investors tend to be more conservative and favor the asset class, because it is less volatile than equities. Similarly, there has been an uptick on call and put buying on fixed income ETFs as well. To compare, there were 827,000 contracts traded on the iShares 20+Year Treasury Bond ETF in 2013, while there have been more than 2.2 million contracts traded on the same ETF this year.
Overall, there are 15 leveraged fixed income ETFs, listed in the US. Total assets have climbed to $3.5 billion with the largest being the 20-Year Treasury Bull 3x which provides exposure to longer-term Treasuries and uses derivatives to track its underlying index. So far, this ETF has already seen $720 million in inflows, nearly eclipsing last year’s total of $783 million. According to Greenfield, the inflows into leveraged fixed income ETFs are likely due to retail traders, while the spike in options activity can be attributed to institutional investors.
Finsum: Leveraged fixed income ETFs are experiencing massive inflows, while options activity on fixed income ETFs is also soaring. .
Josh Schwaber discussed how model portfolios can help improve the client experience in a recent article for InvestmentNews.
The biggest benefit is that it allows advisors more time to spend with clients to understand their needs and goals rather than portfolio management. After all, an advisors’ long-term success is dependent on retaining and attracting clients.
However, many clients fail at this critical step and don’t establish trust with their clients. Further, they aren’t successful at giving advice that applies to financial health from a holistic perspective and instead focus on investment recommendations.
Model portfolios are a great solution to this dilemma as it allows advisors to spend more time on clients and their needs. They also allow advisors to grow their practices to a bigger size due to standardization and the consistent analytics offered by model portfolios.
Further, model portfolios lead to less time spent on managing portfolios, yet there is no tradeoff in terms of returns. They allow advisors to leverage institutional resources, while still allowing for customization to account for a client’s specific goals.
Overall, model portfolios allow clients to grow their practices to an even larger size with no tradeoff in terms of client service.
Finsum: Model portfolios are an invaluable tool to help advisors grow their practice, while still maximizing time spent on understanding and serving clients.
In an article for Financial Planning, Victoria Zhuang discussed the brisk pace of recruitment for financial advisors in the second-half of 2022 despite a volatile and challenging market environment.
According to Diamond Consultants, there was a 12% increase in the number of experienced brokers who switched firms. This is a contrast to the typical pattern of advisor movement and recruitment slowing down in volatile conditions.
In the first half of 2022, 4,249 experienced brokers switched firms which increased to 4,757 advisors moving in the second-half of the year. In total, more than 9,000 experienced advisors moved which was slightly more than 3% of overall advisors in the US.
In addition, transition deals were much more generous in the past, indicating that the wealth management industry remains competitive and ambitious in terms of recruitment and growth. This is also reflected in the generous deals offered to entice movement with many signing deals paying more than 300% of 12-month revenue. Another noticeable trend is gains made by independent broker dealers, while the big banks continue to see outflows of experienced brokers to these smaller firms.
Finsum: 2022 was a banner year for the recruitment of experienced advisors. This is in contrast to the typical pattern of muted recruitment during shaky markets.