Wealth Management
Consumers are increasingly seeking greater personalization. According to a McKinsey report, "The value of getting personalization right—or wrong—is multiplying," 71% of consumers stated that they expect personalized experiences. It stands to reason that this expectation would extend to their investment portfolios, which are arguably more consequential than everyday consumer purchases.
For financial advisors, this signals a shift towards accommodating clients who demand more than what mutual funds and exchange-traded funds (ETFs) can offer. Separately managed accounts (SMAs) are a viable solution to meet this demand for customization. SMAs allow investors to personalize their investment strategy to fit their unique objectives, risk appetite, and financial situations—something that generic investment vehicles cannot always match.
In addition, the expertise offered by investment managers in SMAs is invaluable. Their insights are critical for asset allocation, security selection, and risk management. As the trend towards customization grows, SMAs may well become a cornerstone of investment portfolios, offering the personal touch that today's investors increasingly expect.
Finsum: Separately Managed Accounts may emerge as the solution of choice to fulfill investors' growing preference for personalization.
At the DeVoe and Company annual M&A+ Succession Summit, LPL Financial announced an expansion of its liquidity and succession offerings for unaffiliated advisors. The program was initially started last year for LPL advisors who are eyeing retirement but still a decade away from actual retirement.
In essence, the program is designed to allow advisors to receive market value for their firm immediately, but they are required to commit for a period of time to support the next generation of advisors who would be groomed to take over the business. As an intermediary, LPL would buy 100% of the practice while the chosen successors would run the firm while participating in a 10-year ‘successor advisor’ program before fully taking over.
This strikes a balance as it gives the current generation liquidity and full value for their business, while also setting up the next generation of advisors who may not necessarily have the capital to acquire a practice. According to LPL Executive VP of Strategic Business Development Jeremy Holly, “They’re not having to come out of pocket or take down a bunch of debt to take over. And the principal seller doesn’t have to take a steep discount to sell their practice to that next generation.”
Finsum: LPL Financial introduced a new program for succession planning. Current advisors would be able to sell to LPL but remain with the firm while the next generation is trained to takeover.
The outlook for the financial markets and economy is quite murky given several uncertainties such as a slowing economy, high interest rates, inflation, trouble in the banking sector, and geopolitical risk. Adding to these woes has been the poor performance of bonds. Typically, they are a safe haven during periods of uncertainty and volatility. Yet, they have suffered losses and failed to provide sufficient diversification over the last couple of years.
Thus, many are looking at other asset classes to meet these needs such as fixed-indexed annuities. The rates on these annuities are tied to the performance of an index such as the S&P 500 with much less risk. They combine the security of a fixed annuity while having some upside like an index annuity.
Most fixed-indexed annuities are structured to provide 100% protection of the principal which is especially advantageous during a market downturn. In some ways, these are more secure than bank deposits given that there is a 100% financial reserve requirement for annuity issuers while banks have much lower reserve requirements on deposits.
However, there are some downsides to fixed-indexed annuities. Relative to bonds, there is much less liquidity, as most have some sort of limits on how much of the principal can be withdrawn without incurring a penalty. There are also higher fees than simply investing in a fixed income fund.
Finsum: Fixed-indexed annuities may be a better fit for many investors than traditional bonds especially in the current environment.
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Financial advisors increasingly recognize the significant growth opportunities that rollovers from 401(k) plans represent. With more than $10 trillion invested in participant accounts, these plans offer advisors a considerable potential stream of new assets under management (AUM) in the coming years.
This potential is especially pronounced for advisory organizations that provide both plan advice and wealth management services. The recent trend of advisor consolidation and the push for firms to diversify their offerings means these organizations are in a prime position to attract rollovers from these retirement plans.
However, it's worth noting that some advisors have account minimums that may exclude smaller rollovers or prefer not to take on new accounts with low balances. Additionally, plan sponsors often prefer that all participants, not just those with larger balances, have the opportunity for rollover assistance.
This is where collaboration with record keepers comes into play. A successful example of such a partnership was recently highlighted on planadviser.com, featuring an interview with Ed Murphy, CEO of Empower. The article pointed out Empower's quarter-over-quarter growth in rollover capture. According to Murphy, this success was attributed to the firm's capability to service average accounts of around $100,000, which third-party wealth managers often overlook.
In essence, strategic partnerships in rollover capture can be a win-win, enhancing service provision to all participants while providing potential wealth management AUM growth for financial advisors and record keepers alike.
Finsum: Partnering with 401(k) record keepers on rollover capture offers advisors a win-win proposition.
One of the major benefits of direct indexing is that tax losses can be harvested during up and down years. This option is not available to clients who are invested in indices. This is because clients will own the actual components of an index in their account rather than an ETF or a mutual fund. With regular scans, losing positions can be sold to harvest tax losses which can then be used to offset gains in the future or other parts of the portfolio.
This is because some components of the index will be in the red even in up years. These positions are sold and then other stocks with similar factor scores are added to ensure the benchmark continues to be tracked.
According to Vanguard, “Because investors directly own the individual securities in their direct indexing portfolios, you can harvest losses for them even in years when the index is up. You can use these losses to offset your clients’ capital gains, and help them keep more of what their portfolios earn.” Overall, it believes that the strategy can add between 1% and 2% in annual returns in after-tax alpha for clients with large capital gains in addition to helping optimize short and long-term holding periods to minimize capital gains taxes.
Finsum: Direct indexing has several benefits for investors such as tax-loss harvesting. While many are familiar with its application during down years, less are aware that it can be used to add alpha even in up years.
Over the last couple of years, there has been an increase in the number of actively managed funds that offer exposure to more niche areas such as collateralized loan obligations, asset-backed securities, commercial mortgage-backed securities, and agency mortgage-backed securities. The latest entrant in this space is the Janus Henderson Securitized Income ETF (JHG).
The ETF seeks to generate high income by providing exposure to “the most attractive opportunities on a risk-adjusted basis” across the market for securitized debt. The firm believes that investors can meet their income and duration goals in this sector with lower levels of credit risk. Many of these assets have less sensitivity to interest rates unlike many parts of the fixed income market. According to Paul Olmstead, the senior manager research analyst for fixed income at Morningstar Research Services, “This is a part of the market that does require active management and specialized expertise as there’s a complexity component.”
These funds have also outperformed amid the increase in volatility over the last couple of years. Three years ago, Janus Henderson launched the Janus Henderson AAA CLO ETF (JAAA) which currently has $4.6 billion in assets. In a validation of its premise, the fund delivered a total return of 6.9% YTD and 0.5% in 2022. To compare with a benchmark, the iShares Core US Aggregate Bond ETF (AGG) has a total return of -0.8% YTD and was down 13% in 2022.
Finsum: Many active fixed income funds are being launched with a specialized focus on a particular niche. These funds have outperformed amid the volatility in the fixed income market.