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Historic changes by Bank of Japan, the U.S. economy, & 0dte options

kevin.mesquita — Fri, 12 Apr 2024 13:00:00 +0000

Historic changes by Bank of Japan, the U.S. economy, & 0dte options

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kevin.mesquita Fri, 04/12/2024 - 08:00

As we begin April, we’re noting several possibly historic macro trends. In this post we’ll take a look at the end of an era for the Bank of Japan, the solid growth of the U.S. economy, and the new popularity of zero day to expiration (0dte) options. Understanding these shifts can help advisors to gain a deeper understanding of investor behavior and relevant global macro movements as we progress further into 2024.

Bank of Japan ends its negative interest rate regime

On March 19, the Bank of Japan (BoJ) marked the end of an era by raising its target overnight policy rate from -0.1% to +0.1%. Despite being a small change in absolute terms and one that the market widely read as “dovish,” this shift was the first time since 2007 that the BoJ had raised its policy rate and the first time since 2016 that this rate has been in positive territory.

Beyond the historic significance of the move, the change in interest rate regime could raise long-suppressed borrowing costs for the government, businesses, and consumers, while potentially heralding a repatriation of trillions of dollars’ worth of assets that had sought better returns abroad.¹ For example, Japanese investors’ significant holdings of foreign government debt—Japanese investors are the largest holders of U.S. Government debt, having owned over $1.1 trillion in August 2023—have raised fears that large sales could disrupt markets. As of early April, however, there is little evidence of that.²

Despite also announcing the discontinuation of purchases of ETFs and J-REITs and ending the bank’s policy of yield curve control, the BoJ is maintaining its purchases of Japanese government bonds at a pace of roughly ¥6 trillion ($40 billion) per month. In describing the changed policy mix, the bank’s governor, Kazuo Ueda, stated, “It is important to maintain accommodative financial conditions even as we carry out a normal monetary policy.”³

Although JGB yields have generally risen over the last month—the 3-month bill yielded 0.02% on March 4, up from -0.08% a month prior—the yen remains the lowest-yielding currency globally, sporting a negative real yield at the 10-year tenor, and trades near its three-decade low versus the U.S. dollar.⁴ The yen remains a popular funding source for the carry trade. While the BoJ has taken its first meaningful steps towards normalization, the global impact thus far has been limited, and a much more hawkish stance would be needed to upset the current balance.

By: Michael Wedekind, CFA, Senior Investment Analyst - Fixed Income Research

U.S. economic strength

Economies around the world have failed to keep pace with the American economy. Despite sticky inflation after a pandemic and two foreign wars, the U.S. economy is posting solid growth. The story isn’t quite the same across Europe and parts of Asia as growth remains sluggish. Although a soft landing has yet to be achieved, the chances of one seem highest in the United States.

In response to elevated inflation, central banks around the world increased interest rates. Those increased rates have elicited different responses from consumers. In the U.K., consumer spending fell in the back half of 2023 despite wage growth outpacing inflation. Consumers in Japan saw prices outpace wages and responded similarly by cutting spending in the fourth quarter. All the while spending in the U.S. remains strong, GDP grew by 3.4% in the fourth quarter of 2023.^5,6

Part of the explanation behind the performance deviations lies in governmental response. The U.S. government continues to spend. According to the IMF, government expenditures as share of output jumped from 35% pre pandemic to above 40% during the pandemic. Post pandemic spending remains elevated due to large investments with the CHIPS and IRA acts. Another reason is the geographic isolation from current geopolitical conflicts. America is isolated while European and Asian countries are at the front lines of these conflicts.⁷

The performance divergence from economies around the world compared to America is stark. Aided by governmental spending and distant proximity from ongoing conflicts, the American economy remains strong in hopes of a soft landing.

By: Brandon Rick, Investment Analyst - Equity Research

Zero day to expiration options (0dte)

The options market has seen considerable growth in activity over the past few years, and 2024 looks like it will be another record year, as the average daily trading volume for options surpasses 45 million contracts this year. When looking at option volume this month, the notional value of contracts was 8.7% of the Russell 3000 market capitalization, a level above the historical average. When decomposing the option volume data, we find an interesting trend that is accelerating the growth of option markets, this is the spectacle of zero day to expiration (0dte) options. 0dte are short-dated options that expire the same day the contract is written, and is a recent phenomenon, only attracting high volumes in the past few years. The use of 0dte options has grown so much that half of all the S&P500 options expiring in March were 0dte options.⁸

This trend of 0dte seems to run counter to the prudent, long-standing history of option contracts being used for hedging, a tool to offset risk. Instead, 0dte options are apparently being used to assume risk, as contract writers are utilizing 0dte to leverage risky short-term bets. 0dte options first gained tractions as traders placed bets around big market moving announcements, such as economic data, the Federal Reserve’s interest-rate decisions, or corporate earnings. As reports of traders making big 2,000% payouts emerged, the fear of missing out (FOMO) set in driving 0dte to the levels we are seeing today. This trend in financial markets has coincided with an increase in sports betting, and meme stocks, reaching a fever pitch where individuals are betting on anything they can.^9,10,11

In light of such aggressive risk taking, many are wondering if this is actually investing or rather another form of gambling, akin to placing chips at a roulette table or buying a lottery ticket. Jay Clayton, former chairman of the Securities and Exchange Commission, suggests that the use of 0det is a form of gambling, and that they should not be allowed. However, regardless of your opinion, 0dte exist and are seemingly gaining in popularity. While such risky behavior is not likely to be sustainable, the increased use of 0dte is likely to introduce even more leverage and volatility in to the financial markets.

