Wealth Management
A little more than 3 years ago, the SEC strengthened fiduciary rules with the passage of Reg BI, and this was also adopted by FINRA. According to a recent report from state regulators, brokerages are still struggling to comply with these new regulations.
In essence, Reg BI ensures that any recommendations made by a broker have to be offered impartially along with an explanation of any alternatives. The purpose of these rules is to ensure that there is no conflict between a broker and the client without necessarily imposing the full fiduciary obligation of RIAs.
The North American Securities Administrators Association (NASAA) reviewed broker compliance efforts and found middling results especially given that 3 years have passed. Additionally, the SEC and FINRA have stepped up enforcement efforts this year. According to the group, there remains room for improvement especially as many brokers remain uncertain about the rule and its application to products like annuities, leveraged products, private placements, or other alternative investment products.
Many firms are creating their own protocols regarding compliance and spending more time on understanding their clients’ risk tolerance and goals before providing recommendations. However, the group also found that many brokerages are too lax especially when it comes to providing disclosures and alternative recommendations.
FinSum: The North American Securities Administrators Association conducted an audit of brokerage to see how Reg BI compliance efforts are going.
Bringing home the bacon.
Before taking their talent to UBS Wealth Management, a five person Connecticut team was grinding, managing $700 million in Greenwich, according to a recent announcement, reported advisorhub.com. The team had been at Merrill Lynch.
Also bidding Merrill adieu was John Foley, who managed $340 million in client assets. He landed at RBC Wealth Management, the announcement indicated.
In terms of recruitment, it seems Merrill’s been a favorite target of UBS. That includes a group of 18 in Columbia, South Carolia. A total of $2.6 million was managed by the team.
In other industry activity, LPL Financial scored a group of finance advisors with $260 million in client assets, according to investmentnews.com. Specializing in retirement programs for schools, universities and hospitals, known as 403(b) plans, the group had previously been at Valic Financial Advisors Inc.
“We specialize in financial education and breaking down complex financial situations to a place where clients can better understand and be more comfortable with their decisions,” said financial advisor Angelo Burns in a statement. He’d been at Valic since 2011.
In the wealth management arena, direct indexing is one of the fastest growing areas and presents a unique opportunity for investors and advisors. Demand for these services is likely to grow due to more awareness of the benefits, desire to lower tax bills, lower costs, and easier implementation.
According to Cerulli Associates, direct indexing assets under management (AUM) are likely to grow at a faster rate than traditional categories like ETFs, mutual funds, and SMAs over the next five years and reach over $1 trillion by the end of the decade. Despite these bullish trends, less than 20% of advisors are familiar with the strategy and recommend it to clients.
For investors, the biggest appeal of direct indexing is the potential to lower the tax bill and use harvested losses to offset gains in other parts of the portfolio. Continued adoption and awareness at the investor and advisor level are likely to be the biggest growth drivers over the next few years.
Direct indexing is a form of passive investing except investors are able to access the increased customization and tax loss harvesting benefits of active investing. This is done by recreating an index in a personal portfolio with appropriate adjustments to account for an individual’s situation or financial goals.
Finsum: Direct indexing assets under management is on pace to exceed $1 trillion by the end of the decade. Here are some of the major growth drivers.
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Picking the right niche can really help an advisor differentiate themselves in a crowded market to create a unique brand. Typically, a niche means that an advisor is focusing on a particular demographic such as a particular profession or demographic. But, it can also refer to advisors who specialize in specific areas such as financial planning or alternative investing.
Specialization can lead to more knowledge and expertise. It’s also likely that prospects will seek an advisor out who has more experience in their area of interest or need. In terms of the best niches, one strategy is to specialize in a particular stage of the planning process.
Nearly everyone’s most important financial goal is to prepare for retirement. Therefore, retirement planning is an evergreen niche for advisors and also where they can be most impactful. This involves becoming well-versed about various retirement plans and options. Ultimately, it’s about helping retirees and prospective retirees have the best quality of life.
Another possible niche is to focus on younger clients. This would involve being digitally savvy and understanding their needs and goals with a major emphasis on education around personal finances and investing. Many younger clients also stand to inherit money from older generations given the country’s demographic realities.
Finsum: Picking the right niche is an important decision for every advisor. Here are some tips on picking the right niche and some examples.
Active fixed income is one of the fastest growing categories in terms of inflows and new issues. It’s taking market share away from mutual funds and passive fixed income ETFs. Now, Vanguard is adding to its active fixed income ETF lineup with the launch of 2 new active fixed income ETFs for later this year.
The Vanguard Core Bond ETF and Vanguard Core-Plus Bond ETF provide exposure to a diversified portfolio of bonds across sectors, credit quality, and durations. The Core Bond ETF will focus on US securities with small allocations to higher-risk areas like high-yield credit and emerging market debt. The Core-Plus Bond ETF will have greater allocations to riskier parts of the fixed income market. Each has relatively low expenses at 0.10% and 0.20%, respectively.
Each of these has a mutual fund counterpart and will be managed by the same management teams, share benchmarks, and have the same costs. Yet, they are considered distinct products. It’s simply a reflection that a portion of investors, specifically younger investors, simply prefer the intraday liquidity and ease of these products vs mutual funds.
Active fixed income is also seeing greater interest due to the current uncertainty regarding monetary policy and the economy’s trajectory. Active managers have greater latitude and more flexibility to navigate this environment in contrast to passive funds.
Finsum: Vanguard is launching 2 active fixed income ETFs which are based upon successful mutual funds. The active fixed income category is rapidly growing in terms of inflows and new issues.
Equity and fixed income markets were battered following the September FOMC meeting where the committee left rates unchanged but the committee members’ dot plots for the future trajectory of monetary policy and Chair Powell’s press conference had a decidedly hawkish tilt.
The message was that another rate hike is likely before year end and that rates are likely to stay elevated for longer. Thus, Fed futures markets reduced the odds of rate cuts in 2024, leading to pain for the long-end of the fixed income complex. In contrast, the short-end of the curve saw major inflows as investors look to shield their portfolio from volatility and take advantage of high rates.
Following the Fed meeting, there was $25.3 million of inflows into the iShares Treasury Floating Rate Bond ETF which was about 40% of the total inflows in the previous month. This marks an acceleration of a trend which began last quarter of outflows from longer-term Treasury ETFs and inflows into short-duration Treasury ETFs.
Supporting this notion is the uncertainty over the economy and monetary policy as this tends to lead to volatility for long-duration assets. Additionally, the flatness of the yield curve means that there isn’t sufficient compensation for the additional duration risk.
Finsum: Most of the fixed income complex suffered losses following the hawkish FOMC meeting, but one exception was short-duration Treasury ETFs.