Top Industry Developments in March
Industry Developments
Advisor Trends
Investor Trends
Retirement
Investment Opportunities & Outlook
Brief Summaries of the Headlines
Industry Developments?
Active funds lag passive peers in 2023, reflecting investor preference for superior returns in passive strategies
While 2023 saw a shift from value to growth investing, actively managed funds continued to underperform their passive counterparts. A Morningstar report found that only 47% active US funds managed to outperform their average passive peer. This holds true despite some bright spots, like a comeback for active foreign and fixed-income funds.
The report cautions against drawing conclusions from a single year. Success rates for active funds can fluctuate significantly depending on market conditions. Looking at longer timeframes paints a bleaker picture, with less than a quarter of active funds beating their passive rivals over the past decade.
However, there are some categories where active management might have an edge. Bond, real estate, and US small-cap funds showed higher long-term success rates. The report also highlights that funds with lower fees outperform those with higher fees over the long term. This trend reflects investor preference for cost-effective, high-quality strategies.
Source: Morningstar
Model portfolios reach $5.1 trillion in 2023, ETFs propel growth toward $11.3 trillion market by 2028
Financial advisors are increasingly turning to model portfolios. Broadridge estimates that assets in these portfolios reached $5.1 trillion by the end of 2023 and predicts a surge to $11.3 trillion by 2028, exceeding BlackRock's optimistic forecast of $10 trillion.
A key driver of this growth is the popularity of ETFs within model portfolios. At the end of 2023, ETFs comprised over half (51%) of the assets in these models, growing at nearly double the rate of mutual funds. Low cost and tax efficiency are cited as the main reasons for the dominance of ETFs in model portfolios. Broadridge's data shows that as of 2023, 63% of model portfolio assets were allocated towards equities, with fixed income representing around 32%.
The rise of model portfolios also raises questions about potential herd behavior among advisors. Since these portfolios are pre-built, asset allocation decisions might be influenced by their growing popularity, leading to sudden shifts in investment flows.
Source: ThinkAdvisor
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Knowledge is key: Expertise valued by fund selectors as alternative investments gain traction
A new report by Broadridge ranks asset managers based on how attractive they appear to financial advisors who choose funds for clients. In 2024, these selectors prioritized stability and strong client service. Vanguard dethroned BlackRock as the top brand, with both firms excelling in areas like keeping investors informed and offering appealing investment strategies.
US dominance is clear, with domestic firms like JPMorgan rising and French firm Natixis IM falling in the rankings. This trend reflects investor preference for stability following a year of strong market performance.
The report also highlights the attributes most valued by clients. "Solidity" is king, followed by a stable investment management team. Clear and effective investment strategies are also crucial, as are knowledgeable fund specialists who can provide detailed analysis.
Source: Broadridge
Advisor Trends
Financial advisors see a rise in family involvement in wealth transfer planning, emphasize regular updates, and focus on lifetime wealth
A new study by Edward Jones reveals a significant shift in wealth transfer planning. According to the study, most financial advisors (89%) report that clients have a wealth transfer plan, and many (65%) say clients are actively involving their families in these discussions, even bringing children or parents to meetings. This increased family involvement is seen as positive, fostering trust and clear intentions around future wealth distribution.
The study also highlights the importance of ongoing communication with a financial advisor. Around 77% reported regular conversations with clients about their wealth transfer plans, which ensures the plan adapts to life changes and evolving priorities. A growing number of clients are prioritizing children and even grandchildren as beneficiaries.? However, for those receiving an inheritance, retirement remains the top goal, followed by passing wealth to their own children and maintaining their current lifestyle.
Source: Edward Jones
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Advisors prioritize client experience, embrace AI, while seeking tech solutions to free up time
A survey by Orion paints a tech-driven future for wealth management. Advisors are prioritizing client experience with investments in user-friendly technology to deliver more personalized service. This focus aligns with projected industry growth. However, only 9% feel fully equipped technologically, highlighting a need for further investment.
Disconnected solutions related to technology are advisors' biggest headache (25%). Improved integration is key, freeing up time spent on administrative tasks and allowing a focus on core functions. Outsourcing is another strategy for efficiency. The survey shows an increase in outsourced tasks and a growing interest in outsourcing portfolio management likely due to market volatility.
