Wealth Management
For many clients who want personalized solutions and have complicated financial needs, the traditional approach of mutual funds or ETFs fall short. For investors with more complex tax issues or who desire that their investments align with their values, direct indexing offers a more comprehensive strategy.
Direct indexing captures many of the benefits of passive investing such as diversification, low-costs, and investing in an index. But the key differences are that the actual components of an index are owned by the investor rather than the fund.
Thus, there is a greater level of customization as investors modify these holdings to reflect their own political, religious, or ethical beliefs. This is especially pertinent with the increasing traction of ESG or values-based investing.
This customization can lead to better risk management as portfolios can be adjusted to reflect a clients’ particular risk profile and long-term goals. Another benefit is increased tax efficiency as there is more control over when capital gains are realized. Tax losses can be regularly harvested and used to offset capital gains. Similarly, charitable giving through direct indexing can also have certain tax advantages while also giving clients an opportunity to support causes or organizations that they believe in.
Finsum: Direct indexing has specific benefits that may appeal to clients looking to optimize their tax situation, align their investment with their values, while still retaining the benefits of passive investing.
One of the keys to unlock growth for your financial planning business is an effective marketing strategy. Marketing is important in every industry but even more so for financial advisors trying to differentiate themselves from the competition. You need to show what makes you unique and qualified to improve your clients financial situation.
The right marketing plan will help define your brand, raise your profile, and start generating leads. The first step is to understand your own strengths and weaknesses, identify your ideal client, figure out your unique value proposition, and research the marketing strategies of your competitors. It’s also helpful to think about what mediums or online platforms would be best suited to reach prospects.
Next, it’s time to set specific and actionable goals and evaluate whether your marketing plan is working or needs to be tweaked. Some metrics to consider are traffic to your website, social media followers, new clients, and an increase in sales. Once you have set your goals, it’s time to develop a content strategy.
There are many possible options, but it’s best to start with one that fits with your personality and that you personally enjoy. Once there is some traction, you can consider other forms of content.
Finsum: Financial advisors need a solid marketing plan to effectively grow their businesses. Here are some tips on getting started.
Advisors have to offer personalized solutions for their clients’ financial needs. Of course, this presents an inherent conflict for any advisor who wants to grow their practice as these efforts are often not scalable.
Unified managed accounts (UMA) are a potential solution for advisors to offer low-cost and customized solutions by outsourcing these functions from professional asset managers. UMAs provide an open structure for advisors to toggle between managed account programs, asset allocations, portfolio management, and trading in order to become more efficient and increase the speed of implementation.
Advisors can leverage UMAs to reduce complexity and provide more holistic advice for clients while freeing up time and energy to focus on business development. In contrast to mutual funds or ETFs, UMAs and separately managed accounts (SMA) provide more customization and tax efficiencies. However, SMAs often lead to more administrative burdens since each account generates its own statements, tax documents, and portfolio management needs.
In contrast, UMAs offer access to multiple strategies in a single account while enabling tax savings through tax-loss harvesting. There is more efficiency given that there is less paperwork while also providing a more holistic view of a clients’ financial situation.
Finsum: UMAs can lead to more efficiencies for advisors, leading to less paperwork and tax complications. It also leads to a more holistic view of a clients’ finances.
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First Trust Advisors is launching its 16th taxable fixed income ETF with the First Trust Core Investment Grade ETF (FTCB). The fund has an expense ratio of 0.55% and will look for the maximum possible long-term return by investing all of its funds in investment-grade securities, comprising Treasuries, TIPS, mortgage-backed securities, asset-backed securities, US corporate debt, non-US fixed income securities, municipal bonds, and CMOs.
The fund’s portfolio managers are Jim Snyder, Jeremiah Charles, Todd Larson, Owen Aronson, Nathan Simons, and Scott Skowronski. Its core philosophy is to analyze fundamentals to identify opportunities and risks while seeking alpha through sector allocation and duration management. Decisions are made through a defined and repeatable process which includes scenario analysis and stress testing.
They see upside for FTCB given that yields and credit spreads are at attractive levels. First Trust also believes FTCB will outperform in an economic downturn due to lower credit risk. It also believes the fund is well suited for the current market environment where risk management has been crucial, and active strategies have outperformed. According to First Trust ETF strategist Ryan Issakainen, the fund should “produce better risk-adjusted returns than passive benchmarks.”
Finsum: First Trust is launching a new active fixed income ETF, the First Trust Core Investment Grade ETF which looks to outperform passive benchmarks, maximize long-term returns, and minimize credit risk.
With yields on the 10-year Treasury briefly above 5%, many investors are considering whether this is the time to lock in long-term Treasury ETF exposure. Entering 2023, this was the consensus trade as many expected a slowing economy would erode inflationary pressures and compel the Fed to start cutting rates. Instead, long-duration Treasuries have seen another year of losses as the economy and inflation remained more durable than expected, and the Fed has continued to hike rates.
YTD, the iShares Treasury Bond 20+ Yr ETF (TLT) is down 13%, while the short-duration focused iShares Treasury Bond 0-1 Yr ETF (SGOV) is slightly up on the year. However, the case for long-duration Treasuries is even stronger than at the start of the year, and investors should consider taking advantage of the weakness.
The Federal Reserve has been increasingly dovish in the face of soft economic data and has already signaled that it will hold off on hikes at its next meeting. There is no longer inversion between the 2Y and 10Y which has generally been a reliable indicator of a recession. Weakness in regional banks and a spike in auto loan delinquencies also are indicative of the economy weakening which would also lead to more dovish policy from the Fed and relief for long-duration Treasury ETFs.
Finsum: Fixed income inflows have been strong all year despite considerable volatility and uncertainty about the economy and Fed.Long-duration Treasuries have floundered so far this year, but here are some reasons why investors should consider buying the dip.
Stocks whose prices trail their implied intrinsic value are often seen as attractive investments primarily due to their undervaluation. But a recent article by Vanguard suggests another reason value stocks may be worth considering now. Historically, value stocks have outperformed their “growth” counterparts in times of economic recovery.
The report quotes Kevin DiCiurcio, CFA, head of the Vanguard Capital Markets Model® research team, as he makes the case. “So, if you believe that the Federal Reserve may have engineered a soft landing—that we’re going to sidestep a recession and that the economy’s next move is an acceleration—the case for value is strengthened.”
According to their research published in August, 2023, Vanguard estimated that value stocks were priced more than 51% below their fair value prediction. They stated, “It’s well-known... that asset prices can stray meaningfully from perceived fair values for extended periods. However, as we explained in (previous research), deviations from fair value and future relative returns share an inverse and statistically significant relationship over five- and 10-year periods.”
This observation adds one more reason value stocks are worth a look. In addition to favorable valuations and historically consistent dividends, the possibility that value stocks may shine during the coming economic recovery many anticipate, is another factor to consider. Whether held directly, within a passive allocation, or as part of a Separately Managed Account, now is a perfect time to revisit the case for value stocks in your client’s portfolios.
Finsum: Vanguard's research highlights value stock historical outperformance during economic recoveries.