Wealth Management
Direct Indexing is the process of holding the stocks in the weights of the underlying Index, rather than buying an ETF that tracks an index, and this new opportunity is being adopted by financial heavyweight Charles Schwab and will be available to investors. Starting with the large-cap Schwab 1000 Index, S&P Small Cap 600 Index and MSCI KLD 400 Social Index, Schwab will be available to mix and match to customize a portfolio to hit the investor’s exact needs. However, this option won’t be available to just any investor. The indexing platform will require a $100,000 account size. Adoption of direct index investing is one piece of Schwab’s expansion into personal investing, that goes hand-in-hand with environmental, social, and governance investing and other thematic investing.
FINSUM: Schwab is the latest of Vanguard, Fidelity, BlackRock and Morgan Stanley to jump into index investing. However Schwab’s pricing format is not revealed and its advantages over a low fee ETF are not yet clear.
The appetite for on-demand experiences has grown. In 2020, the global on-demand market...See More
According to the leading regulatory lawyers in our industry, advisors are about to get hit with a doozy. Faegre Drinker Biddle & Reath say that the DOL is planning to release a new fiduciary rule this spring. Since the new version of the rule is being drafted and put forth under the Biden DOL, it is widely agreed that this newest version will look much like the Obama-era rule that got thrown out by the courts. According to Fred Reish, a partner at the firm, “There will be provisions of 2020-02 that'll be moved over to it. Probably the fiduciary acknowledgement, the best interest standard and maybe specific disclosures of reasonable compensation limitation. It'll look a lot more like a fiduciary type rule than it does right now."
FINSUM: This new rule has been widely signaled but we have never had a good fix on timing, but is now becoming clear. Take note.
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Annuities are more available than ever these days. Many large providers have been designing products just for RIAs and are making a big push in the area. Additionally, annuities are now easily included in 401ks. But when is it right to choose one? The overall value of annuities has declined as rates have fallen, but as rates rise, they are becoming more attractive as a source of good guaranteed income. Additionally, they offer unique tax benefits that help enhance returns. Brighthouse, for example is a leading provider of annuities and lead the industry with the FlexChoice (variable annuity) and Shield (index-linked annuities) products. Choosing the right annuity depends on your client’s goals.
FINSUM: Annuities increasingly fit into a client’s portfolio in myriad ways. In some cases for a lower wealth client, it can be a near one-stop shop to accomplish retirement goals, especially if that client is prone to not managing budgets well. In other cases, annuities can provide just a small portion of a portfolio, but do so with guaranteed income.
The $2 trillion Build Back Bill pushed through a contested House of Representatives last week and the climate and social-focused stimulus bill have a complicated tax code in order to garner support. BBB features a dynamic tax system with moving parts that evolves as years develop. Most significant of which is a tax break of about 5.4% relative to current legislation for those earning more than $1 million a year. This tax breaks scales down in income down to $75k, but spikes below that. However, this tax break is very temporary as the lion’s share of the legislation will be paid by higher income individuals. There are other benefits for the rich such as SALT relief, but by and large, starting in 2023 higher corporate taxes and a bump in personal income taxes of 5% will begin to take effect.
FINSUM: Biden’s BBB could be a bad storm of events for the economy where stimulus boosts inflation and higher taxes keep markets and real growth from keeping up.
Financial giants are snatching up direct indexing clients as fast as they possibly can, but they need to do more work to solidify their position with investors. Cerulli Associates is predicting direct/custom indexing will grow at a shocking 12% growth in the next five years which will outpace both mutual funds and ETFs for example. Part of what is responsible for that growth is lower exchange costs which make it possible to hold the underlying asset in an index that was previously untenable for anyone outside the ultra-wealthy. In order to fully realize the benefits of a direct indexing fund, directors will have to be like goldilocks of customization but not straying too far from the fundamental index. However, direct indexing is giving managers their best opportunity in years to take back the reins for clients and outperform ETFs and index platforms. Without a doubt tax loss harvesting is the best edge a director will have in customizing a direct index for their clients and it's the necessary part of how to stand out in the crowded space of custom indexing.
FINSUM: Investors should be in an open dialogue as to their clients preferences in diverging from the underlying index when customizing. The ship can steer quickly in the wrong direction.