Wealth Management
Investing in the right technology has the power to create a more efficient, scalable, and successful practice. The latest disruptive technology is artificial intelligence (AI) which will affect many different parts of a practice and is already impacting specific areas.
Advisors who are able to effectively leverage AI will see a material and quantifiable impact in terms of generating leads, conversion rates, retention, and reducing time spent on operations and management. Client engagement is an area where advisors are already applying AI to generate positive outcomes and deliver more personalized outreach and services.
Ideally, an advisor would be able to spend hours learning and preparing for a client meeting. In reality, this is not possible given constraints and other responsibilities. However, with AI, an advisor can effectively organize and review all of a clients’ data, including notes from previous conversations, and find insights to deliver a more unique and valuable experience.
AI can also help sort through all of the data generated by an advisor or practice and find hidden opportunities or potential risks. They can also provide guidance in terms of strategic decisions and long-term planning. It’s recommended to use a specialist AI model for these purposes given that it’s trained in relevant data and adheres to regulatory standards.
Finsum: AI is the latest disruptive technology that will certainly impact multiple aspects of an advisors’ practice. Here is how it’s already affecting client engagement.
FINRA and SEC regulators have increased enforcement and oversight of Regulation Best Interest (Reg BI). Recent focus has been on increasing compliance within the sales process. There have been several FINRA actions to punish firms for improper supervision to ensure the fiduciary standard is being followed.
The pace of these actions and enforcement has gradually picked up since the moratorium on enforcement ended. Further, regulators have also made public comments emphasizing the need for more aggressive action.
In 2023, there were FINRA enforcements following only 8 in 2022. The agency has also started to impose personal fines for sales violations or requiring advisors to pay back a portion of losses. Prior, regulatory agencies would see compensation and damages from the firm rather than individuals. This change in strategy is a reflection that they are trying to deter violations of the fiduciary standard at the individual and firm level.
Looking ahead, comments from SEC and FINRA officials reveal that this is only the beginning. According to FINRA’s acting head of enforcement, Chris Kelly, ‘more and more’ cases involving all four pillars of Reg BI which includes disclosure, care, conflict of interest, and compliance are likely to be filed.
Finsum: FINRA and SEC regulators are increasing Reg BI enforcement. They are targeting firms for improper sales supervision and punishing brokers for violations.
Pacific Investment Management Co. (PIMCO) has been quite pessimistic on private credit and sees major downside if rates don’t fall as expected. This is contrary to many in the industry embracing private credit like Blackstone and Apollo Global.
In contrast, PIMCO is looking to take advantage of the crisis that it’s forecasting. It also has larger implications for the economy and markets given that private credit has taken the bulk of risky lending which used to come from investment banks.
PIMCO’s thesis rests on the US economy slowing in 2024 and a hard landing in Europe and the UK. If the economy remains resilient, then rates are unlikely to fall as much as expected. This would put stress on private markets where there is less transparency and price discovery. The firm believes that many borrowers are quite risky and quite exposed to a decline in revenues. They believe that about a quarter of private credit portfolios could face difficulties if rates don’t fall or are less than expected.
PIMCO spies an opportunity if private lenders face pressure from its creditors based on portfolio values dropping. This would allow PIMCO to squeeze out other lenders by buying into debt at a discount. It would also continue a trend of the firm moving away from its roots of fixed income investing and increasingly into alternative assets. This segment has grown from $32 billion in 2016 to $170 billion in the first half of 2023.
Finsum: PIMCO is bearish on private credit due to concerns about balance sheet risk with risky borrowers, bearishness on the economy in 2024, and the market pre-emptively pricing in a dovish Fed.
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Vanguard is launching 2 new ETFs giving investors exposure to the municipal bond market. The Vanguard Intermediate-Term Tax-Exempt Bond ETF (VTEI) and the Vanguard California Tax-Exempt Bond ETF (VTEC) launched on the CBOE BZX Exchange and are designed to offer targeted exposure to certain segments of the muni market with an emphasis on quality and yield.
Both also have low expense ratios of 0.08%, making them among the least costly within the muni fixed income category. The intermediate-focused, tax-exempt ETF is particularly timely given expectations that interest rates will decline in 2024 due to a dovish Fed and weakening economic outlook. Thus, many investors are looking to lock in yields at these levels by moving out from the short-end into the intermediate and longer-end of the curve.
In addition to quality and generous yields, municipal bonds also have tax benefits. While VTEI is designed to appeal to a wider swathe of investors, VTEC is for investors who want exposure to California municipal debt. The yield generated from this ETF is tax exempt at the federal and state level for California residents while also prioritizing credit quality.
Finsum: Vanguard is launching 2 intermediate-term, municipal bond ETFs that offer investors tax benefits in addition to income and quality.
The Center for Retirement Research at Boston College recently completed a study which investigated why annuities are under owned despite the benefits it provides for retirees. The findings are particularly interesting for financial advisors given this wide gap and persistent challenge.
The study queried investors with more than $100,000 in financial assets who are in or near retirement. About half of the respondents indicated some willingness to buy an annuity at current rates, while only 12% actually are invested in one.
Interestingly, the study also found that a lack of liquidity or the inability to pass on an annuity as an asset to heirs were not cited as reasons to not purchase an annuity. Instead, the major factor was a lack of knowledge of the product and how to buy one. Some who were more familiar with the product had a negative perception of hidden costs and performance issues.
According to the authors of the study, the reluctance to buy one stems mostly from psychological reasons. Advisors should endeavor to provide more detailed knowledge about these products including the mechanics of how they work in order to increase comfort levels. Then, they should share an action plan of how to actually buy an annuity.
Finsum: Most retirees acknowledge the benefits of owning an annuity and self-report a desire to invest in one. Yet only 12% of retirees own an annuity despite the benefits. Some research on this gap came up with some interesting findings.
Cerulli Associates is forecasting that total assets under management in separately managed accounts (SMAs) will exceed $2 trillion in assets this year. 2023 saw asset growth of 12%, and the firm sees a 15% increase this year. It identifies growth in standalone SMAs in addition to unified managed accounts (UMAs) as key drivers of this trend.
According to Scott Smith, the director of advice relationships at Cerulli, SMAs allow for more customization of portfolios to achieve specific aims such as tax management or value-aligned investing. He also acknowledges that technology has made SMAs accessible and practical for a much wider swathe of the investing universe.
Previously, an SMA would be too complicated and costly due to tax and regulatory requirements to make sense for smaller accounts. A decade ago, SMAs were only available for clients with millions to invest. Now, they are available to clients with minimums of $100,000 in some cases.
The growth of these accounts comes at the expense of traditional brokerages. A key difference is that advisors who use SMAs receive compensation from clients’ portfolio values rather than trading commissions which can create bad incentives.
Finsum: Separately managed accounts are forecast to exceed $2 trillion in client assets this year. These are typically fee-based and allow for more personalization than investing through a brokerage where revenue is generated through trading commissions.