Wealth Management
The US Department of Labor is proposing a rule to close loopholes around the fiduciary standard. Specifically, they are looking at rollovers from 401(k) plans to IRAs; products not regulated by the SEC such as indexed annuities and commodities; and recommendations to employers on which funds to offer in 401(k) plans.
The SEC raised the bar for financial advice in 2019, applying the fiduciary standard to most types of investments. Yet, there are certain areas where the SEC doesn’t have jurisdiction. However, the Department of Labor does have regulatory authority over retirement accounts.
The fiduciary standard mandates that any investment recommendations need to be made in the best interest of clients and that any conflicts of interest should be disclosed. This has major implications given that nearly 6 million Americans rollover approximately $600 billion into IRAs every year, while 86 million Americans are putting money into their 401(k) plans. Indexed annuity sales were $79 billion in 2022 and expected to easily exceed this amount in 2023.
According to the administration, hidden costs and junk fees are denting households’ retirement savings by up to 20%. However, there is some pushback as critics contend that these rules will lead to more confusion, expenses for compliance, and eventually negatively affect retirement plans and retirees.
Finsum: The Biden Administration is looking to expand the fiduciary standard to cover areas that fall outside of the SEC’s jurisdiction such as commodities and fixed annuity products.
Fixed income ETFs are in demand especially with interest rates over 5% and a cloudy economic outlook with risks like a recession and fears of another surge in inflation. Within the fixed income universe, investors can express their views through duration positioning while still taking advantage of income opportunities.
Many ETFs allow investors to focus on specific parts of the yield curve. The most well-known examples are several Treasury ETFs which range from ultra short-term to 20+ years. Lately, issuers have launched ETFs for single-year strategies for further optimization.
However, many market participants believe that even more duration-targeting ETFs need to be launched given the disparity of views and volatility that is endemic to a higher rate and inflation environment. While there is an abundance of options in the US, there are less options in the UK and EU.
As the fixed income ETF market grows, duration-focused ETFs will continue to be a major area of growth especially as more institutional investors are embracing the asset class and driving demand for these products. Many are also of the opinion that higher rates will lead to an environment of increased volatility, shorter cycles, and faster moves. Additionally, these options will be even more imperative for allocators who are investing in shorter timeframes.
Finsum: The fixed income ETF market is growing rapidly. Along with inflows and an increase in volatility, several ETFs have been launched that are focused on a specific part of the curve.
Financial advisors can increase their chances of success of landing Generation Z clients by understanding their generational preferences. Many of these younger investors have an intuitive relationship with technology, so they are interested in digital solutions which will give them a more interactive experience. At the same time, they are also accustomed to having instant access to information.
Therefore, it’s prudent to have the right tech stack in place to facilitate this in addition to a comprehensive digital marketing and communication strategy. This includes social media, interactive content, and other tools to increase engagement. These can also be effective mediums for advisors to show their personality and knowledge to build a more authentic connection with prospects. A successful and repeatable strategy is to offer a free financial assessment which can be an effective lead-generation tool and more effective for younger investors than a phone call or face-to-face meeting.
Many in this generation are also enamored with newer asset classes like cryptocurrencies, so advisors should be able to engage on these topics. In terms of soft skills, advisors should cultivate an air of approachability, relevance, and empathy to increase their appeal.
Finsum: Gen Z is coming of age and will soon be entering their 30s. Here are some tips on how to appeal to this demographic.
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Over the summer, the SEC made a proposal that advisors and brokers would have to address conflicts that emerge through investors interacting with artificial intelligence, an algorithm, or similar technology. At the Securities Industry and Financial Markets Association annual conference, there was some discussion over this proposal with SEC Chair Gary Gensler challenging the audience of financial professionals in his remarks.
Essentially, many believe that this is a way to expand Reg BI to make it apply to all sorts of interactions that happen between an advisor and client. SEC Chair Gary Gensler pushed back on this when he remarked, “We’re not trying to change Reg BI or change the fiduciary guidance.” He clarified that instead the SEC is looking to crack down on the use of predictive analytics to ‘micro target’ investors.
According to Gensler, there is an inherent conflict between current standards and this new technology if it’s built to help an advisor or broker increase their earnings as it would lead to unsuitable recommendations. He wants to see these algorithms modified so that the advisors’ interests are eliminated or neutralized. However, he didn’t have a strong opinion on how this should be achieved, citing that there are multiple paths to achieving this goal.
Finsum: The SEC is proposing a new rule for use of AI and predictive data analysis. At a recent conference, SEC Chair Gary Gensler provided some more details about the proposal.
JPMorgan is looking for a partner to accelerate its push into private credit. Some current prospective partners include sovereign wealth funds, pension funds, endowments, and alternative asset managers, although it’s possible that the bank may ultimately go with multiple partners.
Reportedly, the bank is looking to add to the $10 billion it’s already set aside for its private credit strategy. It believes that this additional capital will enable it to compete with other names more effectively in the space such as Blackstone, Apollo Global, and Ares as it would be able to make bigger deals. Additionally, there would be less balance sheet risk as the bank would originate the deals with its outside partner, providing the capital. In theory, this would allow for more scale to grow private credit revenue without additional risk.
Due to banks dealing with an inverted yield curve and high rates, private credit has been taking market share away from other sources of capital like leveraged loans and high-yield bonds. Already, many of JPMorgan’s competitors like Barclays, Wells Fargo, and Deutsche Bank have launched their own efforts to build a presence in the private credit market, although each has its own strategy.
Finsum: JPMorgan, like many Wall Street banks, is looking to increase its presence in the private credit market. It’s currently in discussions with prospective partners to provide outside capital.
For many clients who want personalized solutions and have complicated financial needs, the traditional approach of mutual funds or ETFs fall short. For investors with more complex tax issues or who desire that their investments align with their values, direct indexing offers a more comprehensive strategy.
Direct indexing captures many of the benefits of passive investing such as diversification, low-costs, and investing in an index. But the key differences are that the actual components of an index are owned by the investor rather than the fund.
Thus, there is a greater level of customization as investors modify these holdings to reflect their own political, religious, or ethical beliefs. This is especially pertinent with the increasing traction of ESG or values-based investing.
This customization can lead to better risk management as portfolios can be adjusted to reflect a clients’ particular risk profile and long-term goals. Another benefit is increased tax efficiency as there is more control over when capital gains are realized. Tax losses can be regularly harvested and used to offset capital gains. Similarly, charitable giving through direct indexing can also have certain tax advantages while also giving clients an opportunity to support causes or organizations that they believe in.
Finsum: Direct indexing has specific benefits that may appeal to clients looking to optimize their tax situation, align their investment with their values, while still retaining the benefits of passive investing.