Direct indexing, increasingly popular among investors, particularly benefits those with concentrated company stock positions by allowing them to replicate index performance while retaining control over individual securities. 

This strategy, once reserved for the ultra-wealthy, has become accessible and affordable for investors at all levels due to recent technological advancements. Through customization based on preferences and goals, direct indexing offers diversification and risk management, crucial for those with concentrated stock holdings. 

Tax efficiency through strategies like tax-loss harvesting further enhances its appeal, maximizing future value potential for investors. With its ability to reduce risk and enhance performance, direct indexing presents a compelling option for investors looking to protect and grow their assets.

Finsum: It used to be infeasible to use direct indexing, but technology improvements are giving smaller investors the edges in tax and diversification that was reserved for the ultra wealthy.

Boston-based wealth management firm NDVR has introduced a cutting-edge solution allowing financial advisors to efficiently manage and optimize client portfolios. The updated NDVR Portfolio Lab streamlines portfolio construction and management, catering to RIAs, family offices, and high-net-worth individuals. 

Through advanced technology, advisors can tailor investment strategies and asset allocations to meet each client's unique needs and goals, while also providing outcome forecasting for more personalized portfolio adjustments. The platform's household wealth optimization feature enables the creation of diversified portfolios across various account types with automatic deployment, alongside capabilities for optimizing tax-advantaged account distributions and providing actionable insights through "what-if" scenarios. 

NDVR offers a range of strategies, including custom indexing and tax-advantaged fixed income solutions, aiming to empower advisors to enhance client outcomes and foster long-term relationships with innovative portfolio solutions.

Finsum: Tailoring solutions that meet clients’ needs will allow for better portfolio optimization and construction.

Human capital is the ability to use your skills and experience to generate income. Younger people have ample time to improve their human capital and earn paychecks to fund their lifestyle. However, as we age, the time and opportunities we have to develop and utilize our human capital decline.

People know that if they suffer an investment loss early in their career, they can make up for that loss by working longer or searching for a higher-paying job. Yet, this ability decreases as we near retirement. Whether we realize it or not, declining human capital makes us less risk-tolerant with our financial capital.

For retirees, most, if not all, of their income must come from their portfolio rather than paychecks, which often causes them to be overly protective of their financial capital and invest it more conservatively than they need to.

One solution to helping them take more investment risk while still feeling that their financial capital is protected is a fixed indexed annuity. These products typically provide downside protection, a steady income, and participation in a portion of the market gains of the underlying equity index.

Finsum: As human capital decreases, investors become more protective of their financial assets, but that doesn’t mean they can’t participate in equity growth. Find out how in this article.

Growth has consistently outperformed value since the Great Recession. For a while, this was attributed to the Fed’s dovish policies, however this has now continued even during this period of substantially higher rates. 

There are some indications that investors should consider rebalancing between value and growth to maintain diversification, since they may be overexposed following growth’s significant outperformance over the past year. In reality, the opposite is happening as inflows are heavily skewed towards technology. 

Over the past year, net inflows into technology ETFs amounted to $18 billion which is nearly equivalent to net outflows in all other sector ETFs. This is also exacerbated by the massive size of the largest 7 technology companies which have become dominant in market-cap weighted indices. 

Another reason to consider value is that it would likely outperform in adverse market conditions given lower multiples and less froth. This could be a prudent choice for investors who are on the sidelines but wary of risks like a recession or inflation. 

Additionally, value tends to do well following periods of froth in markets. For instance, value outperformed in the years following the bursting of the dotcom bubble and the frenzy in equity markets during the pandemic. If valuations revert to the mean, then it could also set the stage for a value renaissance. During these periods, the best performing stocks tend to produce high levels of free cash flow relative to their market caps while maintaining strong balance sheets. 

Finsum: Value underperformed growth by a significant degree over the past year, continuing the prevailing trend of the last decade. Here’s why investors should consider increasing exposure to value ETFs. 

Emerging market bonds are offering a compelling opportunity for investors to lock in attractive yields while also having the potential for price appreciation. While there are many ways for investors to get exposure, the Vanguard Emerging Markets Government Bond ETF (VWOB) is one of the most liquid and diversified options. It currently pays a yield of 6.8% with an expense ratio of 0.20% and tracks the Bloomberg USD Emerging Markets Government RIC Capped Index.

Investing in emerging markets certainly means more risk due to lower credit quality, however the fundamentals are supportive of continued strong performance in 2024, while macro trends are favorable. JPMorgan estimates that emerging market economies will expand 3.9% this year, outpacing the 2.9% growth rate of developed market economies. It sees lower inflationary pressures due to weaker commodity prices which means that emerging market central banks should be able to cut rates, generating a tailwind for emerging market debt.  

In 2023, emerging market bonds were up 11%. JPMorgan is forecasting that the category should also have double-digit returns in 2024. It believes the major risk to this outlook is inflation not falling as expected which limits the ability of central banks to cut rates, especially since the market has already priced in modest easing. 

Finsum: Emerging market debt has major upside for 2024 due to attractive yields, strong fundamentals, and expectations that interest rates will be lowered. 

In 2023, despite upheaval in the banking sector particular with the key industry figure First republic, advisor recruiting remained robust, indicating resilience in the financial advisory industry. 

