Wealth Management
In an article for InvestmentNews, Kristine McManus, the Chief Advisor Growth Officer at Commonwealth Financial, discussed various considerations for advisors who are nearing retirement. Many want to exit their own business in a gradual way rather than suddenly and continue working with new owners to provide a seamless transition for their clients.
According to Commonwealth's research, financial advisor M&A data over the last decade shows that there were 359 deals. In 205 of the deals, the advisor who was selling, immediately retired and exited the business. However, a third of the deals saw the advisors remain past the acquisition.
Some of the positives of this approach are that it leads to less client attrition and provides a natural way to introduce clients to the new management team. For the selling advisor, it allows them to gradually ease into retirement while slowly letting go of responsibilities in a more organic way while ensuring that their business and clients are in good hands.
There are some negatives which include a potential clash in management styles or investing philosophy between the seller and acquirer. Often, the selling advisor has difficulty giving up control when it comes to making major decisions and transitioning into an employee role.
Overall, both parties need to be aligned in terms of goals and constant communication in order to minimize the negatives and accentuate the positives with this type of transaction.
Finsum: Many financial advisors are nearing retirement and need to have a succession plan. One option that is growing in popularity is for advisors to sell their practice but remain as an employee for a certain amount of time.
Many RIAs are testing out new pricing models and moving away from the traditional practice of taking a cut of assets under management especially for placements into alternative investments. In a piece for AdvisorHub, Suman Bhattacharyya covers some examples.
Overall, there is increasing pushback from clients about paying management fees especially when the market is falling. Additionally, these annual fees can compound over time and become a significant amount especially for long-term clients.
These concerns are magnified in years with lower or negative returns. Some advisors are choosing to take a cut on performance, between 10% and 20%, to align clients and advisors’ interests. Others are moving to a fixed-fee model which means either billing by the hour, charging a subscription or a fee per project.
According to some, 2022 which saw negative returns for stocks and bonds is simply accelerating what had been a developing trend. Despite these changes, 82% of revenue for RIAs come from fees on total assets under management.
Therefore, RIAs reliant on these fees for their business should consider alternative models or at least prepare for conversations with clients about the matter.
Finsum: The vast majority of RIAs are reliant on fees generated by total assets under management. However, many clients are electing to move away from this model.
Amid the growing backlash to ESG investing, several anti-ESG funds were launched. Yet, these haven’t seen a significant surge in terms of inflows or returns that would indicate that the category will have long-term success.
According to Morningstar, inflows into these funds peaked in the third quarter of 2022 at $377 million but have dropped by more than 50% to $183 million in the first quarter of the year.
Currently, there are 5 types of anti-ESG funds. Some are political and favor companies that are penalized by ESG factors. Another type are vice funds which invest in ‘sin’ stocks related to alcohol, tobacco, and firearms. There are also voter funds which look to vote against any ESG initiatives. Finally, the largest category are funds that previously used ESG factors for investment decisions but no longer do so.
The biggest player in the anti-ESG market is Strive Asset Management, which was founded by Republican presidential candidate Vivek Ramaswamy and aims to compete with Blackrock and Vanguard. Its first fund saw strong demand but later funds have seen minimal enthusiasm with an average of $5 million of inflows.
Finsum: Anti-ESG is an investing theme that launched last year, and many believed had potential. So far, there are limited signs that it's showing significant traction.
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At Morgan Stanley’s annual US Financials, Payments & Commercial Real Estate conference, CEO James Gorman said that the bank is no longer relying on financial advisors recruiting for growth.
Gorman sees future growth coming from the ‘funnels’ that Morgan Stanley has built which it sees as key to the next $1 trillion in assets it aims to bring over the next 3 years. After a fevered pace of advisor recruiting, the company is seeing minimal movement other than small teams coming and going.
As part of the changing landscape, Morgan Stanley will only be recruiting high-quality teams with substantial assets. This does affect the marketplace given that Morgan Stanley has been one of the most aggressive in terms of recruiting over the past couple of years.
Overall, the bank is moving towards a more holistic, comprehensive strategy when it comes to acquiring assets. In the first quarter, it added $110 billion in new assets. $28 billion came from workplace channels, $20 billion came from advisors hired away from struggling regional banks, and the majority of the remainder came from existing brokers.
In the future, Gorman sees the workplace channel as being its most significant source of growth, especially given that the cost of luring advisors continues to increase.
Finsum: Morgan Stanley has been a leader in advisor recruiting. But, this is changing as evidenced by CEO James Gorman’s recent comments.
In an article for Dividend.com, Aaron Levitt discussed why active fixed income funds have outperformed passive fixed income funds.
The majority of active equity funds underperform their industry benchmarks. Therefore, it’s not surprising that these have dominated in terms of inflows.
But, it’s a different story in fixed income. Recent research from JPMorgan shows that active fixed income has outperformed passive. Some of the reasons for this is that passive funds are overweight with firms and entities that have the most debt.
Active funds have wider latitude and can find opportunities in various parts of the market. They also are able to take positions in different parts of the capital structure. The absence of passive funds in these spaces also leads to more favorable valuations. Many active funds are also able to take advantage of foreign debt and high-yield fixed income.
As a result, inflows into active fixed income have been growing at a faster pace than inflows into passive fixed income. More inflows into active fixed income should also lead to increased liquidity in many parts of the fixed income space.
Overall, active funds have failed to outperform passive ones in the equity space but have done so in fixed income.
Finsum: Recent research shows that active fixed income has outperformed passive fixed income. This is contrary to many investors’ expectations given the outperformance of passive equity funds vs active equity funds.
Fixed income ETFs are seeing a surge of inflows over the past year given higher rates and an uncertain economic and monetary outlook. Blackrock is a pioneer in the space and has $800 billion in assets under management in its fixed income ETFs as of the end of the first quarter.
Now, the asset manager is setting a goal of $2.5 trillion by the end of the decade in assets in its fixed income ETFs. These comments were made by Salim Ramji, Blackrock’s global head of ETFs and Index Investments at its Investor Day earlier this week and were covered by Shanny Basar for Markets Media Group.
He sees the line between passive and active continuing to blur as investors demand more customization and scale. Currently, Blackrock manages $5.9 trillion in assets. Its ETF division, iShares, has $3.1 trillion in assets but accounts for more than 90% of revenue growth. In total, it offers 1,300 ETFs which is more than double that of any other company. Overall, Ramji sees annual ETF asset growth in the double-digits and revenue growth of single-digits to continue as well.
Finsum: Fixed income ETFs are booming due to an uncertain economic outlook and the highest yields in decades. Blackrock is targeting a tripling of its assets in its fixed income ETFs by the end of the decade.