Wealth Management
Direct indexing has gone from an obscure strategy only utilized by a handful of ultra wealthy investors to one that is accessible to all types of investors. In fact, many see it as the next evolution in passive investing as it captures the major benefits such as low costs and diversification. But, it also has some additional benefits such as tax savings and greater customization. According to a recent Morningstar report, tax management is cited as the number one reason that investors are increasingly choosing direct indexing. .
Currently, there is $260 billion in assets under management that is managed via direct indexing. The most common application is to simply mimic a popular benchmark like the S&P 500 or the Russell 2000. Others will endeavor to create their own index around certain themes such as ESG or companies creating jobs in the US.
Beyond surveys, the arms race in direct indexing also indicates its growing importance. Vanguard made the first acquisition in its history when it bought Just Invest and renamed it Vanguard Personalized Indexing Management. The firm sees it as one of its key growth drivers in the coming decade. Similarly, Blackstone bought Aperio, while Morgan Stanley acquired Parametric Portfolio Associates as part of its Eaton Vance purchase.
Finsum: Direct indexing has many benefits, but tax savings is the most common one cited by advisors and clients in a recent survey.
The cultivation of talent’s come a long way. Baby.
At its center: succession planning, according to sigmaassessmentsystems.com.
SIGMA – with the intent of providing organizational leaders with a snapshot of what’s unfolding today in succession planning – produced a report on where things stood this year. Several emerging trends were revealed:
Most organizations are focused on recruiting and retaining staff.
Many organizations recognize that they must keep up with industry innovation.
Many leaders are committed to improving customer experience.
A significant number or organizations want to transform their brand and culture
Interestingly, new financial advisors are setting a high rate of bolting from the industry, according to a Cerulli Associates report, reported financial-planning.com.
The importance of new talent in wealth management is further stoked given the fact financial advisors, who oversee trillions of dollars of assets, are riding into the sunset.
Yet, those making their maiden voyage into the profession aren’t exactly being received with a steaming mocha latte and scone, according to Cerulli, which reported that while 13,169 of new trainees left the industry in the rearview mirror, offsetting the more than 18,000 it picked up,
For ThinkAdvisor, John Manganaro discusses how advisors are increasingly seeing that direct index offerings are essential for high net worth clients given the enhanced after-tax returns. However, it has typically been only used with equities but there are also similar opportunities with fixed income.
By now, most are familiar with direct indexing for equity portfolios. Essentially, it offers the benefits of index investing such as diversification and low costs while allowing for more customization and potential tax savings.
On the fixed income side, direct indexing can allow investors to customize bond portfolios along their desired parameters such as income, duration, geography, or tax profile. There is also the potential for tax-loss harvesting during periods of volatility or bear markets to offset capital gains in other areas.
It’s estimated that direct indexing assets will grow from $260 billion at the end of last year to $825 billion by 2026. Typically, direct indexing adds 30 to 50 basis points of excess returns although the amount can be greater in years with more volatility. For advisors, it’s a way to offer a value-added, low-cost service with greater personalization.
Finsum: Direct indexing assets are forecast to nearly triple over the next couple of years. Most are familiar with its use for equities but it is also being increasingly applied with fixed income.
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At the VettaFi Fixed Income Symposium, Todd Rosenbluth hosted a conversation between Stephen Laipply, the global co-head of iShares fixed income ETFs and Anmol Sinha, fixed income investment director at Capital Group. The conversation spanned a wide array of topics regarding the advantages of investing in fixed-income through ETFs.
Both also spoke of the recent growth in active fixed income ETF offerings, and why they are bullish on the category going forward. However, they rejected the binary of being an active or a passive investor and instead see a role for both strategies in a portfolio.
Active fixed income ETFs allow investors and advisors to better achieve specific goals such as exposure to a certain segment of the market or take advantage of market inefficiencies. Both are in favor of pairing an active ETF with a passive one to achieve ‘total portfolio exposure’.
Fixed income ETFs are outpacing equity ETFs in terms of inflows over the last couple of years due to yields at their highest level in decades and a shaky economic outlook. Within the fixed income ETF universe, active strategies are seeing the most growth as they have outperformed amid recent volatility and advisors and wealth managers are becoming increasingly comfortable with the asset class.
Finsum: At the Vettafi Symposium, there was a discussion centered around fixed income ETFs and their future outlook. Regarding active vs passive ETFs, there was agreement that both are complementary rather than competing.
After a rough 2022 for fixed income, 2023 has seen the asset class eke out modest gains. But, it hasn’t been smooth sailing especially in recent months as most of the gains have been wiped out amid a deluge of positive economic data which is increasing the odds that the Fed’s rate hikes are not done and increases the risk of inflation re-igniting.
However, this hasn’t slowed inflows into fixed income ETFs. According to ETF.com’s Michelle Lodge, the major reasons are higher yields, increased awareness from advisors and institutional investors, and continued uneasiness about the macro environment. In fact, inflows into fixed income ETFs are outpacing inflows into equity ETFs.
Many believe there is a virtuous cycle at work. Fixed income ETFs are increasing liquidity which in turn, is leading to more institutional money flowing into the asset class. The virtuous cycle could pick up more velocity with active fixed income growing in popularity as many of these funds look for opportunities in less liquid areas of various durations and credit quality.
Overall, the popularity of fixed income ETFs is a major development in 2023 even despite a volatile couple of years for bonds.
FinSum: Fixed income ETFs are seeing strong inflows in 2023. This can be attributed to higher yields, a shaky macro outlook, and strong demand from advisors and institutional investors.
In an article for InvestmentNews, Emile Hallez reports on annuity sales reaching record levels in the first-half of 2023. Demand for these products is due to the highest interest rates in decades, coupled with economic uncertainty with factors like inflation and concerns of a recession. Overall, annuity sales reached $182.9 billion in 2023 which is a 28% increase from the first-half of 2022.
One of the fastest-growing annuity categories is registered index-linked annuities (RLIA). These have gone from a fraction of the annuity market to becoming one of the most popular in 2023. In 2017, only 4 companies offered these products, while 17 do so currently with others planning their own offerings in the coming months.
Interestingly, RLIA sales are up 8% compared to the first-half of 2022 but sales of traditional variable annuities are down 25%. RLIAs are different from variable annuities because they offer more protection with some also offering some sort of guaranteed income.
Recent developments are supportive of continued inflows into these products especially given what’s happening in other asset classes. Equities have enjoyed a surprisingly robust performance, but it’s leading to concerns about valuation. Fixed-income also offers generous yield, but the asset class posted negative returns in 2022 and middling returns in 2023. Therefore, it’s likely that annuities continue to see record inflows in the second-half of the year.
Finsum: The outlook for annuities is quite strong for the second-half of 2023 given high interest rates, an expensive stock market, and volatility in fixed income.