Wealth Management
LPL is partnering with MSCI to add direct indexing capabilities to its suite of model portfolios. Advisors will be able to access these features through custom indexed separately managed accounts. Direct indexing is a growth market for advisors due to its ability to provide tax savings in down years, a slight increase in returns, and more personalization.
The company made the announcement at its Focus 2023 event. LPL is currently the largest independent broker-dealer in the United States with nearly 20,000 advisors and over $1.1 trillion in assets.
Rob Pettman, executive VP of Wealth Management Solutions said that “Investors want the ability to customize their investment strategy in order to achieve a range of goals, including reducing overall tax burden and/or avoiding a particular sector or security.”
The new offering will have a $100,000 minimum and include models for large-caps, small-caps, mid-caps, and international stocks. They will have the MSCI USA and EAFE indices as the basis for these portfolios.
There will also be an option for automatic tax-loss harvesting which can be optimized according to each client’s portfolio. Overall, the firm believes that direct indexing will also help with attracting and retaining clients especially with nearly all of LPL’s competitors offering direct indexing.
Finsum: LPL joined the model portfolio race and is partnering with MSCI to offer a variety of options and capabilities.
In 2022, active ETFs accounted for 15% of total global inflows into ETFs. In 2023, active ETFs now account for 25% of total inflows.
Is this a temporary blip due to the current environment of economic uncertainty and high rates and inflation? Or, is this a new trend that we should expect to continue for the foreseeable future.
In a recent report, State Street supports the latter argument. The asset manager sees recent regulatory reform as a major catalyst for growth in the active sector. Rule 6c-11 modernized the process to launch ETF, shortening the runway from many years to 60 days. This has resulted in an explosion of ETF offerings. In the last 3 years, 750 active ETFs have been created, while only 325 were created in the 11 years prior to Rule 6c-11.
Another regulatory change is that ETF providers are able to be slightly less transparent with their holdings. This has led many managers to launch their own ETFs who were previously concerned about giving their best ideas for free. And, it’s also led many mutual funds to also offer active ETFs with similar strategies.
It’s particularly bullish on active fixed income ETFs as it sees more room for innovation in the space. And, it notes that many advisors and institutions are just becoming familiar with the asset class.
Finsum: Active fixed income and equity ETFs are seeing incredible growth over the last couple of years due to a combination of regulatory changes and innovation.
There are many ways for investors to buy Treasuries, but the increasingly popular option is through the iShares 20 Plus Year Treasury Bond ETF (TLT) which is a blend of 10-year and 30-year Treasuries. Currently, this fixed income ETF offers a yield of 3% and is down 2% YTD.
The ETF has been hammered in recent sessions due to Fitch’s downgrade of US debt, larger than expected budget deficits, and rates that are likely to stay elevated at least into Q1 of next year. Another potential reason for TLT’s poor performance in recent sessions is that Pershing Square Capital Management founder Bill Ackman unveiled a bet against TLT and long-duration Treasuries.
Ackman shared his reasoning on Twitter. He believes that ‘structural’ changes in the world such as the re-shoring of supply chains, an increase in defense spending, electrification of the energy sector, aging demographics, and a tight labor market are indicators that inflation is going to remain high for a meaningfully long period of time.
Based on this, he believes that long-term Treasuries will need to offer higher yields to lure investors, while they remain currently priced as if inflation is transitory given the 30-year’s current yield of 4.2% inflation. He believes that it should be yielding between 5.5% and 6% given his expectations of inflation, implying losses between 31% and 43%.
Finsum: Bill Ackman is one of the most successful investors of his generation. Recently, he unveiled a short position against long Treasuries and TLT, one of the most popular fixed income ETFs.
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2023 was supposed to be the year of fixed income.
Coming into the year, the consensus was that fixed income would rally as the economy plunged into a recession, forcing the Fed to terminate its rate hike cycle and even begin cutting before the year was over. The bond bulls got another catalyst following the regional bank crisis which many believed would impair credit markets and also force the Fed’s hand.
Yet, these prognostications have proven to be false. Instead, the US economy continues to grow and add jobs every month. In fact, there are more signs that the economy could be re-accelerating rather than contracting. As a result, the Fed continues to hike, and bonds have given up all their gains on the year.
Despite consensus predictions proving wrong, most Wall Street analysts remain bullish on fixed income. They continue to believe that yields are at or near their ‘cycle highs’ and that a trifecta of factors like cooling inflation, mild economic growth, and geopolitical risks mean that investors should continue adding exposure especially given that equities are unattractive from a valuation perspective at the moment.
Finsum: 2023 was supposed to be a big comeback for fixed income given expectations of a recession in the second-half of the year. Yet, this has proven not to be the case.
The financial advisor space is extremely competitive which means it’s quite important to differentiate and identify what makes you unique. This is even more the case given today’s macroeconomic reality of high rates, inflation, and uncertainties. Advisors and investors may have been spoiled by the last couple of decades of low rates, providing a generous tailwind for stocks and bonds.
For WealthProfessional, Steve Randall discusses why becoming comfortable with alternative investments could fuel growth for advisors in this new era. Given that the upside for stocks and bonds is limited in this era, there is likely to be more opportunities in areas like responsible investing and alternatives, where the landscape is less defined.
In addition to these trends, Randall also identifies actively managed ETFs, virtual assets, and impact investing as other growth areas that could provide differentiation for advisors.
Overall, he believes that asset managers will introduce new products in these areas in recognition of growing interest and demand. Over the last couple of years, alternative investments have generated positive returns and dampened portfolio volatility while stocks and bonds have delivered negative returns.
This outperformance should continue especially if rates and inflation remain elevated, and advisors are recommended to get familiar with new offerings.
Finsum: Alternative investments are gaining popularity for a variety of reasons. But, the most important is its outperformance in the last couple of years while stocks and bonds lagged.
Building a high-caliber team is required for advisors looking to build and scale their own practices which can often include hiring and leading other financial advisors. In InvestmentExecutive, Todd Humber shares some tips for leading a team of advisors.
Communication is key, especially providing a forum for open discussion of ideas and understanding their needs and concerns. An effective advisor is always taking in information and then providing feedback which is shaped by their expertise and experience. This process should be nurtured as this feedback can be used to make better decisions.
Leaders should try to create a culture where everyone feels important and connected to organizational goals. This can be re-affirmed with regular one-on-one conversations with each team member to ensure that they agree and are aligned with the overall vision. These conversations should be a way for members to express any disagreement or share negative feedback.
In general, advisors respond better when they are given latitude to accomplish their objectives. This also will help them grow even if it involves the occasional mistake. Leaders should ensure that they learn lessons and apply them in the future while not reducing their desire to take initiative and ownership.
Finsum: Leading a team of advisors is not a simple task. It requires processing constant feedback from advisors while ensuring that their actions are aligned with organizational goals.