Artificial intelligence and machine learning are poised to disrupt wealth management, with a growing number of advisors (30% in 2024 compared to 18% in 2023) planning to adopt these technologies. This highlights the industry's overall embrace of technology to enhance client experience, boost efficiency, and prepare for an AI-driven future.
Source: Orion
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Financial advisors face dual challenges: Investor satisfaction rises amidst potential client exodus and growing AI competition
A J.D. Power study reveals a double-edged sword for financial advisors. Overall investor satisfaction increased by 8 points, thanks to a booming market. However, a potential client exodus threatens this bright outlook. The study identifies affluent Millennials (a significant 36% likely to switch firms) as a flight risk.
The study suggests advisors may be too focused on short-term market performance and neglecting to build strong, lasting relationships. This lack of personalized service is further evidenced by the high number (70%) of affluent Millennials who utilize secondary investment firms, a figure significantly lower among older generations.
The looming rise of AI-powered investment services adds another layer of pressure. To stay competitive, advisors need to go beyond just delivering returns. By offering a human touch that transcends the limitations of technology and AI, advisors can secure long-term client loyalty in a rapidly evolving investment landscape.
Source: JD Power
Investor Trends
CFP professionals are in high demand as clients prioritize retirement and investments amidst economic uncertainty
A survey reveals a surprising mix of optimism and caution among American investors for 2024. Despite economic uncertainty, 6 out of 7 CFP professionals report positive client outlooks, with a significant portion even more optimistic than in 2023. This translates to increased investment activity. However, upcoming elections inject caution. CFP meeting discussions prioritize core financial goals like retirement, navigating inflation, and understanding the economy. Reflecting this, CFP professionals recommend strategies like financial plans, prioritizing retirement savings, and stock market investment.
The high-interest rates prompt adjustments, with many CFP professionals advising clients to move funds and reduce high-interest debt. Interestingly, despite optimism, some clients are delaying major life decisions like homeownership, family planning, and marriage. The survey underscores the value of CFP professionals during uncertainty. This is reflected in the continued demand for CFP services, with a projected client base expansion for 70% of professionals.
Source: PRNewswire
Financial insecurity is prevalent, but women take charge of emergency savings, retirement planning
A study by Fidelity reveals a financial double-edged sword for women: over 90% experience stress about money, yet taking action significantly reduces it. The study outlines three key strategies for financial peace of mind: building emergency savings, increasing retirement contributions, and planning. However, a "confidence gap" persists. While women are making smart financial choices, many still believe men achieve better investment returns. This highlights a need to bridge this gap and empower women financially.
Positive trends emerge, though. Younger generations are actively dismantling money management stereotypes. Additionally, parents are more likely to discuss finances with their children, treating sons and daughters equally – a significant change from the past.
Overall, the study paints a picture of progress. However, the "confidence gap" underscores the need for continued efforts to empower women and build their financial self-assurance.
Source: Fidelity
Retirement
Americans embrace IRAs as assets soar to $13 Trillion, financial professionals leading rollover guidance
A new report by the Investment Company Institute highlights the growing importance of IRAs in American retirement planning. Assets in IRAs surged to $13 trillion by mid-2023, with rollovers from workplace retirement plans being a key driver.? Four in ten households now own either a traditional, Roth, or employer-sponsored IRA.
Rollover decisions are heavily influenced by a desire to consolidate assets and access more investment options. Interestingly, financial professionals are the preferred source of advice for rollovers (50%), followed by financial services firms (18%) and employers (13%).
Mutual funds remain the dominant investment choice within IRAs, but ETFs are gaining traction. The report underscores the continued popularity of tax-advantaged retirement plans and a proactive approach to financial security, with most traditional IRA owners having a retirement income plan.
Source: Planadviser
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Americans prioritize passions, and seek flexible work options in later years
The pandemic has reshaped how Americans view retirement, with a focus on passions and a rejection of the traditional model. A study reveals a shift towards passions and flexibility. Two-thirds prioritize passions in retirement, with Millennials leading the charge. Traditional retirement holds less appeal for younger generations who are drawn to remote work opportunities and phased retirement options.
Despite economic concerns, confidence about retiring on their terms is high. However, cost of living worries remain, especially for younger generations. Technology like robo-advisors aids saving. but human advisors remain valued, as 80% prefer them for retirement planning.
