Wealth Management
Direct indexing is increasingly becoming a core offering for many financial advisors. Maybe the best indication of its growth is that there have been 12 major acquisitions by wealth management firms of direct indexing providers over the past couple of years.
Although its ubiquity and availability to all sorts of investors is a recent development, direct indexing has been around for many years albeit only for high-net-worth investors. In a recent SmartAsset interview of Vestmark’s SVP of Direct Indexing, Dave Gordon, he discussed what financial advisors need to know, and why wealth management firms are so bullish on the trend.
Gordon cites the growth of direct indexing due to clients demanding more customization and lower tax bills while wanting to retain the benefits of low-cost index investing. Direct indexing is a way for clients to have their cake and eat it as well due to technology which is making it possible for firms to offer these services to all types of clients.
However, there are some differences in terms of direct indexing offerings and approaches. For instance, some direct indexing providers will rebalance losing positions into sector or index ETFs for a temporary period to maintain factor scores and then re-invest in the same securities while others will choose to invest in different securities with similar factor scores.
Overall, he believes that direct indexing is more about data and technology than it is about securities and investing. Therefore, he believes in finding the providers with the best platform and resources.
Finsum: Direct indexing is here to stay, and wealth managers are betting big on the trend. Here are some important things for advisors to understand.
Cerulli Associates conducted a survey of ETF issuers which revealed some interesting findings. Already we are seeing fixed income ETFs gaining market share and seeing a surge of inflows due to higher yields and an uncertain economic outlook, but issuers anticipate fixed income ETFs to continue to outpace equity ETFs in coming years.
Within the fixed income ETF universe, they are particularly bullish on active fixed income. This is different from equities where passive funds dominate active in terms of inflows. But, active fixed income funds have a better track record of outperformance. Further, they are able to take advantage of more opportunities in terms of duration and credit quality as compared to passive fixed income funds, leading to better performance.
According to the survey, issuers expect growth in fixed income ETFs to be driven by institutional advisors and increased familiarity from financial advisors. Based on the findings, Cerulli recommends firms interested in active fixed income products to look for categories with few competitors to offer funds with low fees and attractive pricing. The firm also believes that many fixed income ETF issuers are failing to differentiate their product.
Finsum: Cerulli Associates conducted a survey of ETF issuers and came out with some interesting findings regarding passive and active fixed income funds.
Imagine trying to initiate an exercise regimen. At first, at least, it can seem a little daunting, huh?
Well, now, say you’re in practice management and thinking about developing a brand, starting with a blank slate. Whoa; you might feel as if you’ve bitten off more than you can…well, you get it.
So, three cheers for the helping hand. The checklist, according to lpl.com, can include choosing a name to coming up with a professional logo. These decisions have long term ramifications, so the pressure can be on.
With that in mind, a few pointers:
- Define your value proposition
- Pick your DBA name
- Develop a logo
- Develop a Website
- Execute with Consistency
Think about it: It’s a reality in today’s world: you’re a brand – and it’s incumbent upon you to not only develop yours, but market it, and get comfortable while you’re at it, according to hbr.org.
After all, personal branding’s an intentional, strategic practice. You’re defining yourself and putting your value proposition out there.
You can benefit in a host of ways from a potent, well managed personal brand. It bucks up your visibility can help advance your network and reel in newbies.
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Until a couple of months ago, the market’s consensus forecast was that inflation would gradually ebb lower as the Fed’s rate hikes would choke off economic activity, resulting in an inevitable recession. Needless to say, this scenario was very bullish for fixed income as it would let investors take advantage of higher yields and then profit from appreciation in bond prices.
Of course, reality had a different plan. Rather than a recession, we are seeing the economy continue to grow and add jobs. In fact, there is increasing evidence that the business cycle could be turning higher. Similarly, inflation has proven to be stickier than anticipated, and many believe we could be in a regime of ‘higher for longer’ inflation.
For ETF.com, Lisa Barr spoke to Monish Verma of Vardhan Wealth Management to get his insights on how to navigate this terrain. He believes that inflation will be structurally higher over the next decade which means more volatility in fixed income.
In terms of duration, he likes the short-end at the moment but recommends tactically adding longer-duration closer to the end of the year as the Fed nears the end of its hiking cycle. He also recommends fixed income ETFs that are low-cost and diversified as offering the most upside.
FinSum: Many fixed income investors were caught off guard when the economy and inflation proved to be more resilient than expected. Here are some strategies to consider if inflation continues to linger.
In an article for the FinancialTimes, Moira O’Neill discusses the pros and cons of buying an annuity today. Annuities are increasingly on investors and advisors’ minds because many are now offering yields that are equivalent to long-term returns achieved by equities. Further, inflation is trending lower, while many believe that current elevated rates will prove to be transitory.
From a less quantitative perspective, annuities also offer peace of mind given that there is no variability in terms of returns regardless of what happens with the economy or inflation or monetary policy. This can be appreciated more in the current environment given the rising risk of a recession.
Given that most annuities operate in perpetuity, a big factor in whether buying an annuity makes sense depends on an investors’ lifespan. The longer they live, the better an annuity will perform. And, this would certainly be the case if we go back to a low interest rate world which prevailed for much of the past 2 decades.
For investors and advisors who believe that inflation is here to stay, buying an annuity doesn’t make sense. Instead, they should find better opportunities in other asset classes which tend to outperform in an inflationary environment.
Finsum: Annuities are seeing major demand due to high interest rates, falling inflation, and increasing concerns that a recession is looming.
Many advisors have embraced model portfolios as it frees them from a portion of their portfolio management responsibilities. Instead, they are able to focus more time and energy on areas like client relationships, prospecting, and planning which are shown to be more important to building a successful practice, client retention, and helping clients reach their goals.
However as covered by Jeff Benjamin for InvestmentNews, some advisors are rejecting this approach. Instead, they believe that they can add value to their clients by remaining involved in portfolio management. Many of these advisors apply their expertise when it comes to selecting individual stocks for their clients’ portfolios.
For instance, Ryan Johnson of Buckingham Advisors will manage the large-cap equity portion of clients’ portfolios, but when it comes to small-caps, international, or fixed income he relies on mutual funds and ETFs.
Many of these advisors cite reasons such as tax management, higher concentration, and greater client involvement in their portfolios. That being said, these advisors acknowledge that it’s more work and comes with greater risk. Yet, they are willing to accept the tradeoff.
Finsum: Model portfolios are taking a greater share of the industry as it frees advisors up from portfolio management responsibilities. Yet, some are not so eager to embrace the trend.