Top Industry Developments in February
Market Opportunities & Challenges
Advisor Trends
Investor Trends
Industry Developments
Investment Opportunities & Outlook
Brief Summaries of the Headlines
Market Opportunities & Challenges
Lack of communication around inheritance plans leaves many Americans unprepared for generational wealth transfer
According to a study by Edward Jones, 35% of Americans do not plan to discuss the transfer of wealth within their families. While nearly half (48%) plan to leave an inheritance, discussions on generational wealth are limited, impacting preparedness and family understanding. Baby Boomers and the Silent Generation are expected to pass down a combined $84.4 trillion in assets by 2045, underscoring the importance of communication among younger generations.
Despite 71% of adults with children feeling comfortable discussing generation wealth, only 7% have had such discussions. The study also shows that only about a quarter of adults feel prepared (23%) and confident (25%) in the wealth transfer process. Engaging an expert can be valuable in this process, as 57% of Americans believe having a financial professional guide and inform their family discussions around wealth transfer and inheritance would make planning and reaching a family consensus easier.
Source: Edward Jones
Financial advisors struggle with personalization and marketing, prompting a rise in interest towards generative AI solutions
North American financial advisors are increasingly looking to next-generation technology such as generative AI to address their marketing challenges and meet the increased personalization expectations of prospective and current clients, according to a survey by Broadridge Financial Solutions.
The report?noted that an important part of an advisor’s growth strategy is personalized educational content that forges deeper relationships and helps clients achieve their individual goals, but many advisors find challenges in developing and sharing personalized education.?
Almost half (49%) of U.S. advisors who do not share educational content with clients said they are uncertain how best to do so, 46% said they do not have enough time, 44% thought their clients were uninterested and 34% had run into compliance issues.
The report also found that the number of U.S. advisors who have a defined marketing strategy is at the lowest level since 2019, down to 20% in 2023 from 28% in 2019.?
Source: Broadridge
A surge in ‘retailization’ of alternative assets, making them more accessible to retail investors for long-term wealth building
The report from BNY Mellon states that the investment landscape is witnessing a significant shift as alternative assets, once exclusive to only institutional investors and the ultra-wealthy, are becoming accessible to retail investors. The report attributes this to the robust performance of alternative investments prompting efforts to democratize access, termed “retailization”.
While regulatory concerns, liquidity issues, high fees and minimum investment requirements have hindered retail access to alternative assets, there is a growing movement to make them more available. This shift aligns with the need for strong long-term returns to support longer life expectancies and reduce potential state resource burdens. Governments, as part of their ESG strategy, are seen as supportive of democratizing access to savings vehicles.
Countries are adapting investment frameworks to facilitate retail access, creating new product structures for easier entry. Alternative asset managers are evolving offerings for non-accredited individuals, exploring innovations like tokenization to make products more affordable. Overall, the report underlines a transformative trend toward democratizing alternative asset access, reshaping investment strategies and opportunities for a broader investor base.
Source: Investment News
Advisor Trends
Advisors underestimate client retirement readiness, leading to a knowledge gap and a shift to safer investments
Financial advisors hold notably different views on their clients’ retirement readiness compared to the clients themselves, according to the Allspring Global Investments’ annual retirement survey. While around two-thirds of retirees and near-retirees consider themselves ready for retirement, only 40% of advisors, share this perception. A significant gap exists in understanding specific retirement topics, with 44% of near-retirees and 54% of retirees feeling knowledgeable about Social Security, in contrast to just 10% of advisors who agree.
Concerns about retirement security are shared by both advisors and investors, focusing on inflation, investment performance and retirement planning. The survey reveals a trend of investors monitoring towards stable or fixed income investments for financial security, with three-fourths of near-retirees and retirees making such shifts in the past year.
The survey also reveals that 69% of retirees express that retirement is better than they had anticipated, reflecting a positive reality in their transition to retirement.
Source: ThinkAdvisor?
Cerulli report finds cost is a major concern for unadvised investors, urging advisors to be transparent about fees and services
According to a Cerulli report, unadvised investors have some degree of unease when it comes to signing on with an advisor due to concerns over cost.
