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It’s often remarked that demographics are destiny. Like most developed countries, the US has an aging population with about 10,000 Americans reaching retirement age every day. And over the next decade, more than 20% of the workforce will reach retirement as well.

The issue is even more stark for the financial advisor industry with the average advisor in the 50s. For advisors in this age group, it’s necessary to start thinking about succession planning for multiple reasons. 

For one, a successful exit requires the same type of planning and intention that an advisor helps clients with in order to reach their financial goals. Second, proper succession planning can ensure that you will maximize the value of your practice when you are ready to retire. Finally, it’s an important signal to prospective and current clients that you are committed to their success even if you may no longer be an active part of it. 

The first step is a continuity plan which details what happens to the practice in the event of a death or disability. The second step is to investigate various options. Recently, a popular option for smaller firms is to sell but then continue to work as an employee for a couple of years to ensure a smooth transition. 

Regardless of what you choose, it’s important to keep your clients updated about succession and continuity plans. Ideally, you can meet with your clients and their new advisor multiple times before the final transition. 

Finsum: The financial advisor industry is approaching a demographic cliff. For a variety of reasons, it’s important for advisors to start succession planning. 


Until a couple of years ago, the standard playbook for any investor looking to secure their retirement was a mix of stocks and bonds. But, this traditional style is being challenged especially as stocks and bonds have fared poorly in today’s world of stubborn inflation and high rates. 


This challenging environment is leading to more interest and demand for alternative investing especially as the asset class provided diversification and healthy returns in 2022 when both stocks and bonds were down double-digits. For Kiplinger’s, Tory Reiss covers the pros and cons of alternative investing for prospective retirees. 


In terms of the drawbacks, Reiss mentions a lack of liquidity which means that prices can drop especially during periods of market volatility especially in less mature markets. Another is that these investments typically have higher fees and costs which can undermine long-term performance. Further, there is less transparency and regulation in the space which means that there is more risk. 


However, there certainly are some positives such as the increase in diversification especially in rising-rate environments which have proven to be headwinds for stocks and bonds. There is also a potential for greater returns while also providing a hedge against inflation. 


Overall, investors should be open to some allocation to alternatives but should understand the risks and conduct proper due diligence especially in newer asset classes with less of a track record and regulatory framework.

Finsum: Alternative investments performed well in 2022 while stocks and bonds both saw steep losses. This is resulting in a surge of interest in the asset class. Here are some pros and cons to consider. 


In a strategy note, Scott Solomon and Quentin Fitzsimmons, the portfolio managers of the Dynamic Global Bond Fund, discuss why active fixed income is the best asset class for the current market environment. Despite recent economic data which indicates that inflation and the economy are both more resilient than previously expected, the pair believe that we are in the midst of a shift from one monetary regime to another.


However, they acknowledge that this is not going to be a smooth process. In fact, they expect a bumpy process especially given investor positioning. But, this uncertainty is what they believe will create opportunities in terms of credit quality and duration. Of course, such opportunities can be taken advantage of better by active fixed income managers rather than passive funds which are tracking benchmarks and unable to invest in securities of varying quality and duration.


Soloman and Fitzsimmons see a new ‘normal’ and expect rates to be structurally higher over the next couple of decades given high levels of debt to GDP in developed countries all over the world. Additionally, they anticipate that the negative correlation between stocks and bonds which prevailed in the years between the 2008 financial crisis and the pandemic is unlikely to return as long as central banks are not actively supporting markets. 

Finsum: Scott Solomon and Quentin Fitzsimmons of T. Rowe Price’s Dynamic Global Bond Fund shared their thinking about why they expect active fixed income to offer the best opportunities in the coming years.

July saw a slowing of inflows into fixed income ETFs, while inflows into equity ETFs ramped higher. $17 billion flowed into bond ETFs which was dwarfed by the $43 billion of inflows into equity ETFs. For the month, the 3 most popular fixed income ETFs were the iShares Core US Aggregate Bond ETF, the Vanguard Total Bond Market ETF, and the iShares 20+Year Treasury Bond ETF. 

This isn’t totally surprising given the poor performance of bonds in recent months due to a surprisingly resilient US economy which is leading to increased odds of more hikes and higher rates for longer and decreased odds of a Fed rate cut and continued cooling of inflation. In contrast, equity markets have been on fire with the S&P 500 now closing in on it's all-time highs from January 2022 while many tech stocks and indices are already at new highs. 

Overall in 2023, the share of inflows has been pretty balanced between fixed income and equity ETFs which is a new development as typically equity ETF inflows dominate. This is largely due to investors wanting to take advantage of higher yields and advisors and institutions becoming more comfortable with fixed income ETFs. 

Finsum: There was a slowdown of inflows into fixed income ETFs in July due to increasing volatility and more uncertainty about the Fed’s rate hike path.

For Vettafi’s ETF Database, James Comtois discusses the democratization of direct indexing due to technology and increasing popularity. Initially, direct indexing was only available for ultra high net-worth investors due to its cost and complexity. Yet, technology and financial innovations have now made it quite easy, and we are seeing many firms offer it to clients with as little as $10,000 to invest. 

A key to it becoming accessible for investors with smaller accounts is the reduction in trading costs. The optimal direct indexing strategy is to regularly scan an account for tax loss harvesting opportunities which can be used to offset capital gains. This leads to increased trading activity as these positions are replaced with other stocks that have similar factor scores. However, this is only feasible for smaller accounts due to the drastic decline in transaction costs over the last decade. 

Not surprisingly, nearly every advisorship is adding these offerings. At the Exchange 2023 Conference, Vanguard CEO Tim Buckley exclaimed that Vanguard will “be investing heavily” in direct indexing and that every advisor should consider “using direct indexing for their taxable client accounts.” Currently, $260 billion of client assets are being managed with direct indexing. This figure is expected to exceed $1 trillion over the next decade, underscoring the opportunity for advisors and risk for those that are left behind.

Finsum: Direct indexing has become increasingly accessible to smaller investors over the last couple of years due to increased demand, technology, and decline in trading costs. 


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