Wealth Management
Financial advisors have so many considerations as they guide their clients into a secure retirement. Increasingly, ‘longevity risk’ is an essential factor since people are living longer lives. Obviously this is a positive, but it does mean that plans need to be appropriately adjusted.
Kelli Hueler, the CEO and founder of Hueler Cos., believes that annuities can often be an effective solution to bridge the gap. She is an advocate for lifetime annuity products and believes the current marketplace is the best it's been in decades.
For some time, there had been a bias against annuities from investors and advisors, but this thinking is being challenged especially as we are in a new economic regime of high interest rates and stubbornly elevated levels of inflation. Therefore, the same strategies that worked from 1980 to 2020 when rates were constantly drifting lower, may no longer work.
In addition to longevity risk, the dearth of pensions is another reason that the demand for annuities should continue to rise. And, possibly the most important factor is that due to high rates, annuities are actually paying out meaningful income streams to owners. While there are many downsides to the current economic environment, one silver lining is that annuities are offering a low-risk, robust value proposition.
Finsum: There are many downsides to the current economic environment, yet one silver lining is that annuities are once again offering healthy income streams to owners.
A bad ending can ruin a movie or a TV series, just ask any Game of Thrones viewer. The same applies to any business including financial advisory practices. A great run can be marred by a messy and unorganized ending.
However, it’s easy to understand why an advisor laser-focused on building and operating a business may not put the same intensity or focus into succession planning. After all, there are many heavy decisions that have to be made, and each decision has major implications. So, it’s understandable why succession planning can be neglected.
Nevertheless, it’s clear that succession planning is essential. In the same way that financial planning increases the odds that someone can reach their retirement goals, succession planning can help you maximize the value of a practice, smooth the transition for clients, and give employees peace of mind.
While there are many elements to effective succession planning, the biggest ingredient is transparency throughout the process with clients, employees, and other stakeholders. This will prevent anyone from being surprised by the outcome and will also lead to more understanding especially as it’s likely that the succession plan could have multiple iterations depending on circumstances and developments.
Finsum: Succession planning is essential for an advisor but an important key is transparency during the process.
When it comes to making clients happy, there is no substitute for a wide variety of offerings given that everyone has their own unique circumstances, priorities, risk tolerance levels, and goals. Ironically, the recent trend in wealth management over the past couple of decades has been the opposite with the rise of ubiquitous 60/40 portfolios and passive strategies.
However, the introduction and ongoing proliferation of direct indexing is an antidote and presents an opportunity for savvy advisors. In essence, direct indexing allows investors to recreate an index within a separately managed account by owning the actual individual stocks. This is now possible due to technology, lower commissions, and fractionalization of shares.
The major benefit for clients and advisors is that these indexes can be customized as little or as much as clients desire. Thus, it retains the pros of passive investing, while allowing for personalization and the potential to harvest tax losses.
For example, investors who have strong beliefs about climate change may look to eschew companies who are responsible for emissions or the production of fossil fuels. Instead, they may want to overweight stocks with high ESG scores. With direct indexing, an advisor can theoretically create custom products for each client, leading to greater satisfaction and success for both parties.
Finsum: Advisors should get comfortable with direct indexing given that it allows for personalized products that are more likely to appeal to an investor.
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One of the consequences of tighter monetary policy is that traditional sources of funding such as banks and public markets have dried up. This void has created an opportunity for private financing.
Pacific Investment Management Co. (PIMCO) is seeking to capitalize on these circumstances. Typically, PIMCO is known as a bond powerhouse but in recent years, its alternative segment has made some impressive strides. It sees opportunities to extend credit to companies in need of capital and has been coming up with creative strategies to facilitate this. This includes lending against assets and across the capital structure in addition to offering equity stakes for investors.
The firm is also increasing the number of portfolio managers who are dedicated to private credit and believes it can achieve private equity-like returns in the current environment. It also sees opportunity in the loan books of banks that are looking to shed risk and are focused on strengthening their balance sheets.
It sees upside opportunity in segments like tourism, airlines, gaming, concerts, theme parks and rental properties. However, it’s looking to reduce exposure to banks given the combination of a slowing economy and an inverted yield curve.
Finsum: PIMCO sees opportunity in private credit given that traditional sources of financing have become more difficult to access.
Within asset management, active fixed income is in a growth boom based on a surge of inflows and new issuances to meet this demand. There are two secular components as ETFs continue to displace mutual funds as preferred vehicles for fixed income investing, and institutions and advisors become more aware and comfortable with the category.
And, a cyclical factor is the current market environment given the combination of attractive yields and uncertainty about the trajectory of monetary policy. These environments tend to favor active over passive strategies since active managers have more latitude in terms of credit quality and duration.
In recent months, we’ve seen a frenzy in terms of new issues with Vanguard and Blackrock introducing active ETFs that mirror their own active fixed income mutual funds. Now, Capital Group is joining the fray with the launches of the Capital Group Core Bond ETF (CGCB) and the Capital Group Short Duration Municipal Income ETF (CGSM). Asset managers are responding to demand for these products, or otherwise would lose market share to firms who provide ETF versions of popular mutual funds.
CGCB invests across the entire fixed income spectrum with a focus on capital preservation and generating income. CGSM invests in municipal debt that is exempt from federal taxes and typically short-duration.
Finsum: Capital Group is launching two new active fixed income ETFs which is a major trend in the asset management world.
The last decade has seen an intense war in the wealth management space with an assortment of winners and losers. While advisors are the biggest winners due to generous compensation packages, another big winner has been LPL which is now the largest independent broker-dealer with 21,000 advisors.
Part of LPL’s success has been its variety of offerings for advisors given that it has numerous options for incoming talent. This ranges from more structure to giving advisors independence and latitude to run their businesses as they see fit.
Maybe the best example of this is LPL’s Linsco channel which is designed for younger advisors. It was founded in 2019 and was seeded by the purchase of Allen & Co. which gave it assets under management (AUM) of $3 billion. Remarkably, Linsco now has an AUM of $21 billion and has recruited 49 teams to the group.
Its latest success is recruiting Raanan Pritzker who has been the top-ranked financial advisor at Fifth Third Private Bank over the last 12 years. This marks the first $1 billion+ team to join Linsco. Despite Priztker’s success, he chose to leave Fifth Third as he believes Linsco is better able to provide top-tier services and products to his wealthy clients.
Finsum: LPL Financial’s Linsco has been a massive success story as it’s gone from $3 billion in assets under management to $21 billion as of October 2023.