By: Scott Keller, Portfolio Manager

Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. For more information on Envestnet | PMC, please visit www.investpmc.com.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this brochure is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. Past performance is not indicative of future results. This material is not meant as a recommendation or endorsement of any specific security or strategy. Information has been obtained from sources believed to be reliable, however, Envestnet | PMC cannot guarantee the accuracy of the information provided. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. An individual’s situation may vary; therefore, the information provided above should be relied upon only when coordinated with individual professional advice. Reliance upon any information is at the individual’s sole discretion. Diversification does not guarantee profit or protect against loss in declining markets.

¹Bloomberg: BOJ's Rate Hike May Have Ripple Effect on Bonds, Businesses, and Politics

²Bloomberg: BOJ's Rate Hike May Have Ripple Effect on Bonds, Businesses, and Politics

³Financial Times: Bank of Japan ends era of negative interest rates (ft.com)

⁴Bloomberg: Why Even a Historic BOJ Rate Hike Has Failed to Save the Yen

⁵The New York Times: Soft Landing: Economy in the Era of Persistent Inflation

⁶The Washington Post: Global Economy Faces Challenges with GDP Growth and Inflation

⁷The Wall Street Journal: U.K. Enters Recession After Economy Shrinks More Than Expected

⁸The Wall Street Journal: How I Got Hooked on the Hottest Trade in Markets and Bagged a 2,000% Return

⁹The Wall Street Journal: Is One-Day Options Trading Gambling? Ex-SEC Chairman Says Yes

¹⁰The Wall Street Journal: The 0DTE Boom Is Set to Hit New Heights in 2024

¹¹The Wall Street Journal: The Adrenaline-Fueled Trades Sweeping the Market

Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you better support your clients.

Published Date

Fri, 04/12/2024 - 12:00

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Investing in the sustainable transition: Clean energy

kevin.mesquita — Wed, 10 Apr 2024 13:00:00 +0000

Investing in the sustainable transition: Clean energy

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Carlee Griffeth

kevin.mesquita Wed, 04/10/2024 - 08:00

This year, we are focusing each quarter on investment opportunities in the public markets across different aspects of the transition to a sustainable economy. The idea of a sustainable economy, described in the UN’s 1987 Brundtland Report, is one that meets the needs of the present without compromising the ability of future generations to meet their own needs. This can be achieved through an economy that is low carbon and that efficiently and equitably uses resources. Across the transition, we’ve identified four broad areas of investment opportunities in the public markets today that present an alpha thesis for investors: clean energy, electrification, circular economy, and human health and development.

A pricing dislocation

Despite short-term volatility over the last two years, including sentiment-driven fluctuations, geopolitical headwinds, and rising interest rates and inflation, clean energy stocks may present a unique, long-term opportunity for investors looking to capture alpha. Right now, clean energy stocks are generally trading at a discount to companies growing much slower, particularly wind and solar ETFs which are trading at 20-30% discounts compared to the broader equity market.¹

In addition to the headwinds that drove up the cost of materials and created supply chain issues, clean energy projects also experienced delays as the details of the Inflation Reduction Act (IRA) were finalized, leading to the undervaluation of many clean energy companies, even as they continued to demonstrate strong growth and profitability. This substantial discount relative to broader market indices presents an attractive entry point for investors with a long-term perspective. An investor doesn’t need to have an opinion on climate change or fossil fuels to take advantage of this opportunity. Rather than simply being an opportunity for environmentalists to personalize their portfolio, the investment thesis for clean energy is rooted in the sector’s upside potential—an opportunity for any investor.

The long-term portfolio edge

Even with a potential administration change in the U.S. next year which could result in an unclear future for U.S. climate policy, global demand for clean energy remains strong and is projected to grow. This is in part thanks to the reality that the levelized cost of clean energy generation, particularly across solar and wind, is substantially lower than coal and gas, even without subsidies.² Capex costs are also projected to decline over the rest of this decade by 15-20% thanks to an oversupply of raw materials driving down costs.³ And thanks to record amounts of dry powder in private equity and the historic investment made by the IRA, significant amounts of capital are expected to be injected into the sector in the coming years.

Global policies around emissions and macrotrends on energy demand also contribute to the long-term growth potential. In the U.S., California and now the SEC have issued rules requiring public companies to disclose their carbon emissions in the coming years. Meanwhile, according to one study this year,⁴ two in three ultra-high-net-worth individual (UHNWI) are actively trying to reduce their own personal carbon footprint. These new policies, combined with similar disclosure laws already on the books or in the works across the EU, U.K., and Asia, and the general increase in awareness globally of climate change and the need for urgent action, further bolster the case for long-term investment in clean energy as they contribute to the projected growth in demand for renewables.

By focusing on the long-term growth potential of clean energy, investors may see greater returns as the sector continues to evolve and mature. However, diversification across the entire clean energy value chain may be crucial for mitigating risks and capturing growth potential. Because that potential is in the long-term hold, diversification may help investors weather short-term volatility like that seen over the last two years. Gaining a broad understanding of the compelling investment opportunities in the clean energy transition can help drive deeper engagement with clients who may already have an interest in a specific technology or energy source, or innovation.

Next on the horizon

The rate of electrification across different sectors, meanwhile, will serve as a key indicator of progress in the transition. With nearly 2 million MW of clean energy capacity currently on hold in the U.S. grid interconnection queues, there is uncertainty around transmission capacity expansion. But more to come on that next quarter as we dive into the alpha thesis for electrification.

To learn more about supporting your clients with sustainable investing solutions, reach out to our team at sustainable@envestnet.com or visit envestnet.com/sustainable.

An ESG integrated or ESG data screened investment strategy may limit the types and number of investment opportunities available to the strategy. This may have a positive or negative effect on investment performance relative to strategies which do not utilize ESG integrated investment approaches. There is no guarantee that an ESG integrated strategy will be successful and meet its investment objective. Companies selected for inclusion in a strategy may not exhibit positive or favorable ESG characteristics at all times and may shift into and out of favor depending on market and economic conditions.

