Wealth Management
Direct indexing continues its ascent and is forecast to exceed $1 trillion in assets within the next decade. In essence, direct indexing retains the primary benefits of passive investing while allowing for greater tax efficiency and personalization.
It achieves this by buying the actual components of an index in a separately managed account (SMA). This means that tax losses can be harvested by selling losing positions and reinvesting the proceeds into positions with similar factor scores to ensure that the benchmark continues to be tracked. According to research, direct indexing can boost after-tax returns by 1 to 2% due to these savings. The effect is even more potent in periods with elevated volatility.
Direct indexing also allows for more customization to account for a client’s unique situation. For instance, if an investor has an oversized position in a specific company, that company would not be included in the index, and/or the specific sector could be underweighted. Similarly, if a client is sitting on large, unrealized gains, direct indexing can help reduce the tax burden while helping to construct a more diversified portfolio.
Direct indexing can be a way for advisors to give clients a strategy that accomplishes their financial goals in the long term, reduces tax payments, and aligns their investments with personal values and/or situation. This can help differentiate advisors in a competitive market and create a richer experience that leads to a stronger and deeper relationship with clients.
Finsum: Direct indexing continues to experience rapid growth as it offers the benefits of passive investing with more tax efficiency and customization. For advisors, it also presents an opportunity.
Spring often marks a period of transition for financial advisors, where opportunities for change abound. While the optimism of the season is commendable, it's important to acknowledge that not everything is within reach. Spring serves as a moment for introspection, especially regarding career paths. For advisors, contemplating a shift to a new firm or business model can be daunting, requiring consideration of clients, staff, and the plethora of options available.
However, the abundance of choices can lead to analysis paralysis, necessitating a focused approach. Advisors should consider their priorities, including client service, autonomy, and income growth, as they navigate the landscape of potential moves. The key questions are: what I might not have that I want going forward, and what do you already possess that you will want to maintain?
From traditional wirehouses to independent broker-dealers and RIA aggregators, each option presents its own set of pros and cons. The evolving RIA aggregator market, with its financial backing and potential for future liquidity events, adds a new dimension to the decision-making process. Ultimately, the complexity of the financial services industry highlights the importance of thorough research and leveraging expertise when considering a career transition.
Finsum: Consider the improvements of advanced technology and flexibility of hybrid work when pondering a transition as well.
Annuity vendors experienced robust performance in Q1, with traditional variable annuity sales rising by 13% year-over-year to $14.5 billion, benefiting from strong equity market performance. Overall annuities amassing $113.5 billion in sales, marking a 21% surge compared to Q1 2023. Although falling slightly short of the Q4 2023 pinnacle, preliminary findings from LIMRA's U.S. Individual Annuity Sales Survey reveal this quarter's sales accounted for 84% of the total U.S. annuity market, the highest first-quarter performance since the 1980s.
Bryan Hodgens, head of LIMRA research, attributed this trend to favorable economic conditions and heightened investor interest in securing retirement income guarantees, foreseeing continued resilience in annuity sales despite potential regulatory and economic challenges ahead. Variable annuities are expected to tack on another 10% through the end of the year.
Fixed-rate deferred annuities reached $48 billion, a 16% increase from Q1 2023, driving over 42% of the total annuity market. Fixed indexed annuity sales hit a record high of $29.3 billion, up by 27% year-over-year. Income annuity sales soared to a quarterly high, with SPIA sales reaching $4 billion and DIA sales reaching $1.1 billion, up by 19% and 35% respectively.
Finsum: Bond rates could be coming down as the Fed starts to ease rates and other retirement vehicles will become more attractive.
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Research from Nuveen's indicates that when it comes to advisor recruiting employers can boost their competitiveness in talent acquisition and retention by optimizing employee benefits. With the growing strain of succession planning for financial advisors this could be a key strategy to attracting talent. Among the recommendations is the expansion of benefit offerings to include family planning, caregiving assistance, and tuition aid, fostering a more diverse and engaged workforce.
By reframing benefits as investments rather than mere expenses, employers can potentially amplify returns on investments while addressing employee needs comprehensively. Clear communication and education about benefits are emphasized as essential for maximizing their impact, as evidenced by the findings that only 30% of employees are highly satisfied with their retirement plans.
Furthermore, disparities in benefit satisfaction and confidence in retirement prospects were observed across racial and generational lines, underscoring the need for tailored approaches. In conclusion, by aligning benefits with the diverse needs of employees, employers can drive productivity, efficiency, and overall workforce satisfaction, crucial elements in succession planning for advisors.
Finsum: The bottom line is no longer the bottom line when it comes to attracting new talent in the advisor space and benefits could offer a needed boost to recruiting.
There is a subtle distinction between fee-based and fee-only advisors. Fee-only advisors exclusively offer financial advice but don’t sell any products with commissions. Fee-based advisors also mainly offer financial advice, but they may also sell other non-investment products with commissions, like insurance. This means that they cannot market themselves as being ‘fee-only’.
Many advisors are moving to these models due to their simplicity, while there has been an increase in regulations around the fiduciary standard. In fact, the industry as a whole is seeing fewer broker-dealer accounts and growth in investment-advisory accounts. As a result, many products can now be bought in investment-advisory accounts without a commission, such as annuities and alternative investments.
An important consideration for an advisor going independent is responsibility for compliance. This requires registering with the state regulator or the SEC if there are more than $100 million in assets. It also means responding to regulatory inquiries, developing a compliance program, and having a system to ensure compliance.
This additional burden highlights the challenge of running an independent shop. Another is that there is less time for clients, especially during the initial stages. Even afterwards, the additional responsibilities will lead to less time and energy for client service, prospecting, marketing, etc. By choosing a fee-only or fee-based model, advisors can have less of a regulatory burden.
Finsum: Many advisors are moving towards a fee-only or fee-based model. The biggest reason is that it simplifies and reduces the compliance demands for advisors.
In Q1, inflows into active fixed income ETFs exceeded inflows into passive ETFs at $90 billion vs. $69 billion. This is a remarkable change from last year, when active fixed income ETFs had net inflows of $19 billion vs. $279 billion for passive bond ETFs.
Two major factors behind this development are an increase in uncertainty about the economy and monetary policy and yields above 5% for some of the most popular offerings. According to Ryan Murphy, the head of fixed income business development at Capital Group, this is the beginning of “a longer multi-quarter and potentially multi-year trend out of cash. Investors are getting the best compensation on fixed income in 20 years.”
Flows could accelerate into bond funds as there is $6 trillion in money market funds once the Fed actually starts cutting rates. Yet, the current ‘wait and see’ period is challenging for fixed-income investors, but it’s an opportune moment for active strategies given opportunities to find distortions in prices and credit quality. Stephen Bartolini, portfolio manager at T. Rowe, notes, “The ability to not just blindly buy the index but be smarter and choose around security selection is critical at the moment.”
Finsum: Active fixed income inflows were greater than inflows into passive fixed income ETFs. It’s a result of attractive yields and heightened uncertainty about the economy and monetary policy.