Displaying items by tag: advisors

Until a couple of decades ago, investors had few options when it came to asset classes. Since then, there has been an increase in the number of investable asset classes including REITs, commodities, currencies, etc. Yet so many of these have failed to provide sufficient diversification, especially during down markets.

Investors should consider fixed annuities as they offer capital protection guaranteed returns, and income regardless of market conditions. Thus, they are a way to generate income during retirement and also increase the resilience of portfolios. 

Unlike fixed income, fixed annuities do not fluctuate in value depending on interest rates or other factors. Fixed annuities always have a positive, guaranteed return. When evaluating their portfolios, investors should consider market risk, credit risk, longevity risk, and liquidity risk. 

A fixed annuity reduces a portfolio’s market risk due to there being a guaranteed return and no risk of loss of principal. It also leads to lower credit risk given that annuity providers have superior credit ratings. Longevity risk is also reduced given that annuities provide payments for life. There is a tradeoff in terms of liquidity risk as money invested in an annuity is not easily accessible.

Finsum: Fixed annuities can lead to more resilient portfolios. Although there is a tradeoff in terms of liquidity, it can reduce a portfolios’ market, credit, and longevity risks. 

Direct indexing has been around for 30 years but was once only accessible and viable for ultra-high net-worth investors. Now, technology and lower transaction costs have made it available for a much wider swath of investors who are able to benefit from direct indexing’s tax-loss harvesting and customization abilities.

Interestingly, the strategy is finding particular favor among millennial investors who are interested in tax optimization and personalization which are not possible through traditional passive investing. Advisors can customize holdings in a way that reflects a client’s values and preferences such as prioritizing ESG criteria or adjusting a portfolio based on a client’s risk profile. Holdings can also be customized to account for a clients’ unique financial situation, which is also not possible through investing in ETFs or mutual funds. 

For advisors, it presents an opportunity to differentiate themselves in a competitive landscape by offering personalized and optimized solutions. Direct indexing is likely to continue growing as it’s becoming increasingly available through many online brokerages and wealth management firms. It’s also consistent with many younger investors’ desired preference to have their personal holdings reflect their values and beliefs. 

Finsum: Direct indexing is growing at a rapid pace, and it’s finding favor with Millennial investors due to its tax optimization and personalization.  

High net-worth clients may be facing a major issue due to the upcoming expiration of the 2017 tax cuts after 2025. This will mean the expiration of higher federal gift and estate tax exemptions. The exemptions, which encompass tax-free caps on gifts during life or at death, will be $13.6 million per individual or $27.2 million for spouses in 2024 but will be cut by 50% in 2026. 

This will mean that many more high net-worth clients will be impacted by the estate tax. And, this is the time to begin planning around this new reality given that many estate tax planning strategies take months or even more than a year to implement. 

Some married couples can take advantage of the current higher levels of exemption by removing assets from their estate via lifetime gifts. According to Robert Dietz, the national director of tax research at Bernstein Private Wealth Management in Minneapolis,“The reality is you have to give away more than half to see any benefit from the gift in terms of the exclusion going away.” And for clients uncomfortable making these gifts now, they can keep control of their assets by opening a trust. 

Finsum: The expiration of the 2017 tax bill means that high net-worth clients will have to grapple with much lower exemptions on tax-free giving. 

There is increasing signs of a turnaround in the bond market given compelling valuations, attractive yields, and indications that the Fed is done hiking rates. While many investors will instinctively look to move into passive fixed income funds, active fixed income offers some specific advantages. 

Over the last decade, active fixed income managers have outperformed their benchmark more than 75% of the time even after taking all fees into account. According to Joseph Graham, the Senior Managing Director, and Head of the Investment Strategist Group at Lord Abbett, this is due to several unique factors which make the fixed income market inefficient.

The primary reason is that institutional fixed income investors such as banks, insurance companies, and central banks make decisions based on non-economic factors such as regulations or market stability. This can distort pricing and create opportunities for savvy managers. 

Another inefficiency is that benchmarks are weighted by the amount of debt outstanding. This means that borrowers with considerable amounts of debt are overrepresented. Similarly, indices often have constraints around size and maturity, creating opportunities for alpha around these under-owned securities. Asset managers with teams that specialize in a particular niche are particularly well-suited to discovering such pricing discrepancies.

Finsum: Active fixed income has outperformed passive fixed income funds. Some of the reasons that the fixed income market is inefficient are because many market participants have non-economic incentives and indices are skewed to overrepresent borrowers with considerable amounts of debt. 

The last thing a retiring financial advisor might want to consider is making a significant change to their business. Their focus is often on finding the perfect partner to join their practice so they can transition out over the next few years. However, an overlooked option with significant benefits lies in switching broker-dealers.

Think of it as a reverse recruitment process. Just as firms entice top advisors with cutting-edge technology, competitive compensation, and career development opportunities, these same features can attract a larger pool of potential buyers for a practice. Joining a progressive firm can also expand an advisor's recruitment options, giving them access to a broader range of advisors who might be interested in taking over their business.

Making a switch might seem like extra work at the tail end of a career, but the advantages can be substantial. By aligning with a forward-thinking firm, an advisor may find a smoother transition to their succeeding partner and potentially even a higher purchase price for their practice. Advisors should not dismiss the power of changing broker-dealers as part of their succession plan – it could be the key to a successful and rewarding exit.

Finsum: Financial advisors planning their succession should explore how switching broker-dealers could be their ticket to a rewarding exit.