¹GMO: Turbulence on the Path to Transformation

²Impax Asset Management: The Transition Will Not Be Televised - Part 1

³S&P Global Commodity Insights: Top Ten Clean Energy Technology Trends 2024

⁴Knight Frank Research. 2024. The Wealth Report, 18th edition. knightfrank.com/wealthreport

The alpha thesis for clean energy.

Published Date

Wed, 04/10/2024 - 12:00

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How to grow your practice with tax efficient planning

kevin.mesquita — Tue, 09 Apr 2024 13:00:00 +0000

How to grow your practice with tax efficient planning

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Erik Preus

kevin.mesquita Tue, 04/09/2024 - 08:00

Many clients, particularly high net worth clients, understand that the taxes they pay on gains from investments, or capital gains taxes, could be their portfolio's largest expense. For some investors, the taxes they pay on these gains could approach 50% or higher. With ever-changing tax laws and regulations, investors have to rely on the professionals they work with to manage the intricacies of tax planning and optimization.

Services desired by wealthy investors as part of a wealth management offering, vs. services received¹

The great news is that when tax management is seamlessly built into your overall practice management, advisors have an opportunity to not just deepen client relationships, but to also capture significantly more value from those relationships. Leveraging modern outsourced tax management solutions can empower advisors to accomplish this more efficiently than ever before.

The evidence is compelling. From an investment standpoint, advisors have the potential to add 300+ basis points in annual value for clients, particularly through tax efficiency and behavioral coaching.

Let’s take a look at what tax-efficient planning and investing can look like in your practice.

Optimize practice management with tax efficiency

There are generally two components to delivering tax efficient planning at scale, as we see it.

First, managing your clients’ capital gains starts with strategic portfolio construction. Each investment should undergo thorough review for its tax efficiency. Tax-inefficient investments can be placed into qualified accounts to minimize their tax exposure, while more tax efficient investments can be allocated into nonqualified accounts.

The share of unified managed account (UMA) assets has increased more than five times over the last 13+ years to represent 22% of managed accounts assets.³

One reason we expect UMAs to remain the fastest growth area of managed accounts is their holistic nature and unique tax benefits. UMAs offer investors the ability to consolidate various investments, including separately managed accounts (SMAs), mutual funds, and exchange traded funds (ETFs), into a single account. This helps the advisor offer a holistic approach to portfolio construction, which attracts a greater share of the investor’s taxable assets into this one account. In addition, when outsourcing the management to an overlay manager, this consolidation facilitates automated tax management across all UMA investments, laying the groundwork for the second component of tax-efficient planning and investing.

Envestnet’s Tax Overlay service, not only automates the tax management of the portfolio and allows the client to customize its tax settings, but it also manages the account to specific client driven capitals gains budgets, which provide clarity to the investor of what their portfolio’s tax cost will actually be. This tax budget allows the advisor to demonstrate that they are effectively incorporating tax planning into their value proposition. This approach goes well beyond mere tax loss harvesting by continuously addressing comprehensive tax management needs while adhering to the client's portfolio strategy.

The power of outsourced tax management

Here is an example of how an advisor might work with an outsourced provider, like Envestnet, to offer ongoing tax management to all of their clients at scale.

During the proposal process, you and your client will work with an Envestnet Overlay Specialist to analyze the client’s existing holdings against their desired UMA portfolio allocation. This analysis will demonstrate the tradeoff between limiting capital gains realization and accepting higher tracking error. Based on this analysis, your client determines the long-term capital gains budget they wish to establish, setting the stage for initial portfolio trading.

Then, on the client’s behalf, you’ll communicate to Envestnet the target portfolio allocation and tax budgets, as well as other account settings such as rebalancing frequency. Envestnet invests the portfolio according to your clients target allocation and guidelines while also considering the capital gains budget using a risk optimization engine. The risk engine analyzes the portfolio changes, possible tax implications of the changes, and provides trade recommendations that enable Envestnet to trade the account in a way that balances the tax cost with the client’s portfolio's risk, measured by tracking error.

If you're thinking, 'This process removes a significant analytical burden from my workload,' you're correct. Outsourcing tax management not only enables advisors to deliver sophisticated tax services efficiently to all clients, but it also ensures that even smaller accounts benefit from solutions like Fund Strategist Tax Management. By alleviating this burden, advisors can offer tax efficiency across their entire client base, addressing the tax needs of investors regardless of their tax bracket or portfolio size.

Get started today

It is safe to assume that most, if not all, of your clients are concerned about their taxes. If you aren’t already discussing capital gains with your clients, start now. Evaluate how your clients’ portfolios are affected by capital gains and speak with your firm about accessing Envestnet’s tax overlay services. We find that some advisors already have access through their home office without realizing it.

By addressing tax management you’ll not only be delivering value to your clients, but also strengthening your own business. Tax efficient strategies have the potential to be a win-win for everyone involved.

Envestnet | PMC's Tax Overlay Services team automates tax management for more than $15B in assets at over 100 firms (as of April 2024). Contact us at PMCOverlayServices@Envestnet.com to learn how you can help your clients manage their capital gains taxes.

Neither Envestnet, Envestnet | PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor. Client must carefully determine if the use of tax overlay services is appropriate for their circumstances, risk tolerance, and investment objectives. Tax management services are limited in scope and are not designed to permanently eliminate taxes in the account. In providing tax overlay services, Envestnet will allow Client's account to deviate from Client's selected investment strategy. Client's account may experience significant performance differences from the selected investment strategy due to Client's selection of tax overlay services. Envestnet makes no guarantee that the account's performance will be within any range of the selected investment strategy or the strategy´s benchmark. If Client subsequently disables tax overlay services this may result in the recognition of significant capital gains.

¹Spectrem Group. 2021. "Wealth Management Redefined 2021."

²Russell Investments. 2021. "2021 Value of an Advisor Study."

