Wealth Management
Although 2022 was the worst year for bonds in recent history, there are some silver linings for fixed income investors according to WisdomTree’s Andrew Okrongly and Behnood Noei who are the firm’s director of model portfolios and fixed income, respectively. These are the highest yields in decades which is bringing ‘income back to fixed income portfolios’ and the potential for significant returns. The second is reduced duration risk given that short-term bonds are offering generous yields.
The current environment is significantly different from what prevailed for much of the last 2 decades when bonds both trended higher with minimal volatility. However, the asset class became less appealing due to higher levels of duration risk in addition to miniscule yields. As a consequence, many fixed income investors went further out on the risk curve to find yield whether it was junk bonds, EM debt, or dividend-paying stocks.
Now, investors can find much higher levels of yield with much less risk. Therefore, fixed income can return to its traditional role of providing income and safety in portfolios. In fact, it’s a rare circumstance that shorter-term bonds are offering much higher yields than longer-term bonds with less risk. And, these conditions should persist given current Fed policy and the economy’s resilience.
Finsum: Investors should consider short-duration fixed income model portfolios given that they are offering higher yields with less duration risk.
LPL Financial topped earnings expectations in the second quarter as it reported $3.65 in earnings per share which exceeded analysts’ estimates of $3.47 per share. It was also an 85% increase from last year, primarily driven by higher rates. The company also had another strong quarter in terms of recruitment which the firm expects to continue in the third quarter.
In total, it added 421 new advisors in Q2 for a total of 21,942. Notably, this is more than a 5% increase on a year-over-year basis as it had 20,811 at the end of last year’s Q2. It saw an 8% increase in total assets, reaching $1.2 trillion with organic new assets of $22 billion and recruited assets of $19 billion.
According to CEO and President Dan Arnold, the company’s success was due to winning new clients, expanding ‘wallet share’, focus on servicing clients, and a differentiated experience. It also saw a 99% retention rate in the quarter, and the company continues to invest in new technology and new services such as direct indexing. It also announced the acquisition of Crown Capital which has 260 advisors and $5.5 billion in assets.
Finsum: LPL Financial announced its second quarter earnings results which topped analysts’ expectations in terms of earnings per share and asset growth.
We are seeing a flurry of active fixed income ETF launches over the past few months. While it’s nearly settled that with equities, passive tends to outperform active strategies, active fixed income strategies have performed better than passive fixed income especially in recent years.
Further, there is considerable uncertainty around the economy regarding rates, inflation, and a potential recession which could lead to more opportunities for active managers. Additionally, active managers have more latitude in terms of duration and credit quality.
Therefore, money is flowing into active fixed income ETFs from mutual funds and passive bond funds. For Barron’s, Lauren Foster discusses whether these inflows into active fixed ETFs will continue or is it just a short-term fad.
Money is likely to also flow into active fixed income ETFs from active fixed income mutual funds given that the ETFs offer several benefits such as lower fees, more transparency, and intraday liquidity. The younger generation of investors also tend to favor ETFs rather than mutual funds due to higher comfort levels and an understanding of how high fees can impact long-term performance.
However, the ultimate factor is whether these ETFs will continue to deliver strong returns relative to passive fixed income ETFs and active fixed income mutual funds. So far, they seem to be offering the best of both worlds to investors.
Finsum: A major theme in 2023 has been the rise of active fixed income ETFs. But, there is considerable doubt whether these will gain traction and are better than passive fixed income ETFs or active fixed income mutual funds.
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Strive Asset Management, an upstart competitor to Blackrock and Vanguard, is launching its first fixed income ETFs. Strive is based in Ohio and was founded in 2022 by Vivek Ramaswamy who is now running for President in the Republican Primary. Ramaswamy resigned from the firm earlier this year to focus on his political ambitions, but Strive’s mission and his political campaign clearly have some overlap.
Ramaswamy and Strive are both defined by their opposition to ESG investing and believe that it’s a detriment to investors and the country. Therefore, he’s been critical of asset managers like Blackrock and Vanguard who use their passive stakes in companies to encourage management teams to consider ESG factors when making decisions.
In contrast, Strive and Ramaswamy believe that companies should focus on maximizing profits rather than other factors. Its first 2 fixed income ETFs are the Strive Enhanced Income Short Maturity ETF (STXT) and the Strive Total Return Bond ETF (BUXX). STXT provides total exposure to fixed income with a cost basis of 49 basis points, while BUXX is designed to generate yield for investors by investing in short-duration bonds and charges 25 basis points.
Finsum: Strive Asset Management is launching its first 2 fixed income ETFs. The company differentiates itself by eschewing ESG and rewarding companies that don’t use these metrics.
It’s often remarked that demographics are destiny. Like most developed countries, the US has an aging population with about 10,000 Americans reaching retirement age every day. And over the next decade, more than 20% of the workforce will reach retirement as well.
The issue is even more stark for the financial advisor industry with the average advisor in the 50s. For advisors in this age group, it’s necessary to start thinking about succession planning for multiple reasons.
For one, a successful exit requires the same type of planning and intention that an advisor helps clients with in order to reach their financial goals. Second, proper succession planning can ensure that you will maximize the value of your practice when you are ready to retire. Finally, it’s an important signal to prospective and current clients that you are committed to their success even if you may no longer be an active part of it.
The first step is a continuity plan which details what happens to the practice in the event of a death or disability. The second step is to investigate various options. Recently, a popular option for smaller firms is to sell but then continue to work as an employee for a couple of years to ensure a smooth transition.
Regardless of what you choose, it’s important to keep your clients updated about succession and continuity plans. Ideally, you can meet with your clients and their new advisor multiple times before the final transition.
Finsum: The financial advisor industry is approaching a demographic cliff. For a variety of reasons, it’s important for advisors to start succession planning.
Until a couple of years ago, the standard playbook for any investor looking to secure their retirement was a mix of stocks and bonds. But, this traditional style is being challenged especially as stocks and bonds have fared poorly in today’s world of stubborn inflation and high rates.
This challenging environment is leading to more interest and demand for alternative investing especially as the asset class provided diversification and healthy returns in 2022 when both stocks and bonds were down double-digits. For Kiplinger’s, Tory Reiss covers the pros and cons of alternative investing for prospective retirees.
In terms of the drawbacks, Reiss mentions a lack of liquidity which means that prices can drop especially during periods of market volatility especially in less mature markets. Another is that these investments typically have higher fees and costs which can undermine long-term performance. Further, there is less transparency and regulation in the space which means that there is more risk.
However, there certainly are some positives such as the increase in diversification especially in rising-rate environments which have proven to be headwinds for stocks and bonds. There is also a potential for greater returns while also providing a hedge against inflation.
Overall, investors should be open to some allocation to alternatives but should understand the risks and conduct proper due diligence especially in newer asset classes with less of a track record and regulatory framework.
Finsum: Alternative investments performed well in 2022 while stocks and bonds both saw steep losses. This is resulting in a surge of interest in the asset class. Here are some pros and cons to consider.