Wealth Management
In March, inflows into active ETFs reached a new monthly record of $26 billion. It’s somewhat counterintuitive given the strong performance of global equity markets, which tend to favor flows into passive funds.
For the first quarter, total inflows into active ETFs reached $64 billion, a new quarterly record. YTD, 32% of ETF inflows have been into active ETFs, despite accounting for only 7% of total ETF assets. Based on the current pace, active ETF inflows should exceed $200 billion this year, a more than 50% increase from last year’s record of $130 billion.
A key factor behind the growth of active ETFs is a desire to reduce exposure to mega cap tech stocks, which account for an increasingly large share of popular market-cap, weighted indices. And this has only been exacerbated in Q1, with these stocks tacking on double-digit gains.
Additionally, there are concerns that financial markets could get choppier given uncertainty around monetary policy and the economy. This is leading many market watchers to believe that we are shifting to a new market environment, which should favor lagging stocks and stock-picking strategies over passively holding indices. According to Noah Damsky of Marina Wealth Advisors, “We think a more active approach is appropriate as we anticipate more choppy markets with upcoming rate cuts by the Fed. We’re making active tilts in our portfolio to laggards such as health care, and over time we anticipate increasing exposure to utilities as rate cuts draw nearer.”
Finsum: Inflows into active ETFs reached new records in March and the first quarter. Active ETFs account for only 7% of total assets. So, it’s impressive and telling that 32% of ETF inflows were into active ETFs in Q1.
J.P. Morgan Advisors is empowering brokers with increased autonomy over unified managed accounts (UMAs), enabling independent investment selection without explicit client approval, in line with industry shifts.
Marc Turansky, head of advisory programs, highlights this as a response to evolving standards and client preferences for advisor autonomy. Similarly, Janney Montgomery Scott introduces full discretion options for UMAs, echoing broader industry trends. Janney's advisory accounts hold $73 billion, while J.P. Morgan Securities manages $212 billion.
UMAs have surged to $2.1 trillion in client assets industry-wide, outpacing other advisory programs. J.P. Morgan Wealth Management, says this change reflects an evolving industry standard and caters to clients who trust their advisors' understanding of their financial objectives, thus comfortable delegating decision-making.
Finsum: UMAs are giving advisors more flexibility than other accounts, which can translate to meeting clients needs more effectively.
When it comes to recruiting deals, there is much to analyze and understand beyond the upfront figure. In fact, how the deal is structured can be even more important in the long term, as this will dictate longer-term outcomes like growth, portability, succession planning, and compensation.
Typically, the upfront payment is calculated based on 125 to 175% of trailing 12-month production. This portion is guaranteed and taxed at lower rates, so it’s understandable why so much attention is paid to this figure.
Many firms still offer back-end bonuses, which are generally around 25 to 50% of trailing 12-month production, although these are being phased out. These bonuses are only paid out if advisors successfully transition and achieve pre-defined metrics. Unvested deferred compensation replacement is another element becoming less common as this is increasingly folded into the overall package. However, this represents the amount that an advisor would lose out on by switching firms.
Finally, many deals will also include a ‘sunset program’ so that a retiring advisor can cash out of the business at market value. With this, there are many factors to consider, such as terms, requirements, and financing. For younger advisors, this might be less relevant, but it could be a deciding factor for those closer to the end of their careers.
Finsum: There are many components of a recruiting deal that go beyond the headline amount. In fact, the structure of a deal can be more important when it comes to making the right choice.
More...
Annuity sales in 2023 were up 22% compared to the previous year, reaching $355.4 billion. The biggest contributor to this growth was the independent sales channel, which now accounts for 40.6% of all annuities sold, totaling $156.2 billion. In 2022, independent agents and brokers accounted for 38.7% of sales. They also accounted for 74% of all fixed indexed annuity sales.
The growth in total annuity sales is due to rising interest rates and the large number of Baby Boomers who are entering or nearing retirement. In terms of categories, income annuities saw the largest increase in sales, at 45% for single premium immediate annuities and a 97% increase for deferred income annuities.
While most categories saw growth, traditional variable annuities were an exception, as sales dropped by 17%. In contrast, registered index-linked annuities displaced some of these sales as the category had a 15% jump in sales. These annuities offer investors downside protection and limited upside and total $47.4 billion in sales in 2023.
Keith Golembiewski, the head of annuity research at LIMRA, believes that RIAs are a source of future growth for variable annuity sales. These annuities offer upside potential and allow for deferral of taxes, making them ideal for older clients. Currently, RIAs are a small but growing source of annuity sales.
Finsum: Annuity sales hit new record highs in 2023. Some major reasons are an uncertain economic outlook, Baby Boomers nearing retirement, and high interest rates.
In the face of escalating inflation, Americans are increasingly longing for the retirement security once provided by pensions, a sentiment reflected in a survey revealing widespread concerns about the reliability of existing retirement plans such as 401(k)s.
This shift away from traditional pensions stems from their expense and risk for companies, leading to the widespread adoption of defined contribution plans like 401(k)s, which place the onus of retirement planning on employees. However, the recent surge in inflation has exposed the vulnerabilities of 401(k)s, particularly for older adults nearing retirement.
To address this, there's a growing interest in annuities, which offer a guaranteed income stream and can be seen as a modern iteration of traditional pensions. Annuities, available in various forms including fixed and variable, provide retirees with a way to insure their income stream, offering stability in an uncertain financial landscape and potentially bridging the gap left by the decline of pensions and shortcomings of 401(k)s.
Finsum: Annuities can offer a more secure return and replace the void left by pensions for many Americans.
2024 has proven to be a much more challenging year for financial markets than 2023. Entering the year, the consensus was that the economy would continue to weaken, inflation would keep trending lower, and the Fed would be proactive and aggressive in cutting rates.
Clearly, this has not happened. Amid this new paradigm, allocators are understandably looking to make appropriate adjustments to portfolios. Here’s why they should consider increasing exposure to active strategies.
With fixed income, active investing can allow for precise exposure to a specific theme. For instance, those who don’t believe that inflation will keep trending lower may want to have higher exposure to short-duration debt. Another benefit is that active managers are able to quickly change strategies depending on how events develop, which makes them particularly useful in the current environment. This means that holdings can be optimized for the current environment of ‘higher for longer, but then managers can quickly pivot once the Fed actually starts cutting rates.
Active strategies can also be useful in other asset classes, such as international equities, which currently appeal to many investors due to favorable valuations relative to US equities. With active management, there is more focus on bottom-up, fundamental-focused analysis, which can result in more alpha in less efficient markets. Further, it can also lead to more diversification and risk management than is typically found with passive investing.
Finsum: The first quarter of 2024 has had several unexpected developments. Here’s why allocators should consider active management to navigate this tricky environment.