³Cerulli Associates: UMA's Record 34% Growth Over Three Years, Amassing 22% of Managed Account Assets

Sophisticated tax management services not only enhance client outcomes, but also foster the growth of your practice.

Published Date

Tue, 04/09/2024 - 12:00

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The power of integration in the wealth management experience

kevin.mesquita — Mon, 08 Apr 2024 13:00:00 +0000

The power of integration in the wealth management experience

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Stephen Mennella

kevin.mesquita Mon, 04/08/2024 - 08:00

Envestnet’s wealth management platform provides technology, solutions, and intelligence that supports advisors and financial professionals as they navigate through every step of the wealth management process with their clients.

To dive into why an integrated platform experience matters and how firms are leveraging Envestnet's integration capabilities, we sat down to chat with Stephen Mennella, Head of Product, Strategic Integrations.

Q: A lack of integrated technology workflows was identified by advisors as their number one pain point in our recent Envestnet Trends Report. Why do you think it was number one? How do you see Envestnet’s Wealth Management Platform addressing this issue?

Integrated technology platforms play a crucial role in modernizing and optimizing the wealth management process.

The best platforms provide a comprehensive view of client information, increased efficiency, scalability, and data security.

Envestnet’s Wealth Management Platform consolidates and streamlines the technology and solutions that firms and their advisors utilize with a single point of entry. The coordination of our industry-leading platform allows firms to easily expand their offerings with seamless access to financial planning, banking and lending services, guaranteed lifetime income, and insurance products in a unified experience.

By consolidating various tools and functions into one interface, we reduce the need for manual data entry across multiple platforms, saving time and minimizing errors. And as the firm grows, the platform can scale to accommodate more clients and assets without significantly increasing overhead.

Our ability to easily integrate with third-party applications prevents advisors from ever having to leave the Envestnet platform via SSO for custodian data or servicing. Plus, we offer clients, advisors, and home office users a common digitized experience for reporting, account opening, and maintenance.

Q: Your team has done a lot of work to create a more connected experience across the Envestnet ecosystem. What areas do you think can have the most impact?

Open ENV is our integration framework that powers a connected ecosystem of services, products, tools, and technologies, helping advisors identify opportunities, avoid pitfalls, and seamlessly take action.

Open ENV has integrated with more than 75 technology solutions, ranging from clients’ internal systems to third-party wealthtech solutions like CRMs, risk platforms, and account opening systems.

Our most requested integration is with the Envestnet proposal. For example, if an advisor kicks off their workflow in their CRM, they can seamlessly launch into the Envestnet Proposal tool with the prefilled client information. The data from the completed proposal is sent to an external account opening system.

A firm recently enabled an integration between their CRM and the Envestnet Proposal System, both prefilling and connecting to account opening. Users were surveyed and 94% of respondents noted the integrated process saved time for each account opening, with 31% saying it saves 5 to 10 minutes per account opening, and 33% saying it saves 10 to 20 minutes per account opening.

94% of respondents noted the integrated process saved time for each account opening, with 31% saying it saves 5 to 10 minutes and 33% saying it saves 10 to 20 minutes per account opening.

In the fourth quarter of 2023, 15,936 accounts were opened using the integration, and if we average 10 minutes per account, that’s approximately 2,600 hours we were able to “give back” to advisors.

To make similar efficiencies available to all firms, we are launching a Digital Account Opening solution which will provide fully integrated new account and maintenance flows with specific identified custodians and trust account platforms. It will be configurable across the Envestnet ecosystem, delivered as an integrated component within the Client Portal and Advisor Portals. Integrations will be available with CRMs (e.g. Salesforce), data warehouses, and e-signature tools. Workflows, forms, features, and clients will be configurable by firm. This end-to-end digital onboarding will change the way advisors process their business.

Q: Given there are more than 400 wealthtech solutions in the market, what should firms consider when evaluating their current tech stack or a new vendor?

First and foremost is functionality. The technology needs to provide the necessary features and tools to support the firm’s business requirements, such as portfolio management, financial planning, client communication, and reporting.

Integration is another factor to consider. The ability to integrate with other software used by the firm, for instance a CRM system or custodial platform, can help improve efficiency and reduce manual data entry.

The technology should also be scalable to help accelerate future business growth. It should be able to handle an increasing number of clients, accounts, and assets without compromising performance or security.

Data security is paramount in the financial advisory industry. Robust security measures should be in place to protect sensitive client information from unauthorized access or breaches. In line with this, the technology should comply with relevant regulatory requirements. Features that help advisors adhere to these regulations and mitigate risks are crucial in today’s environment.

Finally, the vendor's reputation and the quality of customer support are important considerations. Firms should look for a vendor that is reliable, responsive, and has a track record of delivering quality products and services.

By considering these factors, a firm can choose the right technology that meets their needs, integrates seamlessly into their daily workflow, ultimately enhancing their practice and improving the ability to serve clients.

Conclusion

The best integrated platforms provide advisors with a comprehensive view of client information, increased efficiency, scalability, and data security. Envestnet's industry-leading platform allows firms to easily expand their offerings with seamless access to multiple solutions that support the end-to-end wealth management process.

To learn more about our new connected experience for wealth management platform users, please visit https://www.envestnet.com/wealth-management/software

Envestnet is not a licensed insurance agency and as such, does not sell or make any recommendations related to the purchase of any annuity or insurance products. Envestnet does not offer any loan products or make any lending decisions. The funding and administration of loans is undertaken by separate and unaffiliated financial institutions.

¹Kitces: Fintech Map

Integrated technology is modernizing and optimizing the wealth management process.

