Wealth Management
Elizabeth O’Brien covered the optimism among bond investors that a change in Fed policy could result in a major rally for the asset class in a Barron’s article. Current fed futures odds show that the market sees a more than 90% chance of the Fed pausing at its next meeting. And given recent inflation and economic data, it’s likely that the Fed has seen sufficient progress to shift its focus to financial stability over combating inflation.
Therefore, it could be an opportune moment to invest in high-quality bonds with longer maturities. These bonds are yielding about 5% which is nearly double what they averaged during the past decade.
While some believe that the economy is weakening enough to compel the Fed to cut rates by the end of the year, others believe this is a more typical cycle and that the Fed will likely be on hold for an extended period of time.
Since 1990, the average pause between hiking and cutting cycles has been 10 months. The typical behavior is that fixed income rallied in anticipation of cuts but volatility picks up until the cuts actually begin, leading to a healthy tailwind for the sector.
Finsum: A major catalyst could be emerging for fixed income given that the market expects the Fed to pivot at its next FOMC meeting in June.
In an article for GoBankingRates, Andrew Lisa shared some thoughts on the best way to onboard new clients. The first thing is to understand that a financial advisor needs to be an independent and trusted professional for the client, similar to a doctor or lawyer.
While each individual client has unique personalities and circumstances, there are still some universal principles and guidelines that you can introduce to your clients. This will help communicate your philosophy and value proposition, while creating momentum towards your clients’ goals from Day 1.
One suggestion is to start with understanding their cash flow. This means understanding every dollar that is coming in and going out. For every financial goal, this is the starting point. Additionally, you can get your clients started on tracking income and expenses to get a better understanding of cash flow.
Related to this, the next step would be to establish clear goals for the short-term and long-term. The nature of goals could differ based on a clients’ circumstances and age. Finally to increase the odds of success, the plan needs to be put into writing. This increases the chances that the plan is followed and daily decisions are aligned with long-term goals.
Finsum: Every client is unique, but there are still some common onboarding steps that advisors can take to introduce them to your practice and philosophy.
In an article for AdvisorPerspectives, Jack Van Dyke of Russell Investments shared some strategies for advisors to attract high net worth investors with direct indexing.
For most advisors, most strategies or tactics to grow their practice revolve around generating additional revenue from existing clients or adding new high net worth clients. And, the key to accomplishing these goals is to have a unique and differentiated offering.
Direct indexing fits the bill as it can help reduce a clients’ tax bill, retain the benefits of indexing, and allow for effective customization. While most advisors are aware of this innovation, they have not yet begun offering it to clients.
Therefore, it’s essential to start the conversation with your prospects and clients. Van Dyke recommends that advisors begin by asking questions to determine whether direct indexing is a good fit for them. These include whether or not they are expecting a large windfall in the future, their current tax liabilities from investments, and whether they have a concentrated stock position.
These questions are effective conversation starters that you can transition into a discussion about why direct indexing can help them reach their financial goals while giving them more control over their financial destiny.
Finsum: The key to a financial advisory practice is to grow their business and/or increase revenue per client. Direct indexing is one way that advisors can achieve these goals.
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In an article for AdvisorHub, Karmen Alexander covered comments from Stifel Financial’s recent conference call when CEO Ronald Kruszewski remarked that there was an opportunity to recruit financial advisors especially following the exit of ‘high payers’.
While Kruszewski didn’t single out any firms by name, it’s likely that he was referring to First Republic which was a victim of the regional banking crisis and was taken over by JPMorgan with an FDIC backstop. The bank was notable for being an aggressive recruiter of financial advisors with large bonuses and attractive packages. At the start of the year, First Republic was reportedly offering as much as 400% of revenue generated in the past year to advisors with over $10 million in revenue.
Unlike First Republic which targeted brokers with over $2 million in revenue, Stifel tends to target smaller brokers. Additionally, Stifel has been much more conservative in the terms that it offers. Overall, the bank hired 49 advisors. Of these, 20 were experienced brokers who were lured from other firms.
Yet, the company also affirmed that while it sees the landscape becoming less competitive with First Republic’s exit, it will continue sticking to its discipline in terms of not offering excessively lavish packages.
In an article for the Financial Times, Mary McDougall reported on growing investor nervousness regarding junk bonds due to tightening credit and financial conditions. According to the Federal Reserve’s survey of Senior Loan officers about 46% of banks are planning to tighten lending standards given worries about defaults and recent stresses to the banking system.
Historically as lending standards tighten, it leads to a wider spread between junk bonds and Treasuries, indicating concerns over growing defaults. This can even potentially exacerbate a recession as companies have tougher times accessing capital markets which can affect corporate decisions,leading to belt-tightening and job losses.
What’s interesting is that many expected that the regional bank failures that began in March would have impacts on spreads and lending. Yet, there hasn’t been an impact yet. In fact, the entire bond complex has been quite strong since these stresses began as many interpreted it as increasing the odds of the Fed pausing rate hikes.
The Federal Reserve also seems to share these concerns as Chair Powell discussed the possibility of a credit crunch and that it poses one of the major risks to its economic outlook and financial stability.
Finsum: Despite the Fed’s rate hikes and regional banking concerns, lending and spreads have remained relatively resilient, but some are concerned that this won’t last.
Category: Wealth Management;
Keywords: #bonds; #Fed; #fixed income
In an article for USA Today, Jessica Guynn summarized the current debate between those who advocate for ESG investing and those who see it as a disguise for ‘woke capitalism’. In contrast, supporters of ESG see these factors as being critical to their investing process. For instance, they see preparations for climate change as part of a managers’ fiduciary duty given its potential impact on asset values.
These tensions came up at the House Oversight Committee meeting last week as Representative Rankin was critical of anti-ESG attacks which he said were coming at the behest of the fossil fuel industry. In turn, Republicans were equally harsh as they countered that asset managers should only consider financial information and that by considering non-financial factors, they were risking the retirement savings of American workers.
At the state level, 17 Republican Attorney Generals jointly filed a motion to block Blackrock from advocating for ESG principles for utility companies.
Many of those opposed to ESG see it as preventing energy companies from making sufficient long-term investments that are necessary to continue fossil fuel production and blame it, in part, for the inflation and oil spike during 2021.
Finsum: ESG investing continues to be a source of political conflict. These tensions came to a head at a contentious House Oversight Committee meeting.