Bonds: Total Market
Over the last year, there has been an increase in the accessibility and availability of direct indexing solutions. Still, the category continues to be dominated by high net worth or ultra high net worth investors. According to Anton Honikman, the CEO of MyVest, there is about $400 billion managed by direct indexing strategies. He anticipates that the next stage of growth for direct indexing will depend on younger and less affluent investors.
Initially, the primary advantage of direct indexing was that it allowed investors to extract tax alpha. He forecasts that as direct indexing becomes democratized over the next few years, providers and advisors will have to make some adjustments.
He notes that custodians will have to offer fractional share support for the technology to work for smaller investors, as implemented by Schwab and Fidelity, which now offer direct indexing to investors with lower minimums.
Typically, there is some premium involved with direct indexing over investing in low-cost ETFs. Given the increase in ETF options over the last couple of years, he believes that it marginally erodes the use case of direct indexing for many investors. Over the longer term, he sees the direct indexing premium compressing in order to remain viable vs. a portfolio of low-cost, targeted ETFs. Further, he believes that the next wave of direct indexing will be driven by younger investors who want to align their portfolios with their values rather than optimize their tax situation.
Finsum: At one time, direct indexing was only available to high or ultra high net worth investors. As it becomes democratized, here are some considerations for providers and advisors.
Unlike mutual funds or ETFs, personalized indexing permits harvesting losses at the security level, offering more opportunities for ultra-high-net-worth investors to capture additional tax advantages. Tax-loss harvesting involves selling an investment at a loss and reinvesting the proceeds into another asset, a key benefit of direct indexing.
Direct indexing strategies involve selling stocks below their cost basis and instantly repurchasing correlated replacements to avoid wash-sale rule violations. Since investors own individual stocks in their portfolios, losses can be captured even when the index gains value. DI experts exemplifies this strategy by selling underperforming securities during market gains, using harvested losses to offset capital gains and taxable income up to $3,000 annually, with the option to carry over losses to future years.
Maximizing tax alpha depends on the frequency of portfolio scans for harvesting opportunities, with daily scanning potentially improving after-tax returns by 1% to 2% or more. Commitment to direct indexing underscores its importance in tax-efficient investing.
Finsum: The frequency through which a portfolio can be scanned for tax-loss harvesting is making the case extremely compelling for direct indexing.
Broadridge Financial Solutions, a financial technology infrastructure provider, expects total assets in model portfolios to exceed $11 trillion by the end of 2028. This would represent more than a doubling of assets over the next 5 years from $5.1 trillion at the end of last year. This forecast is slightly more optimistic than Blackrock’s prediction that model portfolio assets will reach $10 trillion over the next 5 years.
Model portfolios are increasingly being utilized by financial advisors as the industry shifts to a greater focus on planning and client service vs. investment management. In addition to freeing up valuable time and resources for advisors, research has also shown that they tend to outperform, especially during volatile markets, and lead to greater client satisfaction.
For asset managers, model portfolios are a source of growth for ETFs. Currently, 63% of model portfolio assets are in equities, with 32% in fixed income. ETFs comprised 51% of assets in model portfolios, compared to 26% for mutual funds. According to Andrew Guillette, Broadridge’s VP of Global Insights, “We expect ETFs to continue to take share from mutual funds inside model portfolios, driven primarily by their attributes as low-cost and tax-efficient portfolio-building blocks.”
Finsum: Broadridge Financial is forecasting that model portfolio assets will more than double over the next 5 years. It’s expected to drive growth for various asset managers’ ETFs and help advisors focus on client service and building their practices.
More...
It’s an opportune time for younger financial advisors. Many older advisors are nearing retirement, and we are on the precipice of a generational wealth transfer from baby boomers to millennials. However, this doesn’t negate the significant challenges and obstacles faced by new advisors, given their high failure rates. Here are three tips from established advisors to increase the odds of success.
According to Timothy Smith, the founder and CEO of Aurora Private Wealth, rookie advisors need to get used to rejection. He believes that advisors need to develop intangible qualities like perseverance, determination, and discipline in order to successfully build a practice. Further, advisors should have a genuine desire to help people feel in control of their financial lives.
Tammy Haygood, a private wealth advisor at RBC, is an advocate for not using jargon and believes that advisors should be able to explain concepts in clear and simple language. This can only be achieved by having a comprehensive understanding of the material and concepts. She also insists that authenticity is key in order to build trust and form long-term relationships with clients.
Nate Lenz, the co-founder and CEO of Concurrent, believes that younger advisors should seek out mentors. He sees financial advice as an ‘apprenticeship’ business. With the right mentor, advisors can quickly become competent and knowledgeable in multiple areas, such as planning, investments, closing deals, and client service. In this vein, he strongly believes that younger advisors should prioritize experience over other factors like compensation.
Finsum: There’s a lot of difficulty and struggle for advisors at the beginning of their careers. Here are some tips from established, successful advisors on how rookie advisors can maximize their chances of success.
Morgan Stanley expanded its ETF lineup with the introduction of the Eaton Vance Total Return Bond ETF (EVTR) and the Eaton Vance Short Duration Municipal Income ETF (EVSM). The bank is joining many of its peers in converting fixed income mutual funds into active fixed income ETFs.
EVTR focuses on seeking total return through diversified investments in fixed-income securities, including corporate, municipal, U.S. government, and asset-backed securities. EVTR is actively managed and has an expense ratio of 0.32%. Its holdings have an average duration of 6.5 years and an average yield of 4.4%.
EVSM aims to provide investors with tax-exempt current income by predominantly investing in municipal securities with a short-term focus. The fund has a net expense ratio of 0.19%. The average duration of its holdings is 1.75 years, with an average yield of 4.7%.
Both funds were originally highly ranked mutual funds, with EVTR's predecessor, MSIFT Core Plus Fixed Income Portfolio, achieving a ten-year track record in the top decile, and EVSM's precursor, the MSIFT Short Duration Municipal Income Portfolio, ranking in the top third of its category over five years.
With these additions, Morgan Stanley now offers 14 ETFs in the U.S. and has more than $1 billion in total assets, despite introducing its first ETF early last year. Like many other asset managers, Morgan Stanley is looking to capitalize on increased demand for ETFs and active fixed-income strategies.
Finsum: Morgan Stanley is joining many of its peers in converting mutual funds into active ETFs with the launch of the Eaton Vance Total Return Bond ETF and the Eaton Vance Short Duration Municipal Income ETF.
Nearly $68 trillion in assets are moving to a younger generations over the next 30 years, wealth management firms catering to high-net-worth individuals (HNWIs) are urged to adapt by integrating digital solutions to complement their bespoke services, rather than replacing them outright.
HNWIs, distinguished by their substantial asset portfolios, require a tailored approach from wealth managers, particularly given their demand for nuanced portfolio guidance across various asset classes, such as real estate and cryptocurrency. While digital tools are reshaping consumer expectations within financial services, HNWIs continue to prioritize the personal touch and customized service that comprehends their unique preferences and financial complexities.
However, there exists a gap in consistently delivering such personalized service, with over half of surveyed HNWIs reporting a lack of proactive support from their providers. Despite the surge in digital engagement during the pandemic, HNW clients still value personalized experiences, indicating a need for wealth managers to strike a balance between digital convenience and maintaining a human touch.
Finsum: Most clients want a mix of digital and personal service which advisors can use to leverage further business.