Displaying items by tag: clients

Most advisors and investors are familiar with the benefits of diversification when it comes to asset classes. However, there‘s less understanding about the importance of risk factor diversification. In ETF Trends, Scott Welch CFA of Wisdom Tree Investments shares the importance of this concept, and why advisors need to intuitively understand it.

There are some parallels between asset class and risk factor performance and diversification. Both are nearly impossible to forecast especially on shorter timeframes. But over a longer period of time, certain conjectures can be made with confidence. For instance, there tends to be mean-reversion over longer time periods. 

Last year exemplified the risks of not being sufficiently diversified in terms of factor risk, growth was crushed, while value outperformed for the first time in decades. Yet, this has nearly completely inverted in the first-half of 2023 due to the rollicking bull market in stocks linked to artificial intelligence. Thus, this demonstrates the importance of factor diversification and rebalancing, similar to what is done for asset classes. 

Currently, one risk for investors overexposed to growth factors is valuations that are historically elevated. In contrast, value factor stocks are quite cheap from an absolute and relative basis. Thus, it could favor some rotation from growth to value once again. 

Finsum: Asset class diversification is an elementary part of portfolio management and construction. Another important concept is risk factor diversification.

Until very recently, direct indexing was simply not an option for the vast majority of investors.  This is because the strategy is quite tedious to execute and could become cost prohibitive in the previous era when commission-free trading and fractional shares were not available.

This is because the strategy requires creating an actual index within an investors’ portfolio. It’s now feasible and quite easy to do due to technological advances. Additionally, the real alpha in the strategy is created through routine tax loss harvesting. 

This is an automated process where the portfolio is regularly scanned to sell off losing positions. Then, these losses can be used to offset capital gains elsewhere in the portfolio. Proceeds from the sold positions are then reinvested into stocks with similar factor scores to the ones that are sold in order to ensure integrity with the underlying index even if the holdings temporarily deviate. 

Clearly, this strategy wouldn’t be tenable without cheap and/or free trading and fractional shares for smaller sums. In the previous era, the high volume of trades would offset any additional returns. Without fractional trading, smaller sums also would not be able to track the underlying index and not be able to invest in higher-priced stocks that comprise large portions of indices. 

Finsum: Direct indexing’s proliferation is only possible due to 2 specific fintech breakthroughs - commission-free trading and fractional shares. 

LPL continues to add advisors with its recent addition of 4 advisors from Edward Jones who managed $410 million in assets and a Merril Lynch broker, J. Brendan Wood, with $130 million in client assets. 

Wood is launching a solo practice - Wood Wealth Management - through LPL’s employee channel, Linsco. Previously, he had been ranked as one of the top #100 advisors in Massachusetts and worked as part of Foundation Management Group which managed $654 million in assets. 

Linsco was created to appeal to wirehouse brokers who want more independence and want to build a business. It gives more flexibility but doesn’t burden advisors with administrative tasks. In June, another Merril broker with $315 million in assets moved to Linsco as well as the channel now counts 100 advisors in total.

In addition to Merril Lynch, LPL has had success in luring brokers from Edward Jones. 4 brokers and $400 million in assets moved to LPL’s Strategic Wealth Services unit and will operate as Omnia Wealth Group in Elkhorn, Wisconsin. Strategic Wealth Services offers support for marketing, compliance, and administrative tasks for a fee. 

Prior to the latest move, 5 Edward Jones brokers had moved to LPL already this year. LPL is now the largest independent broker-dealer with 21,000 advisors while Edwards Jones is a full-service brokerage with 18,900 brokers. 

Finsum: LPL Financial is the largest independent broker-dealer, and it continues to lure brokers from more established firms like Merril Lynch and Edwards Jones.

In a piece for AdvisorHub, advisor transition company - 3xEquity - shared some lessons for advisors from Twitter’s rebrand. While Twitter has been on a strange journey over the last few years and is now known as X, there are some important takeaways for advisors who are starting with a new firm. 

For one, the most important task is to introduce the new brand to existing clients and stakeholders. With this, it’s important to be consistent with the new branding to ensure there is no confusion among your clients. 

For advisors who are considering moving to a new firm, they should ensure that the new firm’s transition team is sufficient enough to handle the workload in order to ease the move. Additionally, an advisors’ time should be spent communicating with clients rather than handling paperwork or back office functions. 

Re-branding is also another consideration for advisors who are selling their firm, especially as many advisors now are choosing a hybrid phased selling model. With this model, advisors may work as employees and are slowly phased out of the new firm to maximize client retention. This can also lead to confusion among clients so it requires constant communication about the transition process.

Finsum: The transition process can be difficult for advisors who are moving to a new firm. Here are some lessons from Twitter’s re-branding for advisors on what to do and what not to do.

As the summer ends and fall rolls around, it’s natural to expect a surge in market volatility. This is even more relevant this year given that stocks have enjoyed a period of low volatility and gently rising prices throughout most of the summer despite a variety of challenges such as rising rates, stubborn inflation, and pockets of weakness in the economy.

Further, history shows that periods of sharp increase in rates can often trigger stress in parts of the financial system that can have knock-on effects in the real economy. The most recent example is the crisis in regional banks due to an inverted yield curve which could have negative effects on the flow of credit in the economy.

For ETFTrends, Ben Hernandez discusses how direct indexing benefits from these surges in volatility. Direct indexing differs from traditional investing in funds as it allows investors to re-create an index in their portfolio. 

This allows tax losses to be harvested as losing positions can be sold with the proceeds re-invested into stocks with similar factor scores. Then, these losses can be used to offset gains in other parts of the portfolio, leading to a lower tax bill. 

Finsum: Direct indexing has many benefits but the most impactful in terms of alpha is its ability to generate tax savings for clients during volatile markets.