Wealth Management
One of the best real-time measures of the population’s interest in a subject can be gleaned through Google search data. Since the start of the year, searches for the topic are up by 50% and continue to climb with rates. In fact, there is a 0.9 correlation between search volume and longer-term rates.
According to Standard Life, interest in the topic really accelerated once rates exceeded 4%. Currently, many annuities are offering returns in the 7% to 8% range which is leading to strong demand from retirees or those close to retirement who are looking for income.
Recent months have seen rates continue inching higher, while inflation expectations have moderated. Higher real rates are also adding to the appeal of annuities given concerns about the economic outlook and costs.
Two more contributing factors behind annuity demand are pent-up demand and demographics. For more than a decade, rates were so low that annuities simply didn’t deliver sufficient returns for investors or retirees. Instead, monetary policy was designed to push them higher up the risk curve in order to generate yield.
Demographics also can’t be ignored. Next year, 12,000 Americans will be reaching retirement age every day. And by 2031, 70 million Americans will be above retirement age. The population is even older in Europe and Japan and will likely be interested in boosting their income during retirement.
Finsum: Google search data shows that interest in annuities has surged since the beginning of the year. It’s not a coincidence that this happened as long-term rates were breaking out to multi decade highs.
In an article for AdvisorHub, Lisa Fu covers a recent research report from Cerulli Associates which shows that portfolios managed by CIOs outperform those managed by advisors over multiple time frames. Over the last 3 years, model portfolios earned a 1.8% annual return which beat the 1% return of advisor-managed portfolios. The outperformance was similar on longer timeframes as well.
Further, the outperformance was even stronger during periods of market volatility. During negative quarters over the last decade, model portfolios outperform 60% of the time. Model portfolio performance was also more consistent while advisor-led portfolios have much wider dispersion in terms of results.
Of course, this is an indication that most advisors are better off using model portfolios which frees up more time to focus on operating a business, prospecting for new clients, and investing in client services and relationships.
Many older advisors are resistant to giving up these responsibilities given that it was an integral part of the job for so many years. Yet, firms are encouraging younger advisors to go with model portfolios due to better outcomes for clients’ portfolios and more time and energy for tasks and actions that are more correlated with success.
Finsum: A research report from Cerulli Associates shows that model portfolios perform better than advisor-managed portfolios.
Although the advisor recruiting frenzy is certainly slowing down, two trends clearly standout. One is that LPL Financial has been a big winner with its variety of models and offerings for incoming advisors. The second is that Merrill Lynch has been a big loser with several high-profile exits.
This continued this week with two teams leaving Merrill Lynch who collectively manage over $1 billion in assets. The Coutant Group which is led by Kevin and Keith Coutant announced that they are leaving for UBS. The five-person group manages $700 million in assets with lead advisors Keith and Kevein having spent 23 and 20 years at the company, respectively. At UBS, they will be joining Soundview Wealth Management and continue operating in Connecticut.
So far in 2023, UBS has recruited away nearly $4 billion in client assets from Merrill Lynch. Reportedly, the bank has been offering generous packages to brokers including guaranteed back-end bonuses and deals that are in the 400% range.
The other major exit from Merrill was John Foley who managed $340 million in assets and left for RBC. According to reports, the exits are motivated by competitors offering more generous compensation and providing more freedom in terms of product recommendations and client relationships.
Finsum: Merrill Lynch has seen a steady stream of exits from advisors and brokers with large books. The latest are more than $1 billion in assets leaving for UBS and RBC.
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‘Higher for longer’ is the main takeaway from the FOMC meeting after the committee decided to hold rates. Members also signaled that another rate hike is likely before year end. Overall, there was a hawkish tilt to Chair Powell’s press conference as 2024 odds saw consensus expectations decline from 3 to 4 rate cuts to 2 to 3 cuts.
FOMC members’ dot plots also show expectations of less easing in 2024. In June, it saw 2024 ending with rates at 4.6%. This was upped to 5.1%. The Fed did acknowledge progress in terms of inflation’s trajectory. Powell remarked that “We’re fairly close, we think, to where we need to get.”
Fixed income weakened after the FOMC with yields on longer-term Treasuries jumping to new highs. Yields on the 10-year reached 4.48% and have broken out above the spring highs. The increase in yields has had negative effects on equities, specifically the financial sector and small caps. However, yields on shorter-term Treasuries haven’t risen above spring highs.
It’s an indication that markets are not expecting terminal rates to move materially higher but it’s adjusting to a longer duration of high rates. For fixed income investors, it likely means that volatility will persist in the short-term.
Finsum: Longer-term Treasury yields are breaking out to new highs following the FOMC meeting. Expectations of meaningful Fed rate cuts in 2024 are being tempered.
With major technological disruption happening in every industry, it’s natural to consider how the financial advisor industry will change over the coming decades. After all, the industry is unrecognizable to how it was a few decades ago. Here are some of the trends that will shape how the industry evolves.
People, especially the younger generation, are increasingly spending more time in the digital world including when it comes to managing their finances. Many in this cohort would rather communicate with their advisors over text, email, or video calls.
Artificial intelligence (AI) presents a threat and opportunity to advisors. AI is being used to augment robo-advisors and give them more interactive capabilities and personalized advice. While this could lead to some market share gains, advisors can also utilize AI to augment their own businesses by improving back-end operations, automating low-level processes, reducing expenses, free up time for client services, and boosting marketing efforts.
Another major opportunity is the massive aging of the population and retirement of the baby boomer population. As this generation passes, trillions in wealth will be passed down to Generation Z and Millennials. Successful advisors will be able to form trust and relationships with older clients and their children.
Finsum: The financial advisor industry is going to face major challenges and opportunities over the next couple of decades. Demographics and technology are two of the most impactful.
Direct indexing is a new approach to investing which involves recreating an index within an investors’ portfolio which combines the benefits of passive investing in addition to tax loss harvesting capabilities with the potential for increased customization. For these reasons, it’s been growing in popularity especially as it’s become available to a wider swathe of investors.
However, according to a recent report from Hearts & Wallets, a wealth management research firm, most investors remain unfamiliar with the concept. In fact, there is considerable confusion about what it specifically means. Many weren’t able to specifically delineate between ETFs and direct indexing.
Another challenge is that many investors believed that direct indexing was closer in approximation to active investing rather than passive investing and that it would require some sophisticated management. For those who were interested in direct indexing, the potential tax savings were the biggest factor.
One of the conclusions of the report was that the industry should consider renaming ‘direct indexing’ to something that was more definitive. Too many investors who would be good candidates for these products are dismissive due to an incorrect understanding of its function and benefits.
Finsum: Direct indexing is growing in popularity. Yet, a recent report on the category revealed some issues that may impede its future growth.