For prospective affluent clients, cost transparency (46%) and general expense (28%) are cited as the most difficult aspects of working with an advisor. Given the variety of ways in which an advisor typically charges for services, whether asset-based fees or commission-based, it can be a challenge for prospective clients to fully understand how much they are paying for financial advice, how they will pay for it, and what type of advice they will receive.
Financial advisors are encouraged to engage in open discussions with potential clients about the fee structure offering clear estimates of expected costs, details on payment methods and a transparent overview of the services the client can expect. This approach is deemed to be essential for building trust and ensuring clients have a comprehensive understanding of the value they will receive from the advisory relationship.
Source: Cerulli Associates
Investor Trends
Older Americans lack retirement knowledge, making advisors crucial to bridge the gap for a secure future
A recent study reveals a concerning lack of actionable retirement knowledge among older Americans, with an average score of 31% on a retirement literacy quiz. The study emphasizes the direct correlation between financial literacy and factors like asset levels. Notably, advised respondents exhibit their retirement income literacy and better outcomes than their non-advised counterparts.
Financial professionals play a key role in educating clients and make them understand how much to save, where to save, and how to draw down at retirement, bridging the knowledge gap.
The study also addresses key knowledge areas for individuals aged 50-75, focusing on the critical period when issues like income withdrawal and managing finances in retirement become prominent. Respondents’ self-ratings of retirement income knowledge were compared with actual scores, revealing a substantial gap in savings.
The research stresses the need for personalized financial plans tailored to individual goals, lifespan projections, and healthcare requirements in the dynamic of landscape of retirement planning.
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Despite challenges, Black consumers remain optimistic, resilient about their financial health
A survey by Achieve reveals that while Black consumers frequently experience financial stress, their expectations for improved financial health in 2024 surpass those of other demographics. The survey, aimed to understand key financial pain points and goals within the Black American community, identifying inflation and debt as significant challenges hindering financial goals.
The survey reveals that 76% of Black consumers live paycheck-to-paycheck, with 54% struggling to make ends meet and 33% reporting financial comfort.
Optimism is evident in the fact that 75% of respondents have no plans to leave their current jobs, suggesting expectations of income growth through wage increases or additional income sources. Concerns about debt and inflation persist, with 47% expecting increased grocery costs and 40% anticipating higher utility expenses.
Financial goals for Black respondents include making more money, increasing savings, and paying down debt. Access to traditional banking is high, but many struggle with inadequate funds.
Source: PRNewswire
Amidst another wave of layoffs, a new Quicken survey uncovers what is driving Americans’ personal finance decisions
A survey by Quicken reveals that 80% if Americans have financial regrets, primarily centered around insufficient emergency funds and not adopting more aggressive investment strategies. The impact of these regrets intensifies during periods of income instability, particularly amid recent layoffs in sectors like tech, media, logistics and finance.
Notably, 48% of Americans lack enough savings to cover three months without income, making financial prioritization crucial amid the threat of layoffs. The survey highlights that while 54% credit good financial advice for effective budget management, 17% have received financial advice that hurt them financially.
Looking ahead, positive economic indicators like strong job and wage growth, coupled with expected interest rate cuts due to declining inflation may provide favorable conditions for Americans to enhance their financial wellness.
Source: Quicken
Industry Developments
Millennial and Gen Z wealth reaches new heights
The financial assets of Millennials and Generation Z grew the most of any generation since 2019. Gen Z, the youngest generational cohort, recorded nearly $6 trillion in financial wealth—up from $2 trillion in 2019.
While all generations saw their wealth increase, Millennials and Gen Zers were aided by large increases in ownership of both stocks and retirement accounts. By the end of 2022, most Millennials and Gen Zers (55%) held a retirement account either through their employer or acquired independently—a 6% increase from 2019. Additionally, the retail trading boom of the early 2020s affected this group the most, with 22% now owning individual stocks and 9% owning pooled assets including mutual funds and ETFs, up from 13% and 6%, respectively.
For asset managers, having advisors and financial planners of these generations will provide perspective on the unique challenges facing Millennials and Gen Zers and will help deliver the strongest advice solutions possible given their needs.
Source: Cerulli Associates
Low-Cost and active ETFs boost January ETF flows
After entering the new year on the heels of December 2023’s record ETF inflows, January ended with an equity selloff driven by uneven earnings reports and less than exuberant guidance from mega-cap tech leaders.