Published Date

Mon, 04/08/2024 - 12:00

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Community Investing: How To Invest In the Underserved

robert.fundy — Fri, 05 Apr 2024 20:12:47 +0000

Community Investing: How To Invest In the Underserved

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Envestnet Wealth Solutions

robert.fundy Fri, 04/05/2024 - 15:12

Essentially, community investing involves allocating investments to support low-income and other underserved communities with capital, credit, and training, primarily in the following areas:

Needed services – this includes fostering healthy communities, education, childcare, and access to transit, jobs, food, and affordable housing
Economic development – this includes creating
quality jobs and developing the infrastructure to support the community
Sustainable communities – this involves growth strategies, environmental considerations, and energy resilience¹

The need for these types of investments is evident in many communities. As of 2017, the U.S. Census reported that 12.3 percent, or 39.7 million people, live in poverty in the United States.² Particularly due to urbanization, rising costs of living are surpassing the wages of lower-income people. On average, there are only 37 adequate and affordable housing options for every 100 extremely low-income households, and there is a shortage of seven million affordable and available rental homes for households with extremely low incomes at or below the poverty level.³

The U.S. education system is also desperately in need of funding. It would reportedly cost $197 billion to bring all K-12 school buildings into good overall condition; and, the nation is $46 billion a year behind what it should spend to provide healthy and safe modern facilities.^{4, 5}

For investors interested in providing support, there is a wide range of community investment options – more than ever before – with attractive scale, providing improved access and opportunity.

The Opportunity To Invest

While there are an increasing number of investment options, there is also some hesitation given the unconventional nature of many of these types of strategies. Although some community investments are concessionary, there are many options that can provide a competitive market rate return for your clients.

According to the US SIF: The Forum for Sustainable and Responsible Investment, the community investing space grew more than 50 percent from 2016 to 2018. The largest growth was among community development credit unions, whose assets have nearly doubled since 2016, mainly due to mergers and acquisitions within the sector.⁶

If your clients are seeking these types of investments, a customized strategy typically starts with just two questions:

What location would you like to target? Are you personally tied to the neighborhood you live in, the town you were raised in, or a particular district, city, state, or region?
What type of community impact would you like to have? Are you interested in education, financial literacy, healthcare access, food access, or other something else?

From there, you can identify the investments best suited for their interests.

How To Access Community Investment Options

One of the most common and accessible ways to invest in communities is through depository institutions, such as community development banks and credit unions, with deposits and CDs. A bank or credit union can be designated as a Community Development Financial Institution (CDFI), which means it offers credit, capital, and financial services to organizations engaged in work that benefits low-income communities.

In order to be designated a CDFI, the investment must meet specific federal guidelines regarding the level of support provided to underserved communities. There are also options to invest directly in a CDFI loan fund; some vehicles provide microfinance to entrepreneurs and small businesses in underserved communities.

Another option is to invest in a fixed income mutual fund that has a community focus in its mandate, stating in the prospectus that there is a designated allocation to CDFIs, or an allocation to municipal bonds that have an explicit use of proceeds directed at underserved communities.

There are community investment opportunities within the public equity space as well. Here you might identify investment strategies that, within stock selection and portfolio construction, consider how companies interact with the communities in which they operate. For example, evaluating a company’s commitment to create jobs in underserved communities. Or, for a company that operates in areas where indigenous people live, assessing how that company is incorporating indigenous perspectives in relevant decision making. Companies that pay attention to the communities in which they operate are better positioned for long-term success, reducing reputational risks and building positive brand value and awareness.

Fund managers that incorporate this level of analysis have the potential to create meaningful community impact through engagement with holding companies around what they’re doing to create social benefit for the communities they effect.

Some fund managers have an investment objective to provide current income deemed to be qualified under the Community Reinvestment Act of 1977. The Act was put in place to encourage depository institutions to help meet the credit needs of low- and moderate-income neighborhoods, and CRA regulators ensure that the investments meet those standards.

A crucial aspect of a community investment is the managers’ ability to report on the positive impact of the investment. You can use these metrics to communicate the social benefit of the investment to a client. For example, if a key theme within the portfolio mandate is affordable housing, how many tenants were provided access to housing, what was their demographic and income breakdown, and over what time horizon were they supported? If an investment has a focus on financial inclusion, how many people were provided access to credit or what is the increase in “banked” adults? It’s important to see clearly defined financial and social return expectations.

Community investments are now more accessible than ever. And with that, there is an unprecedented opportunity for advisors to deepen conversations with clients around meaningful and personal investment impact, whether it be in the town they grew up, the place they live now, or anywhere in between.

1. “Community Investing,” USSIF.com, last accessed on August 14, 2019, https://www.ussif.org/communityinvesting.

2. Kayla Fontenot, Jessica Semega, and Melissa Kollar, “Income and Poverty in the United States: 2017,” Census.gov, last modified on September 12, 2018, https://www.census.gov/library/publications/2018/demo/p60-263.html.

3. Andrew Aurand, Ph.D., MSW, Dan Emmanuel, MSW, Diane Yentel, MSSW, Ellen Errico, Marjorie Pang, “The Gap: A Shortage of Affordable Homes,” National Low Income Housing Coalition, March 2018, https://reports.nlihc.org/sites/default/files/gap/Gap-Report_2018.pdf.

4. Debbie Alexander, Laurie Lewis, John Ralph, “Condition of America’s Public School Facilities: 2012-13,” National Center For Education Statistics, March 2014, https://nces.ed.gov/pubs2014/2014022.pdf.

5. “State of Our Schools,” 21^st Century School Fund, Inc., U.S. Green Building Council, Inc., National Council on School Facilities, “State Of Our Schools,” 2016, https://kapost-files-prod.s3.amazonaws.com/published/56f02c3d626415b792000008/2016-state-of-our-schools-report.pdf?kui=wo7vkgV0wW0LGSjxek0N5A.

6. “2018 Report on US Sustainable, Responsible and Impact Investing Trends,” US SIF Foundation, 2018, https://www.ussif.org//Files/Trends/Trends_CI_2018.pdf.

