Wealth Management
In an article for ETFTrends, James Comtois discusses how direct indexing can help investors reduce their tax bill by harvesting tax losses which then can be used to offset capital gains in other accounts. The proceeds from these sales are used to make investments in assets with similar factor scores to ensure consistency with benchmarks.
However, tax-loss harvesting is not a strategy that can be used by investing in an ETF or a mutual fund. In fact, direct indexing is one of the main ways that investors can maximize tax-loss harvesting. This is because with direct indexing, investors own the actual components of an index. It also allows for greater customization as advisors or investors can choose to alter the holdings to suit their personal situation.
At regular intervals, the portfolio is scanned for tax-loss opportunities. By automating the process, it ensures that opportunities aren’t missed to lower an investors’ tax bill. Increasing the frequency of these scans also leads to more alpha. According to research, tax-loss harvesting can add between 20 to 100 basis points of performance.
Finsum: One of the main benefits of direct indexing is that it allows investors to reduce their tax liability while allowing investors to realize the benefits of index investing.
In an article for SmartAsset, Rebecca Lake CEFP shares some tips on successful retirement planning for financial advisors. While advisors spend so much time and thought into their clients’ financial goals, they don’t do the same for themselves especially given the complications of succession planning. Additionally, advisors can maximize the value of their practice by taking some proactive steps.
The first step is to figure out your ideal outcome and then create a plan to achieve the goal. The earlier that you can start taking steps towards this goal, the higher your chances of success. This could mean thinking of how to transition the business whether that means selling to employees, the highest bidder, or passing the business on to your heirs, and how it will impact clients and employees.
The second step is to figure out the value of your business and to consider getting a professional appraisal. This will help you make better decisions so that you can ensure a successful transition.
Finally, advisors have to consider their own personal financial situation that is independent of their business to ensure a comfortable retirement. This includes all the major components of planning such as retirement contributions, insurance, life insurance for family, budgeting during retirement, etc.
Finsum: Many advisors don’t spend enough time on their own retirement and succession planning. However, this is an increasingly important issue given the aging of the wealth management industry.
In an article for SeekingAlpha, Principal Financial Group previews the third-quarter and lays out the opportunities and risks it sees in fixed income. Overall, the firm expects the asset class to have a modest tailwind given its expectations for a recession by the end of the year.
As evidence, Principal Financial cites the unprecedented tightening over the last 16 months, slowing economies all over the world, tightening credit standards, and the inverted yield curve. It believes that the next 2 hikes will be the Fed's last in this hiking cycle.
However, the firm doesn’t believe the central bank will be successful in engineering a ‘soft landing’ despite this increasingly becoming the consensus position over the last couple of months. Instead, the firm anticipates a final lurch higher in yields with the breakout ultimately being rejected.
Amid this period of volatility and uncertainty, the firm believes that active funds are best positioned to take advantage of market conditions, and it sees the most upside in high-yield fixed income given that the firm’s base case is for a mild recession.
Finsum: In Q3, Principal Financial Group sees upside for fixed income due to a softening economy, and it sees the most value in high-yield.
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In a piece for FutureVault, Kristian Borghesan covers some important items that financial advisors need to consider for succession planning. This type of thinking is increasingly important given the boom of M&A in the space in addition to the aging of advisors in the industry.
Advisors want to ensure a smooth transition in their business to the next generation of advisors while ensuring that client satisfaction is not sacrificed. Additionally, both parties need to be aware of regulatory requirements as well as potential impacts on other employees at the firm.
The goal of succession planning is to ensure continuity of the business, retain clients, preserve the value of the practice, and transfer skills and expertise. Advisors and acquirers have a variety of options to choose from when it comes to structuring the transaction. Increasingly, many advisors are choosing to stay on as employees in a limited capacity to ensure a smooth transition.
So much of the value of a financial advisor practice is due to the clients. Therefore, there needs to be a plan and transition period to ensure that relationships are successfully transferred to the new team. Some recommendations include joint meetings and a slow transition of responsibilities while maintaining active communication with clients during the transition process.
Finsum: Succession planning is essential for advisors to ensure a smooth transition of their business and maximizing the value of their firm. Here are some important considerations.
In an article for MarketWatch, Jamie Chisholm discusses whether stocks can still rally despite the recent surge in bond yields following a spate of positive economic data. Fixed income enjoyed strong performance for most of the first-half of the year, however the asset class gave up a portion of these gains in June as it became clear that the Fed was not done hiking rates given resilience in inflation data and the jobs market.
However, Chisholm warns that as yields get above these levels, they have a tendency to become a headwind for equities. He cites Mark Newton, the chief technical strategist at Fundstrat, who believes that bonds are due for a bout of strength. He believes this pullback in yields will fuel the next leg higher in equities.
Newton believes that yields will find resistance at these levels and sees more risk of a breakdown in yields rather than a sustained breakout to new highs. He also believes the market is going in the wrong direction in terms of over-rating the Fed’s hawkishness in response to recent data. As evidence, he cites trader positioning which shows that the bulk of traders are betting on more rate hikes into year-end.
Finsum: Bond yields are now trading at their 52-week highs following a series of better than expected economic data. Can equities still rally with yields at these levels?
In an article for InvestmentWeek, Jeffrey A. Johnson, the head of Fixed Income at Vanguard, discusses why there is opportunity for investors in active fixed income funds. He sees attractive valuations coupled with elevated yields. However, he warns that more volatility is likely given that central banks aren’t yet finished raising rates.
According to Johnson, periods of volatility are when active fixed income really shines. Further, he believes investors can increase their odds of success with active investing by selecting funds with qualified and capable management teams in addition to low costs.
Over the long-term, most active funds fail to beat their benchmarks. The story isn’t so simple in fixed income given that active managers can take advantage of different durations and credit quality that aren’t available to passive funds.
Given the challenges of active management, Vanguard recommends a blend of active and passive funds. Although, it favors active management during periods of volatility and uncertainty. In contrast, passive funds offer predictability and lower costs, while active funds offer a higher degree of risk and reward.
Finsum: According to Vanguard, the outlook for active fixed income funds is improving. The asset class tends to outperform during periods of volatility and economic and monetary uncertainty.