Wealth Management
In an article for SmartAsset, Rebecca Lake, CEPF, discussed some networking strategies that advisors should implement to grow their business. First, networking will ensure that advisors have a pipeline of future opportunities.
Networking is also effective to help you establish a reputation in your community and can help you connect with people who could be potential clients. It’s especially important as word of mouth remains the primary way that people choose their advisors.
The simplest step is to join a professional association that is national or locally based. These will regularly put you in face-to-face contact with people in your industry and potential clients in an informal, relaxed setting. Local organizations will also give you the opportunity to participate in community events which can provide organic opportunities to form relationships with people in your community.
Another important piece for advisors is to grow a presence on social media. It can help display your personality and thinking on a deeper level, and it can help you find potential clients within your niche. And, you can also use social media to try to understand whether or not these prospective clients are a good fit for your practice based on their digital footprint.
Finsum: Networking is an integral part of success for any financial advisor as it will ensure that you have a pipeline of potential clients.
Model portfolios continue to be a major beneficiary of current volatility and uncertainty as evidenced by Charles Schwab seeing $4.6 billion in inflows to its bond ETF according to an article by Bloomberg’s Carly Wanna.
These inflows are being attributed to adjustments made by a model portfolio and are offered by many large asset managers. Currently, there is no firm estimate on the size of the model portfolio industry, but manu speculate that trillions are managed through them. And, they are offered by the largest asset managers including Vanguard and Blackrock.
But, the best indication of their size and influence is the massive inflows and outflows from ETFs which tends to happen at the beginning or end of quarters. Additionally, it’s easy to match the inflows and outflows from various ETFs. In this case, the model portfolio seems to be reaching for increased yield as it moves out of Treasuries and into lower-rated corporate debt.
Overall, model portfolios are booming due to the strategy providing the benefits of active management with lower costs and increased transparency.
Finsum: Model portfolios are having an impact on Wall Street as evidenced by the huge inflows into Schwab’s bond ETF.
In an article for InvestmentNews, Jenny Zhang of Beyond Investments laid out a quick guide for advisors to evaluate alternative investments. It’s not surprising that interest in the asset class has soared in recent months given the various macro headwinds and poor performance for stocks and bonds in 2022.
Another factor leading to increased interest in alternative investments is that credit is tightening up amid a slowing economy, high-profile bank failures, and a hawkish Fed. This will force many companies to seek capital in private markets, leading to more opportunities for investors in this niche.
From an advisor perspective, it’s quite challenging especially as there is more risk and less transparency around alternative investments. The key is to understand that the asset class can be part of a diversified portfolio.
In terms of fundamentals, advisors should first focus on a client’s specific needs and risk tolerance. Then, they should understand the size of the total market and the borrower’s collateral in the vent of a default. Additionally, two more important factors are the capital structure of the deal and its time horizon.
Finsum: Alternative investments are rapidly growing due to the uncertainty of today’s environment. Here is a quick guide on how to evaluate these investments.
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In an article for AdvisorPerspectives, Larry Swedroe of Buckingham Wealth Partners discussed the conundrum of ESG investing. In essence, the asset class is currently outperforming which many are interpreting as a validation of ESG’s promise.
Yet, Swedroe contends that this conclusion is incorrect, since it doesn’t include the effect of increased inflows. In fact, a recent study from Norway’s oil fund revealed that non-ESG stocks actually delivered superior returns over a longer time period. One potential explanation is that inflows lead to increased valuations for ESG stocks, while it leads to depressed valuations for non-ESG stocks.
Another explanation for the conundrum is that ESG stocks are less risky, because they on balance tend to have higher compliance standards and risk-management protocols. In the long-term, stocks with higher risk profiles tend to have better returns albeit with increased volatility.
Companies with higher ESG scores also tend to be larger than companies with lower scores. This is another complicating factor as smaller companies tend to deliver higher returns over the long-term due to the risk premium.
Overall, investors should understand that ESG outperformance is likely to be a short-term phenomenon due to the surge of inflows. Over the longer-term, the asset class could see lower returns due to a lower risk premium.
Finsum: ESG investing is booming, and many believe the asset class will continue to outperform. Larry Swedroe explains why it’s not so simple.
In an article for John Hancock Investment Management, Steve Deroin, the Head of Asset Allocation Models and ETF Strategy, discusses why he believes active fixed income will see a strong decade of growth as it’s uniquely positioned for the current market environment.
Active ETFs are a small share of the total market, but they are rapidly growing. It provides the benefits of the ETF structure, while being more responsive to a volatile market environment. Currently, active ETFs have 5.3% market share but received 14.4% of net inflows in 2022. Additionally, they accounted for 63% of all new ETFs in 2022 which is the 3rd straight year that active offerings outpaced passive ones.
In the fixed-income market, active ETFs offer exposure to bonds with more liquidity, transparency, and lower costs. Many passive fixed income ETFs don’t offer exposure to higher-yielding instruments and are instead concentrated in Treasuries and mortgage-backed securities.
Thus, given these trends and a much more volatile market environment, the active fixed income ETF segment will continue to rapidly grow.
Finsum: Active fixed-income ETFs are growing faster than passive fixed-income and active equity ETFs. Expect this trend to continue over the next decade.
In an article for ETFTrends, Mark Hackett discussed whether fixed income can rally given the backdrop of rising inflation and rates. These are potent headwinds for the asset class given that both factors reduce the value of future income and principal.
Of course, this is a major change after a decade of zero percent rates and inflation under 2%. Under these macro conditions, fixed income consistently delivered strong returns for investors with minimal volatility. In addition to these headwinds, there is also an increase in geopolitical tensions, re-shoring of supply chains, a nascent banking crisis, and a slowing economy which could stumble into a recession.
Despite these challenges, investors should still retain a considerable allocation to the asset class. In fact, fixed income has performed well since the middle of 2022 especially as inflation is trending lower, while the market is pricing in rate cuts by the end of the year. Additionally, fixed income is offering yields that are above that of equities.
Due to these developments, fixed income investors can earn above-average returns with minimal risk given the yields in short-term Treasuries and corporate debt.
Finsum: Fixed income ETFs struggled in 2022 due to rising rates and inflation. Despite some headwinds, there are some silver linings for the asset class.