However, that’s nothing out of the ordinary. Seasonal buying patterns historically have made December the strongest month for ETF inflows and January the weakest. Better than usual performance across asset classes pushed this January’s inflows to $43 billion, which was $13 billion more than January’s average, but still 12% lower than ETFs’ average monthly inflow of $49 billion. January’s inflows were attributed to low-cost core exposures, which took in $41 billion and are less susceptible to the seasonality rip and dip than tactical ETFs and active ETFs adding an all-time record of $20 billion.
Source: State Street Global Advisors
Investment Opportunities & Outlook
European stocks deserve more attention
After outperforming for 18 months, European stocks are now cheaper than US stocks since mid-2023. However, on a medium-term horizon, the region’s outlook has structurally improved. In the last decade, European companies' profits haven't grown as fast in the past decade due to factors like austerity measures. Europe's economic struggles stemmed from the financial crisis, debt issues, and government spending cuts. Zero or negative interest rates to counter deflation risks caused banks’ return on equity to plunge. The EU is now issuing common debt for certain projects, allowing for more government spending. They've also successfully replaced Russian gas with American LNG, avoiding a winter energy crisis after the Ukraine war. These recent structural changes and increased government investment could lead to higher profits for European companies, making their stocks more attractive.
Source: JP Morgan Asset Management
Despite recent drops in yields, the fixed-income market is still presenting valuation opportunities
Interest rates have been down recently and yields on 10-year Treasury bills have fallen significantly, from a high near 5% in late October to around 4.25% in mid-February. Fed has finally ended its hiking cycle and will cut rates at some point in 2024. If the Fed cuts rates, the yields on Treasury bills and other short-term investments will likely go down too. This means investors will earn less interest on cash savings. Historically, during Fed rate-cutting cycles, 5-year bonds have outperformed cash investments. Vanguard's analysis suggests this has happened in 15 out of the last 17 instances. So, 5-year bonds have outperformed cash from the first rate cut to the last.
Source: Vanguard
Why stocks can survive bond market bumps
Typically, a back-up in rates has led to a sell-off in stocks. It is believed that the current environment is different for three reasons: the degree of the move in rates, current economic cycle, and strength of mega-cap technology. Beyond the gyrations of the bond market, stocks are benefiting from a rethink on the broader economic outlook as recession fears are fading away. It is believed that 10-year yields to trade in a range, probably between 3.75% and 4.25% this year and a range-bound bond market coupled with solid economic growth could allow stocks to rise another 4-8% before year’s end.
Source: Blackrock
Vanguard’s outlook for financial markets
United States recent growth and labor market data suggest the U.S. economy remains robust with potential rate cuts. Inflation continues to ebb, but risk is posed by strong wage growth. Whereas The European Central Bank (ECB) is waiting on data before deciding on rate cuts.? ECB could begin lowering interest rates in June, with 25-basis-point cuts potentially at each of its final five policy meetings of the year.
In the UK, the economy might have fallen into a technical recession as the economy shrunk for two quarters in a row in the latter half of 2023. However, there are early signs that things might be picking up again. These initial indicators suggest the economy may have grown slightly, by 0.1% to 0.3%, in the first quarter of this year.
Source: Vanguard
Soft landing could support emerging markets debt
A more dovish U.S. Federal Reserve (Fed) should support a rebound for emerging market (EM) economies. This is likely to benefit both higher-rated local currency debt and to an extent, dollar-denominated debt. EM currencies recovered in 2023, but the strong U.S. dollar could still cause problems. This is even though, based on economic fundamentals, the dollar seems to be overvalued.
Across hard currency debt, spreads are fairly tight within the core investment-grade EM economies. But compared to U.S. investment-grade corporate bonds, spreads look reasonably attractive, thus presenting some relative value opportunities. If monetary policy loosens in major developed markets, a decline in interest rates could work in favor of local currency EM bonds. Also, many economies such as India, South Africa, Indonesia, and Mexico are heading towards election and Sri Lanka, Ukraine, and Ghana are potentially heading toward or already in the midst of debt restructuring. Thus, volatility could potentially increase.
Source: Capital Group
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