Community investing presents a strong opportunity for direct, meaningful, and measurable impact for an investor – and can often serve as a low-risk, high-impact component of an investment portfolio – delivering social benefit alongside financial return.

Published Date

Thu, 09/05/2019 - 12:00

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Clean Energy stocks look the cheapest they have in years

kevin.mesquita — Fri, 05 Apr 2024 13:00:00 +0000

Clean Energy stocks look the cheapest they have in years

Display Author

Michael Wedekind, CFA

kevin.mesquita Fri, 04/05/2024 - 08:00

Did you know that Envestnet offers one of the largest asset manager networks in the industry? Regularly throughout the year, we like to share perspectives from our Envestnet | PMC research and due diligence teams.

What we’re seeing and hearing about the global energy transition

Investors don’t have to look hard to find signs of negative sentiment surrounding the industries and firms at the front line of the energy transition. Sales of electric vehicles are falling short of Detroit’s lofty targets. Offshore wind, a crucial component of the U.S. East Coast’s future carbon-free energy mix, spent 2023 in the doldrums due to cost overruns that led to projects being rebid. Necessary growth in the U.S.’ balkanized electric grid continues to be strangled by NIMBYism or monopoly utilities themselves as they jealously guard their rate base from competition by cheap renewables from outside their service area. Rising interest rates, high materials costs, and geopolitical tensions have all been major contributors to these and other challenges facing the clean tech and climate action universe of stocks, which have struggled versus the broad market since their relative peak in early 2021.

In September 2023, GMO partner, Lucas White, who manages the firm’s Resources and Climate Change strategies, penned a whitepaper that’s worth reading in full and that addresses this period of relative weakness in cleaner energy and conservation stocks. In brief, Mr. White argues that clean energy stocks’ “abysmal” stretch of underperformance is typical of an asset class driven by sentiment. However, the author notes that these increasingly mature and profitable businesses now boast valuations that are “quite sober and price in negative or negligible growth in many instances.” This ambient negativity toward the sector’s prospects would seem to be at odds with the increasing economic viability of clean energy and broad, well-financed policy support in the U.S., EU, and China. Despite this, the “vibecession” that gripped the broad market for much of 2023 has yet to abate in the climate solutions space, with these stocks falling further behind broad global equities over the past several months.

Wilderhill Clean Energy Index vs. MSCI ACWI Index

Clean energy stocks’ underperformance has been painful and sustained since 2021, with only brief retracements to the downtrend. Our covered managers that focus on this space—namely GMO and Impax—and others with expertise in clean technologies (e.g., Lazard) argue that recent underperformance has only amplified valuation anomalies and brightened the long-term outlook for these stocks. Writing in November 2023, Lazard laid out a four-fold justification for its heightened conviction in clean tech: 1) unprecedented government and private investment are poised to transform the industry; 2) nascent technologies are becoming ever more economically viable; 3) logistical and inflationary headwinds that have driven the recent selloff are expected to dissipate; and 4) current valuations don’t reflect the earnings potential in the space, which provides an attractive entry point for patient investors willing to tolerate elevated volatility. Despite clean tech stocks having yet to turn a corner in the financial markets, 2023 was still a record year for solar PV capacity additions, and almost all U.S. grid capacity additions in 2024 are expected to be clean, according to the U.S. Energy Information Agency.

U.S. planned utility-scale electric-generating capacity additions (2024)

Annual clean electricity capacity additions vs projections

A good time to add Clean Energy exposure

While aligned with this thesis and the strong growth trajectory for renewables, neither GMO nor Impax are encouraging investors to rush pell-mell into clean energy stocks, despite their attractive valuations. This space is diverse, spanning various stages of the solar PV supply chain, wind, biofuels, storage, etc., and some companies are better positioned than others to grow and navigate uncertainty. Both GMO and Impax argue for a fundamentally disciplined, thematic approach that combines clean energy stocks with those of firms focused on other aspects and exigencies of the energy transition, such as energy efficiency, grid tech, sustainable agriculture solutions, critical minerals, and water. For example, while Impax selectively holds wind exposure in its Global Environmental Markets Fund, the investment team has higher conviction in its building energy efficiency, industrial energy efficiency, and smart/efficient grid investments, given their greater stability versus the more capital intensive and volatile wind business. Reflecting Mr. White’s conviction in the space, GMO’s Climate Change Fund held roughly 47% of its assets in clean energy—primarily solar, biofuel, and battery investments—at the end of January 2024. Still, the investment team nonetheless diversifies beyond this segment by holding large strategic stakes in energy efficiency companies, copper miners, sustainable agriculture firms, and grid tech providers. Investors should always critically evaluate their risk tolerance and goals, and clean energy stocks have tended to be significantly more volatile than broad market equities. However, for those seeking to capitalize on the secular tailwinds of the global energy transition and/or diversify away from mega-caps that have driven the recent market rally, there has rarely been a better time to consider adding exposure to this dynamic sector.

Investors seeking to capitalize on the secular tailwinds of the global energy transition and/or diversify away from mega-caps should pay attention.

Published Date

Fri, 04/05/2024 - 12:00

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Introducing our first Wealth Management Platform release of 2024

kevin.mesquita — Tue, 26 Mar 2024 20:39:25 +0000

Introducing our first Wealth Management Platform release of 2024

Display Author

Envestnet Wealth Solutions

kevin.mesquita Tue, 03/26/2024 - 15:39

Proposal tool updates

A Current Account Analysis PDF is now included in our Next Generation Proposal (NGP) tool. Advisors can select “view current account analysis” to generate an analysis of existing client accounts, before selecting proposed products in the new proposal and Strategy Modification workflows. Once generated, the advisor can download the analysis as a PDF to share with your clients.

