Displaying items by tag: advisors

Direct indexing combines the best elements of running a traditional portfolio with passively investing in indexes. This means that investors can reap the benefits of passive investing such as low costs, diversification, and proven long-term outperformance. Yet, they can still take advantage of tax loss harvesting which isn’t possible through investing in ETFs or mutual funds. 

This is because direct indexing leverages technology to recreate an index within an individual account. This technology will also regularly scan the portfolio for tax loss harvesting opportunities. Losing positions are sold and then replaced with positions that have similar factor scores to ensure that the index continues to be tracked. Over a whole year, this will lower an investors’ tax liability.

According to research, direct indexing will lead to an additional average annual return of 1.1%. Further, various direct indexing providers can optimize a portfolio according to an investors’ specific tax situation by offering various scenarios and the subsequent impact on capital gains. From an advisors’ perspective, many clients are interested in reducing taxes and aligning their investments with personal values. Direct indexing can help with both goals which means it can be quite potent in terms of recruiting and retaining clients. 

Finsum: Direct indexing can increase an investors’ average annual return by reducing tax liabilities. This is in addition to the typical benefits of passive investing such as diversification and low costs. 

Model portfolios represent an effective strategy for financial advisors to enhance efficiency within their practices by offering a standardized approach to portfolio construction and analytics. Models simplify the portfolio design process, allowing advisors to save significant research time and scale their services more effectively. Moreover, uniformity in portfolio construction promotes consistency, reduces biases, and improves regulatory compliance.

However, advisors must exercise due diligence in evaluating the credentials of model portfolio providers, considering aspects such as investment philosophy, historical performance, and associated fees. It is also essential to maintain flexibility for customization to meet the unique needs and risk profiles of individual clients.

While model portfolios offer considerable efficiency and informed decision-making advantages, their successful integration into a financial advisory practice requires careful consideration and a client-focused strategy. When utilized judiciously, model portfolios can significantly contribute to a financial advisory practice's operational efficiency and client satisfaction levels, albeit not as a universal solution but as a valuable component of a broader strategic framework.

Finsum: Explore how model portfolios boost advisory efficiency with standardized construction, analytics, and compliance, while ensuring due diligence and customization.

Investing in the right technology has the power to create a more efficient, scalable, and successful practice. The latest disruptive technology is artificial intelligence (AI) which will affect many different parts of a practice and is already impacting specific areas. 

Advisors who are able to effectively leverage AI will see a material and quantifiable impact in terms of generating leads, conversion rates, retention, and reducing time spent on operations and management. Client engagement is an area where advisors are already applying AI to generate positive outcomes and deliver more personalized outreach and services.

Ideally, an advisor would be able to spend hours learning and preparing for a client meeting. In reality, this is not possible given constraints and other responsibilities. However, with AI, an advisor can effectively organize and review all of a clients’ data, including notes from previous conversations, and find insights to deliver a more unique and valuable experience. 

AI can also help sort through all of the data generated by an advisor or practice and find hidden opportunities or potential risks. They can also provide guidance in terms of strategic decisions and long-term planning. It’s recommended to use a specialist AI model for these purposes given that it’s trained in relevant data and adheres to regulatory standards. 

Finsum: AI is the latest disruptive technology that will certainly impact multiple aspects of an advisors’ practice. Here is how it’s already affecting client engagement. 

The Center for Retirement Research at Boston College recently completed a study which investigated why annuities are under owned despite the benefits it provides for retirees. The findings are particularly interesting for financial advisors given this wide gap and persistent challenge. 

The study queried investors with more than $100,000 in financial assets who are in or near retirement. About half of the respondents indicated some willingness to buy an annuity at current rates, while only 12% actually are invested in one. 

Interestingly, the study also found that a lack of liquidity or the inability to pass on an annuity as an asset to heirs were not cited as reasons to not purchase an annuity. Instead, the major factor was a lack of knowledge of the product and how to buy one. Some who were more familiar with the product had a negative perception of hidden costs and performance issues.

According to the authors of the study, the reluctance to buy one stems mostly from psychological reasons. Advisors should endeavor to provide more detailed knowledge about these products including the mechanics of how they work in order to increase comfort levels. Then, they should share an action plan of how to actually buy an annuity. 

Finsum: Most retirees acknowledge the benefits of owning an annuity and self-report a desire to invest in one. Yet only 12% of retirees own an annuity despite the benefits. Some research on this gap came up with some interesting findings. 

Cerulli Associates is forecasting that total assets under management in separately managed accounts (SMAs) will exceed $2 trillion in assets this year. 2023 saw asset growth of 12%, and the firm sees a 15% increase this year. It identifies growth in standalone SMAs in addition to unified managed accounts (UMAs) as key drivers of this trend.   

According to Scott Smith, the director of advice relationships at Cerulli, SMAs allow for more customization of portfolios to achieve specific aims such as tax management or value-aligned investing. He also acknowledges that technology has made SMAs accessible and practical for a much wider swathe of the investing universe. 

Previously, an SMA would be too complicated and costly due to tax and regulatory requirements to make sense for smaller accounts. A decade ago, SMAs were only available for clients with millions to invest. Now, they are available to clients with minimums of $100,000 in some cases. 

The growth of these accounts comes at the expense of traditional brokerages. A key difference is that advisors who use SMAs receive compensation from clients’ portfolio values rather than trading commissions which can create bad incentives. 

Finsum: Separately managed accounts are forecast to exceed $2 trillion in client assets this year. These are typically fee-based and allow for more personalization than investing through a brokerage where revenue is generated through trading commissions.