Wealth Management
While model portfolios are gaining in popularity, there are some notable detractors such as Lifeworks Advisors CEO Ron Bullis who criticized model portfolios for not providing enough customization for clients. His comments at the WealthStack Conference were covered by Patrick Donachie for WealthManagement.
Specifically, he believes that the risk scores used by model portfolios are not effective indicators of the actual risk faced by clients which can vary by large amounts. He believes that the industry is falling short on meeting the needs of clients especially in a world of increasingly personalized services that are immediately available.
Due to the ubiquitousness of smartphones and finance apps, the cost and inconvenience of switching advisors has dramatically declined. This is a major change from the previous decade. And, we saw a taste of this during the collapse of Silicon Valley Bank with $42 billion in customer deposits exiting the bank in days as rumors of a collapse spread.
Advisors need to start thinking about this new reality as competition for clients could also increase. They need to clarify and understand what is unique about the services they are providing to their clients and need to proactively take steps to grow the relationship with clients.
Finsum: With technology comes inevitable change, financial advisors need to prepare for a world where clients are much more proactive in switching firms due to digitalization.
Regulation Best Interest (Reg BI) was passed by the SEC in 2019 and implemented in 2020. It essentially requires brokers to only recommend products to customers that are in their best interest. It also requires that brokers must inform clients of any potential conflicts of interest and financial benefits they may accrue.
Until recently, enforcement of Reg BI has been lacking, but this is clearly now changing as authorities are stepping up. The most recent incident is FINRA fining five broker-dealers for failing to comply with regulations including Reg BI and Form CRS.
These firms were cited for a lack of guardrails and protocols that would lead their registered brokers to adhere to Reg BI. Relatedly, these firms were also penalized for missing deadlines related to Form CRS and/or providing incomplete information. Form CRS is an overview of a broker’s services, fees, conflicts of interest, prior disciplinary action, and other information to increase transparency and minimize fraud risk.
The five firms did not admit or contest FINRA’s decision. Like previous Reg BI enforcement, the penalties and citations were minor. In contrast, the SEC has only filed one major Reg BI case, but it pursued much harsher penalties.
Finsum: Reg BI is a new regulation which mandates that broker-dealers must inform clients of any conflicts of interest and recommend products that are in their best interest. Recently, regulatory authorities are stepping up enforcement.
One reason for the growing popularity of direct indexing is tax-loss harvesting. However, many investors fail to capture the full benefits, because they are manually reviewing their portfolio for these types of opportunities.
In an article for Vettafi’s Direct Indexing Channel, James Comtois shares why automation is essential to unlocking the full benefits of direct indexing. With direct indexing unlike investing in indexes, losing positions can be sold to reduce an investors’ tax liabilities. Then, these proceeds can be reinvested in similar assets.
However, the more frequently these opportunities can be uncovered, then the greater the potential alpha. Therefore, investors should look to automate this process in order to capture the most benefits. Unfortunately, many advisors continue to do this process on an annual or quarterly basis which means they are missing many opportunities.
With the right software, these scans can be conducted on a daily or weekly basis, leading to more consistency and better outcomes in terms of tax savings. Automation can also help advisors find the best rebalancing opportunities. Overall, more frequent scans can lead to between 20 and 100 basis points of additional returns.
Finsum: Direct indexing is rapidly growing, but many advisors fail to capture its full benefits, because they are not automating the process of finding tax-loss harvesting opportunities.
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Over the last decade, ESG investing has grown increasingly popular among asset managers as a way to evaluate investments and reward corporations for considering environmental, social, and governance factors when making decisions.
Like any trend, there has been a backlash as many conservatives believe that corporations should focus on financial metrics. And, there has been a wave of legislation from Republican governors and state legislatures banning the use of ESG factors by asset managers, managing state funds, when making investment decisions.
Given its prevalence in institutions and rising salience as a political issue, it’s interesting to look at recent Gallup polling which shows that the issue has had little impact on most Americans regardless of their political affiliation.
Even though the issue has entered the political arena in the last couple of years, only 38% of Americans are familiar with the term which is unchanged from 2021, the last time that Gallup conducted a poll on the issue. In addition, 40% of Americans were not aware of ESG at all, while 22% were somewhat familiar with the concept.
Clearly, ESG investing is a big deal for institutions and politicians, it’s failed to break through to the public.
Finsum: ESG investing has grown in prominence among investors and politicians. However, Gallup polling shows that it’s not on the radar of most Americans.
In an article for Financial Planning, Erica Carnevalli discussed some best practices for financial advisors looking to bolster their digital marketing. For advisors looking to market their services especially to younger prospects, having an effective online presence is necessary.
According to Broadridge Financial Solutions, over 40% of advisors have landed clients through social media marketing but only 28% of advisors have an online marketing strategy. Creating your strategy, targeting your ideal client, and ensuring that it aligns with your firms’ value is the first step.
The second step is to find the channel that aligns with your personality. Some options include podcasts, short form videos, or blogging. The key is to make small investments in terms of time and energy at first. Once, something gains traction, then you can double down on that particular approach. Another key is to stay consistent in terms of your output and timing so that you can be a consistent presence on your prospects’ feed.
Finally, advisors need to curate a professional online image that reflects the best version of you. This means keeping your content professional and curating any comments that could detract or distract from your aim.
Finsum: Digital marketing is increasingly necessary for advisors who are looking to grow their practice. Here are some important considerations.
In a blog post for JPMorgan, Nancy Rooney, the Global Head of Managed Solutions, discusses how many investors have been aggressively buying short-duration fixed income given that yields are at their highest levels in decades and economic risks abound. Some of the most prominent ones include a slowing economy that many believe is likely to tip over into a recession, a standoff between Congressional Republicans and the White House over the debt ceiling, a stressed banking system, and a hawkish Fed.
While this move has paid off so far in 2023, Rooney raises some concerns that it may undermine investors’ efforts to reach their financial goals. Having too much allocation to fixed income and being underexposed to equities will hinder portfolio returns in the long-term. In fact, a portfolio solely in Treasuries would have failed to beat inflation over the last 30 years.
She recommends that investors think about equities as the growth engine for their portfolios, while Treasuries are more of a cushioning. This means that investors should consider using periods of fixed income outperformance to regularly rebalance their allocations in order to stay on track towards their financial goals.
Finsum: Fixed income has been a strong performer over the last couple of quarters. Yet, it doesn’t mean that investors should go overboard in increasing exposure to the asset class.