The tumultuous environment in banks likely spurred advisors to seek stability and growth opportunities elsewhere. This trend is expected to continue in the current year, with more advisors exploring moves to firms offering better support and prospects for their practices. 

The allure of independence and the ability to provide personalized service to clients continue to drive advisors away from traditional banking institutions. Firms that prioritize advisor support and flexibility are likely to attract a significant share of talent in the upcoming months. Amidst ongoing industry shifts, the importance of robust support systems and adaptable business models cannot be overstated for both advisors and the firms competing to recruit them.

Finsum: Advisors are making changes in 2024 mirroring the flexibility desired in many other job categories. 

Alternative investing was ascendant following 2022 when both stocks and bonds were down double-digits. The asset class proved its worth as it delivered positive returns while reducing portfolio volatility. 

2023 has followed a different script as the S&P 500 finished the year at new all-time highs, gaining 24%. Bonds also finished the year with healthy gains while continuing to provide attractive levels of income for investors.

Yet, there are no indications that demand for alternative assets is eroding. In fact, many wealth managers are now recommending an allocation of between 15% and 25%. According to Paul Camhi, a senior financial advisor at The Wealth Alliance, “Even after a great 2023 for stocks and bonds, we still believe that owning alternative investments as part of a properly diversified portfolio makes sense. We include these strategies as part of our strategic, long-term allocation, not as tactical short-term investments.”

Additionally, a survey of advisors by iCapital revealed that 95% plan to increase or maintain current levels of exposure. The survey also showed that 60% of advisors expect alternatives to outperform public markets this year. Within alternatives, private credit has seen the largest share of inflows. Buffered ETFs are also increasingly popular, especially for retired investors as they provide protection during periods of elevated volatility while still providing upside exposure during bull markets. 

Finsum: Alternative investments continue to see healthy inflows despite the strong performance of equities and bonds. Many now see continued benefits as it provides differentiated returns and diversification to portfolios.

Last week, the Nasdaq made an all-time high pushing past its previous highs from January 2022. This was before the Federal Reserve embarked on an aggressive campaign of rate hikes to curb inflation. In one respect, the tech-heavy Nasdaq is playing catch-up with the S&P 500 which has been setting new record highs over the last couple of months and is now more than 10% above its January 2022 levels.

While a major component of these advances is due to the strength in the 7 largest technology stocks and frenzy around the AI boom, it’s worth noting that the equal-weighted indices for the Nasdaq and S&P 500 also made new, all-time highs as well. It’s an indication that the bull market is expanding in terms of participation. It also leads to the conclusion that the market is strong from a bottom-up perspective as well.

Another way to assess the market’s strength from a bottom-up perspective is corporate earnings. With Q4 earnings season nearly in the books, it’s clear that earnings remain robust despite a host of macro headwinds. So far, 97% of S&P 500 companies have reported. 73% topped earnings expectations, while 64% exceeded revenue estimates. Overall, earnings were up 4% compared to last year, marking the second consecutive quarter of earnings growth, validating the bullishness of investors. 

Finsum: The stock market is making all-time highs consistently in 2024. The strength goes beyond the ascendant tech sector as equal-weighted indices are hitting new highs, while corporate earnings continue to grow despite an array of headwinds. 

While portfolio construction is crucial for achieving client investment goals, it's merely one facet of a successful financial advisor-client relationship. A deeper understanding of the client's life circumstances and how their investment objectives fit into their overall financial picture is equally important for fostering trust and long-term engagement.

Time constraints often lead advisors to outsource portfolio construction, allowing them to dedicate more time to relationship building. Delegating this task can prove to be a win-win for both parties. The client gets professional investment management from an entity whose sole job it is to maintain their portfolio. And the advisor has more time to be there for their clients when they truly need them.

However, even with outsourcing, advisors must understand the client's portfolio construction and ongoing management comprehensively. Overreliance on outsourced services can lead to losing track of the intricate details of the investment process.

Ultimately, the client relies on the advisor to bridge the knowledge gap between their financial goals and the details of portfolio implementation. By remaining knowledgeable and engaged, advisors can effectively represent their client's best interests and build a robust and enduring partnership.

Finsum: Advisors outsourcing portfolio construction benefit from more time to build client relationships, but they still need to keep up with the details of the investment management of client accounts. 

It’s a simple truth: the more you do something, the better you’ll become at that task. For financial advisors, communicating with clients consistently and confidently is one of those skills that is essential to a healthy practice.

Let’s apply this concept to explaining to a client their investment portfolio: how it was constructed, how it’s maintained, and why it has the components it does. Imagine two scenarios: one where you’ve built customized portfolios for each of your clients and another where you’ve implemented a set of model portfolios across your book of business. In which scenario would you feel more confident explaining each approach to each client?

The point is this: model portfolios offer more than just operational efficiency. They provide advisors with the benefit of consistent communication. By implementing a defined set of investment strategies across your client base, you can polish your investment story into a clear and consistent narrative.

This consistency translates to proficiency and, ultimately, confidence. You become adept at articulating its nuances and rationale by repeatedly explaining a unified investment approach. And the more practiced you become at telling your story, the more confidence you convey to your clients.

Finsum: Find out how model portfolios can help you tell your clients a consistent and compelling investment story, building trust and confidence.