We’ve also incorporated client feedback to:

Model Import UX Improvements—making it easier to find models to import in NGP model builder
Improve the manual account creation experience—there is a newly added 'Holdings Summary', new visibility into ST & LT Gain/loss details, and we’ve made it easier to import and correct issues on file upload
Create a more intuitive tax overlay workflow—a more focused path to program selections with the tax overlay feature in NGP

Client portal enhancements

With our new Branded Login Experience, we are white labeling our platform. It will provide the ability to lead with a client desired name in the URL link followed by Envestnet in the following format clientname.envestnet.com, along with firm specific logo.

Our Externalize Configuration Manager gives external users the ability to manage the configuration experience for their enterprise, firm, or branch. The CM will provide for scale and alleviates effort of Envestnet teams to set up firms for new client portal with appropriate permissions and administrator settings.

New Mobile Full Reports—On the mobile application, when advisors click on a report widget, they now have the ability to see the full report view of the following:

Net Worth
Account Performance
Asset Allocation
Holdings
Activity
Realized Gain/Loss
Projected Income
Spending

Advisor controlled sleeves

Account Level Flows in/out of Sleeves (ALFS) have been extended to accounts in shared models, where that is the only account in the model, as well as extended to implicit ownership accounts.

Servicing updates

Advisors now have the ability to enable/disable Trade Holds in Bulk processing, rather than doing it individually.

We also now allow Intraday Deposits for Admin traded accounts, when the Intraday Deposit API is enabled.

Billing updates

With this release we have implemented a self-service billing group and debit account management, empowering advisors to directly manage these tasks with sponsor approval.

Other billing updates include:

New page “Mutual Fund Rebate Report” to display the 12b1 fee processed at the account level
Sponsors can now apply account-level billing exclusions to multiple fee components and edit Custody fee components
The maximum fee computation logic is now extended to include off-cycle bills
Total Fee Amount in the IFP file displays the Client fee and firms can now specify the Calculated Fee Adjustment
Advisors can now manage the billing groups for their accounts and the shared accounts Ability to exclude Manager fees when affiliated products are used in retirement accounts and proposals

Want to know more?

For our comprehensive release notes and additional information, reach out to your Envestnet Enterprise or Regional Consultant.

Stay up-to-date on all things Envestnet! We invite you to follow us on LinkedIn, Twitter and YouTube.

Check out these quick highlights from our first product release of 2024.

Published Date

Wed, 03/27/2024 - 12:00

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A guide to SEC audits

kevin.mesquita — Tue, 19 Mar 2024 19:47:33 +0000

A guide to SEC audits

Display Author

Seth Johnson

kevin.mesquita Tue, 03/19/2024 - 14:47

For RIAs, you can add one more certainty to that list: SEC audits. Some examiners pay a visit to a new RIA within the first year or so and regularly throughout its life. Regulators might also show up unannounced from time to time, looking to ensure compliance with a specific area of interest or responding to a complaint.

Most audits generally follow a similar process. First, you are notified of the audit by mail or phone, followed by a request for documentation. You’ll then meet with examiners, who review the documents they’ve requested.

From there, examiners will follow up with you with any additional questions, followed by a final report listing their findings and actions you must take, if any. The process can take anywhere from a few weeks to a few months or longer, depending on what examiners are looking for.

While stressful, understanding the types of audits, how they are conducted, and what they’ll look for can make audits far less disruptive. This guide provides an extensive overview of the audit process, and how to prepare your firm for when regulators come knocking at your door.

SEC audit types

There are three types of audits that the SEC conducts: routine, for-cause, and sweep examinations.

Routine inspections

The most common is the routine inspection, which is intended to be a comprehensive review for compliance with applicable laws and regulations.

A routine inspection also examines the processes a firm uses to ensure compliance and whether or not they’re making the necessary disclosures. Examiners compare their findings with what the firm listed in their Form ADV and look for discrepancies.

New RIAs may undergo a routine inspection, sometimes referred to as a welcome exam, within the first year or two of operation.

While most of the time a firm will receive advanced notice of routine inspections, the SEC does occasionally arrive unannounced. On average, RIAs can expect to undergo a routine inspection once every three to five years.

For-cause inspections

If the SEC has reason to believe a firm is not in compliance, a for-cause inspection may occur. A whistleblower or complaint often triggers these inspections and they can occur unannounced.

In most cases, these investigations are initially limited to a particular area or activity of the firm, such as improper client disclosures. However, should the SEC find evidence of more widespread non-compliance, these inspections can grow in scope.

Sweep or limited scope examinations

When state and federal level regulators want to ensure compliance with specific areas, such as advertising, custody, and so on, or investigate the need for further regulation, they obtain data through a sweep examination. While firms often receive some type of warning, they can occur with limited advanced notice as well.

These initiatives are often conducted at multiple firms simultaneously (i.e., a ‘sweep’ of the industry). While limited in scope, firms targeted by sweep examinations should still expect to be asked to produce a significant amount of documentation.

Every firm will be the target of a routine inspection at some point, and many the target of either sweep examinations or at-cause inspections. Regardless of the type, what you should expect from an SEC audit and how you should react is generally the same.

The basics of an RIA compliance examination

The SEC and state regulatory bodies have broad authority to conduct examinations and there are few limits on the type and amount of documentation they can demand. A firm or its employees cannot impede these efforts without a sound legal basis.

Any interactions with examiners should go through the Chief Compliance Officer. Given some recent data security (phishing) attempts, firms should take care to validate that the examination is legitimate; the CCO be sure to contact the regulatory body to confirm the credentials if the inspection is done virtually.

Examinations vary widely in length and may be scheduled or unannounced. Following an audit, it may be weeks or months, or even years before a final report is released while examiners study their findings. From time to time, it may be necessary for examiners to conduct additional interviews or request follow-up information.

