Wealth Management
The landscape for financial advisors has shifted rapidly over the last decades. And, these shifts are only accelerating in terms of frequency and impact. Thus, advisors also need to update their strategy and approach to thrive in this new environment.
A major change is that advisors have to work harder to get and keep clients, especially given that many other money managers are likely competing for clients' resources, time, and attention as well.
For Financial Planning, John Guthery discusses why advisors should start embracing model portfolios to align their business with this new environment. Increasingly, the most value that an advisor brings is through quality time spent communicating with their clients to understand their needs and plan appropriately. This is true for both parties.
Too many advisors are spending too much time managing portfolios and researching investment ideas, when they could instead be focused on tasks that will actually grow their business. Most long-term research shows that advisors fail to beat the market over long periods of time.
With model portfolios, this function is effectively outsourced so that advisors can spend more time on the tasks that actually move the needle in terms of building and operating a thriving practice.
Finsum: Financial advisors tend to feel like they are not spending enough time with clients. Model portfolios are one solution as it frees up time for advisors.
For Vettafi’s ETFTrends, James Comtois shares his thoughts on the major differentiator for direct indexing vs the traditional strategy of investing in index funds. Over the last couple of decades, it’s become accepted wisdom that investing in passive funds is the best path to retirement given their diversification, history of long-term gains, and low costs and fees.
However, there is one drawback to this strategy. Investors are unable to capitalize on tax losses to offset gains to lower their year-end tax bill. Direct indexing addresses this weakness while still retaining the major benefits of passive index investing. In addition, it also enables investors to customize their holdings to reflect their personal values and beliefs.
Still, the key advantage for direct indexing is the boost in returns due to tax-loss harvesting. This can result in additional performance between 1 and 2% and is more potent in years with greater volatility. It can be particularly beneficial for investors who have gains in other parts of their portfolio.
With direct indexing, the portfolio is scanned regularly to sell losing positions. These are replaced with stocks that have similar factor scores to continue tracking the benchmark.
Finsum: Direct indexing has several benefits for investors but its key advantage is that it can help them reduce their tax bills and boost performance in more volatile years.
Active fixed income ETFs are seeing strong inflows and a slew of new launches to capitalize on its increasing popularity. Some major drivers of demand are growing awareness and comfort from advisors and institutions, elevated yields, and outperformance on longer timeframes.
In addition to these secular drivers of demand, the asset class is benefitting from the current uncertainty around the economy and Fed policy. Active managers have more discretion in terms of duration and quality when selecting securities. This creates more alpha especially in a sideways market.
The latest entrant in the active fixed income ETF space is Madison Investments which just launched the Madison Aggregate Bond ETF which invests in all types of bonds to generate superior long-term risk-adjusted performance. It believes that the fund will have lower risk than benchmarks in addition to income through risk-conscious investing.
The ETF has an expense ratio of 0.40% and marks its third ETF launch and first fixed income ETF. It will be co-managed by Mike Sanders, the Head of Fixed Income, and Allen Olson, Portfolio Manager. The fund will hold between 100 and 500 securities with up to 10% in non-investment grade credit. Currently, it has an average duration of 6.3 years.
Finsum: Madison Investments launched the Madison Aggregate Bond ETF which is an active ETF that aims to have lower risk than benchmarks.
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Bonds tend to go down for two reasons - an increase in default risk and rising interest rates. This supports the idea that current weakness in bonds is primarily due to the increase in rates as the default rate remains quite low.
This combination of high rates and low defaults is the ideal environment for high yield fixed income. Investors can take advantage of elevated yields. As long as the economy stays resilient, the default risk will remain low. If the economy starts to weaken, the default risk will likely start ticking higher, but this would also prompt a loosening of Fed policy which would be a positive catalyst for fixed income.
For Vettafi, Todd Rosenbluth shares 3 high yield fixed income ETFs that are worth considering. The iShares $ iBoxx High Yield Corporate Bond ETF (HYG) is the largest and most well-known. It pays a 5.7% yield and is composed mostly of B and BB-rated bonds.
For investors who want more safety in terms of credit quality, the VanEck Fallen Angel High Yield Bond ETF (ANGL) pays a 5.0% yield and is composed of higher-quality bonds rated above BB. Rosenbluth points out that ANGL has seen particularly strong inflows in recent weeks.
Finsum: High yield fixed income is generating interest among investors. Not surprising given elevated yields even despite low default rates.
There’s a war for talent in the financial advisor space. It can certainly be challenging for practices that are looking to expand, but here are some tips to increase your chances of success from SmartAsset’s Rebecca Lake, CEFP.
The first focus should be on understanding your goals in order to help you evaluate candidates and make the best decision. Try to think about what key responsibilities will the new hire handle, and how will he or she be integrated into the firm.
Next, it’s important to consider your company’s culture and assess candidate’s personalities to determine whether they would be a good fit. Then, Lake recommends creating an ideal candidate profile which can include an overview of their skills, experience, personality, and values. This will help you decide if the candidate would be accretive to thecompany’s culture.
The next step is to invert the process and think about what a prospective candidate sees when looking at your company. These include compensation, work setup, flexibility, vacation policy, parental leave benefits, education opportunities, career training, etc.
Once these steps are complete, it’s time to start investigating various recruitment channels. Often, the best strategy is to start with your network and professional colleagues as this can yield the best talent in the least amount of time with minimal cost. If that fails, then the other paths can be pursued.
Finsum: For financial advisor practices that are dealing with a surge of growth, here are some tips on hiring and recruiting new advisors.
Most fixed income investors are waiting on a Fed pivot before getting aggressively bullish on long-duration fixed income. Others are studying economic data to see any indications of a slowdown which would presage a pivot and also push bonds higher.
However, they may be missing an opportunity in municipal bonds according to Columbia Investments. These are one way to take advantage of higher yields and the recent selloff in long-duration bonds. Further, they offer unique tax advantages especially when buying debt in your own state and/or municipality. Currently, the average yield for municipal debt is 3.5% which is quite generous considering its after-tax.
This is above the historical average. Additionally, history shows that default rates are quite low with municipal debt. Finances at the state and local level remain quite solid, and there have been more upgrades than downgrades so far this year, indicating that finances continue to improve.
This state of affairs is leading to lower supply for municipal debt. Whenever the Fed does decide to pivot, this is a key factor in why municipal debt is likely to outperform as demand will certainly surge.
Finsum: Given the steep losses in fixed income over the past couple of months, many investors may be overlooking a very unique opportunity in municipal bonds.