Wealth Management
2023 was supposed to be the year of fixed income.
Coming into the year, the consensus was that fixed income would rally as the economy plunged into a recession, forcing the Fed to terminate its rate hike cycle and even begin cutting before the year was over. The bond bulls got another catalyst following the regional bank crisis which many believed would impair credit markets and also force the Fed’s hand.
Yet, these prognostications have proven to be false. Instead, the US economy continues to grow and add jobs every month. In fact, there are more signs that the economy could be re-accelerating rather than contracting. As a result, the Fed continues to hike, and bonds have given up all their gains on the year.
Despite consensus predictions proving wrong, most Wall Street analysts remain bullish on fixed income. They continue to believe that yields are at or near their ‘cycle highs’ and that a trifecta of factors like cooling inflation, mild economic growth, and geopolitical risks mean that investors should continue adding exposure especially given that equities are unattractive from a valuation perspective at the moment.
Finsum: 2023 was supposed to be a big comeback for fixed income given expectations of a recession in the second-half of the year. Yet, this has proven not to be the case.
The financial advisor space is extremely competitive which means it’s quite important to differentiate and identify what makes you unique. This is even more the case given today’s macroeconomic reality of high rates, inflation, and uncertainties. Advisors and investors may have been spoiled by the last couple of decades of low rates, providing a generous tailwind for stocks and bonds.
For WealthProfessional, Steve Randall discusses why becoming comfortable with alternative investments could fuel growth for advisors in this new era. Given that the upside for stocks and bonds is limited in this era, there is likely to be more opportunities in areas like responsible investing and alternatives, where the landscape is less defined.
In addition to these trends, Randall also identifies actively managed ETFs, virtual assets, and impact investing as other growth areas that could provide differentiation for advisors.
Overall, he believes that asset managers will introduce new products in these areas in recognition of growing interest and demand. Over the last couple of years, alternative investments have generated positive returns and dampened portfolio volatility while stocks and bonds have delivered negative returns.
This outperformance should continue especially if rates and inflation remain elevated, and advisors are recommended to get familiar with new offerings.
Finsum: Alternative investments are gaining popularity for a variety of reasons. But, the most important is its outperformance in the last couple of years while stocks and bonds lagged.
Building a high-caliber team is required for advisors looking to build and scale their own practices which can often include hiring and leading other financial advisors. In InvestmentExecutive, Todd Humber shares some tips for leading a team of advisors.
Communication is key, especially providing a forum for open discussion of ideas and understanding their needs and concerns. An effective advisor is always taking in information and then providing feedback which is shaped by their expertise and experience. This process should be nurtured as this feedback can be used to make better decisions.
Leaders should try to create a culture where everyone feels important and connected to organizational goals. This can be re-affirmed with regular one-on-one conversations with each team member to ensure that they agree and are aligned with the overall vision. These conversations should be a way for members to express any disagreement or share negative feedback.
In general, advisors respond better when they are given latitude to accomplish their objectives. This also will help them grow even if it involves the occasional mistake. Leaders should ensure that they learn lessons and apply them in the future while not reducing their desire to take initiative and ownership.
Finsum: Leading a team of advisors is not a simple task. It requires processing constant feedback from advisors while ensuring that their actions are aligned with organizational goals.
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When it comes to financial advisors, many instantly think of managing portfolios and selecting stocks. While many advisors still cling to this model, model portfolios are increasingly gaining favor. For one, portfolio management at the client level is not scalable which means that advisors would eventually be overburdened if the firm keeps growing.
Equally important, it frees up time for them to focus on the activities that actually drive success for their practices - client relations and effective prospecting. Also, most research shows that advisors who actively manage portfolios don’t necessarily generate better returns in the long-term.
According to research from Cerulli Associates, model portfolios generated better returns than advisor-managed portfolios over multiple timeframes. And, this discrepancy widened during periods when the market experienced a negative quarter as model portfolios outperformed 60% of the time amid these conditions.
The biggest drawback for advisor-led portfolios is the wide dispersion and variability of performance especially compared to model portfolios which had much steadier performance. Given that model portfolios are leading to better returns for clients with less volatility and also frees up time for advisors to focus on client relations and growing their business, the continued proliferation of model portfolios seems inevitable.
Finsum: Model portfolios are taking an increasing share of the asset management pie. The benefits for advisors are obvious in terms of growing their business but research is also showing better returns with less volatility.
Generation Z is defined as being born in between the mid 90s and mid 2010s. Older members of this group are starting their careers and beginning their investing journeys. This group is shaped by events like the 2008 financial crisis and the pandemic. They also are the first generation to grow up with the Internet and have a much more intuitive relationship with technology especially when it comes to managing finances.
In a piece for USA Today, Jon Stojan explains why alternative investments are gaining traction with Generation Z. Some of the unconventional options include investing in art, wine, farmland in addition to more known options like cryptocurrencies and precious metals.
According to a survey from the Lansons Group, only 10% of Americans have invested in alternative assets but 30% of Gen Z investors have done so, highlighting the appeal of alternatives.
The most commonly cited reasons are a potential for high returns, hedging against inflation, and interest in tangible, enduring value. However, there are some drawbacks to these asset classes especially as their performance is unproven through multiple market cycles unlike stocks and bonds. Additionally, they tend to come with higher costs and less liquidity.
Finsum: Alternative investments are gaining traction with Generation Z investors who are looking to invest in asset classes beyond just stocks and bonds. Examples include cryptocurrencies, precious metals, artwork, farmland, and wine.
In FinancialPlanning, Victoria Zhuang shares some insights from research regarding a key segment of the population that can help financial advisors successfully grow their practices. In essence, about $72.6 trillion of assets is set to be passed down to heirs through 2045.
And, this trend is accelerating. This year, $700 billion is forecast to be passed down, and the number is set to double by the next decade. However, many advisors are not positioned for this epic wealth transfer. Only 35% of advisors surveyed indicated that younger investors are a ‘critical priority’ or ‘high but not critical priority’.
In fact, clients under the age of 44 only make up 27% of accounts. Many in this cohort will benefit from the wealth transfer. Advisors should be appealing to this demo by offering specific advice and services regarding estate planning and wealth transfer.
Additional tips to appeal to this niche are to offer more technology like video calls, AI, and/or robo-advisors that would feel more intuitive for Millennials and Generation Z. Firms can also target or recruit younger advisors who may do a better job of connecting with ‘young heirs’.
Finsum: Prospecting ‘young heirs’ could be the key to success for advisors over the next couple of decades given the ‘great wealth transfer’ of $72.6 trillion in assets by 2045.