Displaying items by tag: risk

One of the most important decisions that retirees will make is their Social Security claiming date. It’s only made once, and it will have long-term repercussions. Therefore, it’s crucial to make the best decision. 

There are single-premium, non-variable fixed or indexed annuities that are designed to offer retirees income at one level during the first benefit period and then at a different level during the second benefit period. 

This can help retirees push back their claiming date so that they can receive a higher level of benefits. The initially higher level of income can last up to 8 years. The median premium is $100,000, with an average of $155,000. 

These offerings have been popular with middle-income clients and even some wealthier clients, especially among workers in government jobs who can retire at earlier ages. Additionally, these products are also amenable to investors with less tolerance for risk who value steady income over asset appreciation. One obstacle to greater adoption of these types of annuities is that it’s challenging for advisors and agents to explain the benefits of pushing back the Social Security claiming date. 

Finsum: Annuities can help retirees by pushing back their Social Security claiming date. One annuity product is increasingly popular as it comes with a higher level of income in the upfront years to help bridge the gap.

Direct indexing has witnessed a meteoric rise, with investments in direct indexes eclipsing $260 billion by the end of 2022. This method, involving the investment in individual securities comprising an index rather than the index fund itself, offers a distinctive set of advantages. 

It not only aims to closely replicate index performance but also holds the potential to significantly enhance tax efficiency. Furthermore, direct indexing provides a level of customization surpassing conventional index funds, making it increasingly attractive for those seeking tailored investment approaches. Direct indexing is gaining momentum, particularly due to its ability to mitigate risk concentration. 

Through this strategy, investors can manage individual components for tax purposes more effectively. By liquidating underperforming securities to offset taxable gains elsewhere in their portfolio, investors can potentially reduce tax liabilities and enhance tax efficiency. However, it's essential to navigate this strategy within the confines of the wash sale rule, which prohibits claiming a tax deduction for a sold security if a substantially identical one is purchased within 30 days before or after the sale.

Finsum: More needs to be said about direct indexing reducing risk in the portfolio by selecting and deselecting stocks based on their risk profile. 

Over the last few years, Wall Street banks have been losing market share to private lenders. Recently, they have been looking to win back business by serving as intermediaries between private lenders and companies. 

Previously, leveraged buyouts were financed by a combination of high-yield bonds and/or leveraged loans, arranged by a major bank or group of banks. And this accounted for nearly a third of investment banking revenue on Wall Street.

However, private lenders have muscled in on this line of business, forcing banks to adopt and come up with their own strategies to remain viable. Banks like Wells Fargo and Barclays have partnered with private credit funds to source deals, advise lenders, and help companies navigate the right steps to secure financing. 

Banks also have preexisting relationships with many privately held companies. According to Barclays, private credit funds have $430 billion in uninvested capital. Since the 2008 financial crisis, banks have had more stringent capital requirements. This means it is more desirable to advise and provide services to borrowers rather than take on additional balance sheet risk. 

It’s also helping Wall Street banks get through a dry period for deals due to high interest rates, impeding M&A activity. They are able to collect fees from lenders and borrowers. Typically, direct lenders will split fees with the banks that originate the deal, between 25 and 75 basis points. 

Finsum: As private lending has displaced a major chunk of Wall Street’s investment banking revenue, banks are adapting by serving as intermediaries for private lenders and borrowers.  

1. Rowe Price made an aggressive bet in 2020 by increasing exposure to equities in its target return funds, as equities were crashing due to the pandemic. At the time, the asset manager was criticized for this move; however, it’s paid off in spades, with the S&P 500 hitting new, all-time highs earlier this month. As a result of its success, T. Rowe Price now has the third-most assets in terms of target-date funds behind Fidelity and Vanguard. 

Further, T. Rowe Price has remained up to 98% invested in its target-date funds, which is higher than its peers. According to an analysis from Cerulli, retirees hold up to 55% of their portfolio in equities at T. Rowe Price. Compare this to Fidelity and Vanguard, where equity allocations are 38% and 30%, respectively. 

Despite its recent success, some continue to believe that T. Rowe Price’s target-date funds are taking on too much equity risk. According to Ron Surz, the president of Target Date Solutions, “80% of assets should be risk-free at retirement. Virtually all target date funds are way riskier than the theory they follow." However, some believe that higher allocations to equities are necessary given that lifespans are increasing, which increases the risk that retirees could outlive their savings. 

Finsum: T. Rowe Price is pursuing a more aggressive strategy than its peers when it comes to equity allocations in its target-date funds. So far, it’s worked well, but there are some skeptics.    

Buffered ETFs are seeing explosive growth. The category had less than $200 million in assets and now has $36.7 billion. The major appeal is that they allow investors to remain fully invested while offering downside protection. 

However, they do tend to have higher costs and may not be appropriate for many investors. Buffered ETFs follow a benchmark while also using stock options to limit downside risk and capping gains on the upside. 

These products are modeled after structured notes, which have proven to be popular among high net worth and institutional investors. Like structured notes, buffered ETFs follow some sort of lifecycle, which means that advisors and investors have to consider market conditions when making a decision. This means they are not appropriate for rebalancing or dollar cost averaging strategies. An important consideration is the start date of the buffer ETF and the performance of the underlying index since the start date, as this could affect the value and desirability of the buffer.

According to Jeff Schwartz, president at the investment analytics firm Markov Processes International, “There is a lot to understand with buffer ETFs, and the history of structured products shows that both advisors and investors often do not fully understand the nuance of these vehicles." 

Finsum: Buffered ETFs are experiencing a surge in growth. The upside is that they allow investors to remain fully invested while capping the downside. However, there are also some downsides to consider.