Wealth Management
The U.S. is seeing 30-year records on inflation, and whole generations of American’s have never seen inflation this high. Even worse inflation is even more elevated for healthcare services. Healthcare inflation is expected to be nearly 12% for the next two years according to HealthView Services. This could be a huge hole in retirement savings as a couple of retirees today can expect to spend over $85k on healthcare, those retiring in a decade over $160k and those in the next two decades just shy of $260k. Moreover, social security won’t be enough as the cost of living adjustment doesn’t track healthcare inflation or even standard inflation. Meaning healthcare costs will eat away at most of Social Security.
Finsum: HSAs are more valuable than ever given these ridiculous healthcare inflation costs.
There has been a serious increase in interest in annuities during the pandemic, but overall the product suffered as retirements got put on hold. Bond market disruption has increased that excitement and Legal and General, a British provider, is expecting a big turn around with the pandemic in the rear view. They have already seen a 5% uptick in since the onset of the pandemic. A full recovery is underway and retirement is back on the agenda for many investors, which makes annuities attractive again. Additionally data around savings rates and flows are trending positive for annuities as well.
Finsum: Annuities are just the better alternative for many retirees when the interest rates and inflation are in the position they are now.
Model portfolios have been a surprisingly quick growing tool for the financial industry in the last year, and Morgan sStanley’s Wealth Management is capitalizing by adding a series of new model portfolios. These strategies will have hefty minimums of $750k to $1.5 million and are targeting tax and direct indexing strategies from the recently acquired Parametric. This was a key reason Morgan Stanley acquired Parametric last year to rapidly develop and deploy direct indexing strategies. Overall the portfolios have acquired $150 million in assets since their inception in January.
Finsum: Financial companies took a page out of tech companies playbook by just acquiring the companies that might align with them and allow the to quickly scale when it came to direct indexing.
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2021 set an all time record for American’s quitting with approximately 47 million opting to leave their jobs and giving the year the title the ‘Great Resignation’. However, financial advisors have remained insulated from the one off spike. Many say this has to do with how advisors see their business, and being their own practitioners. This holds many companies accountable for keeping advisors satisfied because they can take their book of business elsewhere. Still there have been a slight increase in quits but that's part of a broader trend over the last three years for financial advisors.
Finsum: Firms are definitely getting the message, and are increasing measures for both retention and hiring in order to grow scale and attract advisors.
Female advisors are heavily underrepresented in advising, and that's just because the industry fundamentally doesn’t understand how to recruit and retain them. Female advisors represent about a fifth of the industry. The number one way according to research to obtain and retain female advisors is having women occupy leadership positions. Additionally, female advisors want more flexibility stressed in the hiring process. A pipeline strategy with flexibility is a wonderful way to hire more female employees and retain them afterward.
Finsum: Female advisors can click and connect with different sets of clientele and are an underrepresented portion of the financial industry.
The longer equity portfolios experience growth over time the fewer the opportunities there are to realize the losses and take advantage. Actually quant fund AQR called these appreciated portfolio’s a ‘liability’ for tax purposes. One interesting thing they find is that tax preferred passive equity and direct indexing can develop unrealized gains rapidly. It takes only 3 years for direct indexing to have unrealized gains hit 50% of the portfolio value and 5 years for a tax preferred passive strategy. AQR offers an alternative approach, ‘enhanced indexing’ which is a tax-loss strategy they developed that can help investors. If a direct-indexing strategy already has large unrealized gains it is hard to catch up, but the enhanced indexing strategy can still generate losses for tax purposes. Enhanced indexing is the preferred option when a portfolio is already heavily appreciated.
Finsum: Direct indexing and enhanced indexing are both novel strategies in maintaining an ETF like strategy while taking advantage of tax-loss harvesting.