The last couple of years have been a wild ride for energy markets including developments like oil prices briefly going negative during the pandemic, Saudi Arabia releasing supply to discipline OPEC members, Russia’s invasion of Ukraine, etc. While some volatility and uncertainty is assured given geopolitics, investors in the sector will be rewarded for having a long-term mindset and focus on fundamentals.

This includes being aware of the trends shaping the industry. In terms of oil, it’s clear that supply and demand is trumping geopolitical risk. This is evident as oil prices remain under $80 per barrel despite a large increase in MidEast tensions and the war between Russia and Ukraine continuing. More relevant to price is that production remains plentiful, especially from the US, while demand has been less strong than expected due to weakness from China and Europe. 

Another trend is that M&A should continue in the sector following a slew of deals at the end of last year. Large producers are eager to lock down high-quality properties. Valuations also remain attractive, while companies in the sector have large amounts of cash on the balance sheet following years of capital discipline. 

Finally, investments in renewables will continue despite recent struggles. The IEA is forecasting that 460 gigawatts of renewable energy production will be added. In the US, the EIA sees wind and solar production surpassing coal for the first time. 

Finsum: Oil prices have remained under $80 per barrel despite a slew of geopolitical risks due to robust supply and weaker than expected demand. 

Financial markets have been quite strong over the last few months on the prospects of an economy that continues to defy skeptics and evade a recession, falling inflation, and a dovish Fed. But there are some signs that the market’s ascent is being interrupted by a bout of volatility due to some high-profile earnings misses, a more hawkish than expected FOMC, and flagging momentum in the labor market. Given the uncertainty around the Fed, an upcoming election, and the importance of economic data in the coming months, this volatility is likely to persist.

This volatility is uncomfortable for investors. However, for direct indexing investors, there is a silver lining as volatility leads to opportunities to harvest tax losses. Direct indexing entails reconstructing an index within an account by owning the actual holdings rather than a fund. 

This approach combines the benefits of passive investing - low costs, diversification, and proven performance - with the ability to harvest tax losses that is possible with individual stocks but not by investing in an ETF or mutual fund. Direct indexing platforms will automatically scan portfolios on a regular basis for tax loss harvesting opportunities. These positions are then replaced with positions with similar factor scores to ensure that the index continues to be tracked.

Finsum: There are some signs that the market rally is ending and that the markets could be entering a period of volatility. One advantage of direct indexing is that it is able to harvest tax losses during this period. 

Investing in the right technology has the power to create a more efficient, scalable, and successful practice. The latest disruptive technology is artificial intelligence (AI) which will affect many different parts of a practice and is already impacting specific areas. 

Advisors who are able to effectively leverage AI will see a material and quantifiable impact in terms of generating leads, conversion rates, retention, and reducing time spent on operations and management. Client engagement is an area where advisors are already applying AI to generate positive outcomes and deliver more personalized outreach and services.

Ideally, an advisor would be able to spend hours learning and preparing for a client meeting. In reality, this is not possible given constraints and other responsibilities. However, with AI, an advisor can effectively organize and review all of a clients’ data, including notes from previous conversations, and find insights to deliver a more unique and valuable experience. 

AI can also help sort through all of the data generated by an advisor or practice and find hidden opportunities or potential risks. They can also provide guidance in terms of strategic decisions and long-term planning. It’s recommended to use a specialist AI model for these purposes given that it’s trained in relevant data and adheres to regulatory standards. 

Finsum: AI is the latest disruptive technology that will certainly impact multiple aspects of an advisors’ practice. Here is how it’s already affecting client engagement. 

Stocks were lower, while Treasuries caught a bid following the latest FOMC meeting which was deemed hawkish despite the Fed holding rates as expected. In essence, Chair Powell’s remarks during the press conference made it clear that the central bank is not willing to cut yet.

In response, markets were in a risk-off mood. Fed futures showed that the odds of a rate cut at the next meeting declined from 40% to 36%, while the odds of the first cut happening in May increased to 59% from 54%. 

Overall, the policy statement and Powell’s press conference underscored that the Fed is moving in a more dovish direction, just not as fast as the market’s desired pace. The policy statement expressed that there is a better balance in terms of employment and inflation goals. However, before cutting rates, it wants to see even more progress on the inflation front. In essence, the resilient economy and labor market mean that the Fed has more latitude to continue its battle against inflation before pivoting to support the economy and risk re-igniting inflationary pressures.

Rather than hawkish or dovish, its current stance can be characterized as ‘data-dependent’. Some of the important releases, prior to the March FOMC meeting, will be the January and February employment data and consumer price indexes. 

Finsum: The Fed held rates steady but came out slightly more hawkish than expected. This led to the odds of a rate cut in March slightly dropping, but the bigger takeaway is that the Fed sees inflation and employment risks as being balanced and remains data dependent. 

FINRA and SEC regulators have increased enforcement and oversight of Regulation Best Interest (Reg BI). Recent focus has been on increasing compliance within the sales process. There have been several FINRA actions to punish firms for improper supervision to ensure the fiduciary standard is being followed.

The pace of these actions and enforcement has gradually picked up since the moratorium on enforcement ended. Further, regulators have also made public comments emphasizing the need for more aggressive action. 

In 2023, there were FINRA enforcements following only 8 in 2022. The agency has also started to impose personal fines for sales violations or requiring advisors to pay back a portion of losses. Prior, regulatory agencies would see compensation and damages from the firm rather than individuals. This change in strategy is a reflection that they are trying to deter violations of the fiduciary standard at the individual and firm level.

Looking ahead, comments from SEC and FINRA officials reveal that this is only the beginning. According to FINRA’s acting head of enforcement, Chris Kelly, ‘more and more’ cases involving all four pillars of Reg BI which includes disclosure, care, conflict of interest, and compliance are likely to be filed. 

Finsum: FINRA and SEC regulators are increasing Reg BI enforcement. They are targeting firms for improper sales supervision and punishing brokers for violations.