A familiar mantra of financial advisors and tax planning experts is that it’s not what you earn; it’s what you get to keep that matters. This principle underscores the significance of effective tax management strategies within a taxable investment portfolio. An essential technique in optimizing after-tax returns is tax-loss harvesting, which involves selling investments at a loss to offset taxable gains in the same year.
A powerful tool for executing this strategy is direct indexing. Unlike product structures like mutual funds, direct indexing accounts allow investors or their advisors to buy and sell individual securities. This granular control enables them to recognize losses for tax purposes while maintaining their investment strategy.
However, timing is crucial. Establishing a direct indexing account early in the taxable year affords the account holder increased flexibility later. This positions them to maximize the opportunities for tax-loss harvesting as they accumulate over the year. By doing so, advisors can proactively manage the portfolio to leverage potential tax savings, which can be particularly beneficial when preparing for year-end financial discussions with clients.
Essentially, the sooner an advisor sets up a direct indexing account for their client, the more they can potentially benefit from tax-loss harvesting strategies during the year.
Finsum: Advisors can help their clients keep more of what they earn by utilizing direct indexing accounts to harvest tax losses throughout the year.
Over the next few years, it’s expected that alternative assets will become a larger part of client portfolios. Advisors will have to contend with a changing landscape especially as more products will be introduced that are more complicated in terms of taxes and reporting.
A looming challenge for advisors will be handling the increased workload as well as understanding these products in a comprehensive manner in order to explain it to their clients. It’s likely that asset managers will form partnerships with RIAs in order to help them navigate and simplify the process. Already, some asset managers have started to invest in efforts to educate advisors, but more will be necessary given the increase in the number of options.
According to Ernst & Young America's Financial Services, some advisors will increase allocation to alternatives to 10% or more. In the near-term, private credit products will see the strongest growth as they are seen as less risky while offering higher yields than fixed income.
In addition to private credit, most exposure to alternatives currently is through liquid alt mutual funds, liquid alt ETFs, and publicly-traded REITs. Over the next couple of years, areas forecast to have the highest growth in terms of assets are cryptocurrencies, digital assets, hedge funds, private equity, and private debt.
Finsum: The alternative assets space is expected to heat up in the coming years. One challenge for advisors will be to understand these products and handling an increased workload.
Natixis Investment Managers and CoreData Research conducted a survey of 11,000 investors. One of the most interesting results was that those who were invested in model portfolios were less stressed, had more confidence, and trust in their advisors relative to individuals not invested in a model portfolio.
11% of model portfolio clients felt stress while 23% of non-model portfolio investors were stressed. Similarly, 45% of model portfolio investors felt confident about their finances, compared to 24% of non-model investors. Further, 78% of model portfolio investors saw volatility as an opportunity. In contrast, only 47% of non-model portfolio clients felt the same way.
Only about half of the respondents were invested in a model portfolio despite the benefits. Currently, about 51% of wealth managers and RIAs offer third-party model portfolios. However, it does present an opportunity for advisors as it frees up more time for financial planning, client service, and prospecting.
Ronnie Colvin, the founder of Fractional Planner, said “Model portfolios make life easier for the advisor because the allocation percentages and the investments in the portfolio are predetermined. So the advisor doesn’t have to go and scour the market for various investments to fill a target allocation.” He added that model portfolios can help with managing risk while also leading to a more customized experience given that there are model portfolios optimized for tax efficiency, sustainability, income, and alternatives.
Finsum: Model portfolios offer certain advantages for clients and advisors according to a survey of investors. These include increased levels of confidence, less stress, and more trust in their advisors.
Direct indexing is seeing a surge in popularity as it appeals to many investors due to its tax benefits and customization abilities while still offering low costs and diversification. Hearts & Wallets conducted a focus group in 3 cities across the US with investors to get their thoughts on the emerging strategy.
Direct indexing is essentially a variant of traditional index investing through low-cost ETFs or mutual funds. However, the major difference is that investors replicate the index within a separately managed account. This means that they own the actual constituents of the index which means that there are additional opportunities for tax-loss harvesting and personalization.
The focus groups were overall very favorable to the concept and more so than in previous years. Respondents seemed to be most attracted to its potential tax savings. In contrast, many were less enthused about customization given that it added a layer of complexity and seemed time-consuming. A small minority did appreciate the option of being able to avoid companies they don’t like.
Another interesting finding from the focus group is that it’s appealing to investors with less assets as well as high net-worth investors specifically for its tax savings. According to the firm, two-thirds is in taxable accounts, and this continues to grow at a faster pace than money in nontaxable accounts. Thus, advisors are likely to have the most success by stressing this benefit of the strategy.
Finsum: Hearts & Wallet conducted a focus group of investors in 3 cities about direct indexing. It revealed that investors were most receptive to the strategy’s tax benefits.
Entering 2024, active fixed income investors are grappling with a unique mix of risks and opportunities given recent developments in inflation, yields, and rates. Insight Investment collected thoughts from BNY Mellon’s fixed income portfolio managers to get their thoughts on the coming year.
Adam Whiteley, the portfolio manager of the BNY Mellon Global Credit Fund, sees a continuation of 2023 trends in credit markets in 2024. He believes developed economies will avoid a recession. However, the major focus is on determining where markets are in the credit cycle. This will have implications for identifying risks and the best sectors within the fixed income universe.
The portfolio managers of the BNY Mellon Global Short-Dated High Yield Bond Fund have a positive bias for high-yield and short-duration debt. Yet, they believe that investors will have to take credit analysis and cash flow modeling more seriously, given they expect a slight increase in the default rate. Overall, they still see the high-yield debt market as being stable and strong despite these risks due to better credit quality and strong balance sheets.
In terms of emerging market (EM) debt, the firm has a cautious outlook in the near-term despite more upside for EMs. The biggest variable is likely to be developed market and economic performance. EM corporates tend to have strong balance sheets so are well positioned for any slowdown.
Finsum: BNY’s active fixed income managers shared their thoughts and outlook for 2024. Overall, they see some risks in the coming year, but the overall market remains in a good place.
AllianceBernstein launched 4 new fixed income ETFs. With these new issues, AllianceBernstein now has 7 active fixed income ETFs and a total of 12 ETFs. The firm entered the ETF market in 2022 with the Ultra Short Income ETF and the Tax-Aware Short Duration ETFs. These now have assets of $587 million and $290 million, respectively.
Two of the new ETFs - the Tax-Aware Intermediate Municipal and Tax-Aware Long Municipal - invest primarily in municipal bonds and have a 28-basis points expense ratio. Its other fixed income ETF launches are the Corporate Bond ETF and the Core Plus Bond ETF. The Corporate Bond ETF invests primarily in US dollar-denominated corporate debt issued by US and foreign companies. The Core Plus Bond ETF will invest primarily in corporate bonds and mortgage and asset-backed securities. These ETFs have an expense ratio of 30 and 33 basis points, respectively.
As of December 1, active fixed income ETFs had a total of $169.8 billion in assets and $30.1 billion of net inflows according to Morningstar. In contrast, passive fixed income ETFs had total assets of $1.3 trillion and net inflows of $169.1 billion. The higher ratio of net inflows to assets for active fixed income indicates that the category is making up ground with passive fixed income.
Finsum: AllianceBernstein is launching 4 new active fixed income ETFs. Overall, active fixed income is much smaller than passive fixed income, but the gap is shrinking.