The study finds that motivations for retirement timing vary by generation, with financial security and career goals driving Gen Z and Millennials, while Boomers prioritize emotional readiness. Encouragingly, younger generations are saving more for retirement. Overall, the study highlights a changing retirement landscape, with Americans seeking a purpose-driven "golden age" with flexibility.
Source: Fidelity?
Investment Opportunities & Outlook
Is the S&P 500 too concentrated?
Led by the Magnificent Seven stocks that have captured investor attention this year, the concentration of market capitalization in the biggest US equities is the highest in decades. This trend worries some investors, but Goldman Sachs points out that past periods of high concentration have not necessarily led to crashes. The ten largest US stocks now account for 33% of the S&P 500 index’s market value, well above the 27% share reached at the peak of the tech bubble in 2000.
The S&P 500 has generated an annualized total return of 16% over the past five years, compared with a 30-year annual average of 10%. The top ten stocks have accounted for more than a third of that gain. Still, today’s top stocks trade at lower valuations than the largest stocks did at the peak of the technology bubble. Today’s ten largest stocks trade at a collective forward price-to-earnings (P/E) multiple of twenty-five times, well below the peak valuations carried by the largest stocks in 2000, 2020, and the middle of 2023.
Source: Goldman Sachs
Taking Stock: Q2 2024 Equity Market Outlook
Even though it is an election year, stocks are still expected to do well compared to bonds and cash, but high valuations mean investors need to be choosy. According to Blackrock, analysis of data back to 1928 is that average full-year price returns in election vs. non-election years are basically the same at 7.3% and 7.5%, respectively, but the path to getting there is very different. This year's strong performance (+7% so far) is above average for election years could mean an even better trajectory for stocks if past cycles are any indication.
More important than politics are the secular trends that we see driving markets over a three-to-five-year time horizon. Good long-term investment examples are Digital disruption and AI, Electric vehicle companies, public utility companies, and the healthcare sector.
Source: Blackrock
Hedge funds flock to Europe, ditch US stocks
In a potential sign of a changing market sentiment, hedge funds are trimming their holdings in US stocks, which have seen strong gains recently, and are instead increasing their exposure to European equities. This shift comes as analysts believe European stocks, currently trading at a lower valuation compared to their US counterparts, and an ongoing debate over how expensive U.S. equities are. The S&P 500 trades at 21 times forward earnings estimates, while European equities are trading at 14 times according to BofA Securities. While the US market remains ahead year-to-date, Europe's recent performance suggests a potential catch-up as the discount between both is the deepest historically. Europe's STOXX 600 is up 6.5% this year, still lagging the S&P 500, which rose 9.6%. Last year, the S&P rallied 24%, posting the double of the STOXX performance.
Source: Economic Times
Hedge funds investing in credit are in demand
Investors are flocking to credit-focused hedge funds for the second year running. In a survey, around 44% of investors plan to increase their exposure to hedge funds with a credit strategy this year, and only 3% plan to decrease it. Allocators’ interest in Asia continues to cool as well. Demand for the region peaked in 2021, with almost half of the allocators surveyed expressing interest in increasing their exposure to Asia. Now it is the least sought-after, falling behind Europe and North America. This year is the first time in many years that appetite for Europe outpaces the other two regions, with 17% of allocators saying they will increase their allocation there. Also, the pensions' share of the hedge fund investor base has fallen as private capital's share rises.
Source: Goldman Sachs
A turning tide: what lower interest rates could mean for listed real estate
Real estate is poised for a comeback as inflation and interest rates settle down, according to Macquarie. The 2022-2023 interest rate hike cycle has been the steepest hiking cycle in 40 years. Over the course of this, the U.S listed real estate market, which represents around 65% of the global index, fell 44.6% from its peak at the start of the rate hike cycle in March 2022 through to the trough in October 2023. A decline in interest rates would have positive ramifications for listed real estate as a fall in both debt costs and the risk-free rate positively impacts valuations and would signify the potential end of what has been a brutal rate hiking cycle.
With the announcement of no further rate cuts, U.S REIT markets rallied 6.3% from the announcement to the end of December. Despite this, listed real estate still screens as cheap relative to both history and the S&P 500.
Source: Macquarie
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