Following receipt of the examiners’ final report, RIAs will generally have 30 days to respond to any deficiencies, if any. Once these deficiencies are addressed, or the RIA ‘passes’ the inspection, a closing letter is usually issued and the audit is concluded, but note that anecdotally, more firms are reporting that the SEC is keeping examinations open for extended periods of time, and occasionally does not issue a formal close letter. Firms are encouraged to insist on a formal close letters for books and records purposes.

How to prepare your RIA for an audit

The threat of an SEC audit might intimidate new RIAs. However, as long as your firm and its employees are taking the necessary steps to stay in compliance daily, you’ll already have the information examiners are seeking and in the form they want it.

Maintain your books and records

SEC Rule 204-2 requires RIAs to retain copies of all advertisements and communications that they’ve published either directly or indirectly, along with information substantiating any performance information included in those communications.

Examples of what should be retained include:

E-mails
Social media posts
Revisions of information on your website

In addition, advisors should also retain logs of any communications over other channels, as necessary. With the recent enforcement actions related to the failure(s) to retain required communications, it is recommended that firms chose platforms that are able to retain multiple different types of communications, and ensure that employees are restricting work communications to these recorded, firm sponsored and approved channels.

Records that should be regularly maintained include all account statements that reflect all activity on client accounts and any worksheets used to calculate the return for these accounts.

Other examples of records you should actively maintain include, but not limited to:

All marketing materials
Any product and performance related materials and calculations
Financial account records
Client investment advice and transactions
Records of client communications and recommendations made
Evidence of your authority to conduct business on behalf of the client
Registration and client disclosures
Records of votes cast on behalf of clients
Client custody ledgers
An up-to-date copy of your firm’s ethics code
Details of any programs used to attract referrals
Political contributions of the firm or staff
Details of any compliance issues, and steps taken to resolve them

Keeping good records won’t matter if there is no system to organize or efficiently retrieve them. Delays and issues in producing the information may trigger a deficiency notice for poor recordkeeping practices.

Implement a compliance program

SEC Rule 206(4)-7 requires that firms review the “effectiveness” and “adequacy” of their compliance policies at least once a year. Originally just a requirement that the review occurs, the rule was revised in November 2023 to make a written report of the findings mandatory.

This is likely not an issue for larger firms that already have substantial compliance programs, and likely a compliance officer that isn’t wearing multiple hats. However, for smaller firms, the new documentation requirements may require rethinking how you’re handling compliance.

The changes to Rule 206(4)-7 intentionally don’t specify a format or medium, so you’re free to use whatever works best for your firm.

In many cases, you might find that your records are spread out across several formats and locations. We recommend selecting a single location and using standard formats (PDF, etc.) to make retrieval easier.

Whomever the Chief Compliance Officer is, this person should conduct no less than annual reviews, and document the process and any actions taken to address deficiencies.

The CCO should also not assume that everyone understands compliance equally, and methods of educating employees of the requirements and mandates often occur through the delivery of the Code of Ethics, Compliance Manual, new hire and ongoing mandatory training, and quarterly or annual employee certifications.

It’s also important to remember that SEC rules are meant to serve as a basis for compliance. A generic compliance program provides generic protection. Firms are expected to identify areas of risk specific to their business and take steps to tailor their compliance program accordingly.

While the SEC mandates an annual review, compliance experts recommend moving to a quarterly review instead. In theory, this should make annual reviews easier since problems (especially those appearing shortly after a review is completed) are caught much sooner.

And while CCOs are where the buck stops when it comes to compliance, creating a system where some tasks are delegated to other ‘lines of defense’ and management firm is encouraged. CCOs generally don’t control the business and cannot be everywhere, all at once. Compliance should not be put into a position of supervising the business, but instead are responsible for developing a regulatory framework, implementing that framework, and auditing to ensure that the business is following policies, procedures, and best practices.

Ensure that client fees are disclosed, and that the fee calculations are accurate

A clear record of all actions taken, and accuracy, is key to ensuring compliance. This includes transactions, user actions, account changes, and more, and how they’re connected. In an audit, examiners are not only looking for what and when an incident occurred, but why.

The audit trail inside your billing system provides just this and makes it easier for you to produce a complete picture of your firm’s billing activities to regulators. If you’re using a finance-specific billing system, it is likely such a feature is included.

Envestnet’s Billfin provides a detailed audit trail that tracks all changes their team makes to client billing. This includes changes to the householding (groupings of accounts that are billed together) and changes to the fee schedule assigned to clients and accounts. Tracking like this is critical for firms with multiple users since it helps them to quickly determine who made a change and when it was made.

Billfin’s Billing Details report provides an up-to-date snapshot of every client’s billing setup, so users can quickly check that any client’s setup matches the billing expectations established in the advisor’s ADV. With the help of these reports, users and auditors can identify if a billing setting is wrong and at which point it was changed (if in the last 6 months). In those instances, firms will be able to provide auditors with individual client invoices and an audit trail from BillFin.

If your billing system cannot generate detailed audit reports, it’s likely whatever other history the application provides will not be sufficient to comply with SEC regulations.

Run a mock audit

There is no need to walk into your first SEC audit unprepared. Independent compliance consultants have extensive experience in helping firms understand areas where examiners might find your firm out of compliance.

Typically, you’ll want the consultant to run the audit based on what examiners look for in a routine inspection. While there’s no guarantee that the consultant will find all the issues an examiner might have, your risk of serious deficiencies in an actual audit will be significantly less.

How to respond to the SEC

It’s important to remember three things about responding to an SEC inquiry: answer as promptly and completely as possible. Not all SEC communications will require a response, however, it is your responsibility to ensure you understand what regulators are asking you to do whether or not they want to hear back from you.

If you don’t understand a request, ask for clarification. This can also shorten the length of an inspection, as the examiner doesn’t have to follow up to clarify their request. If you need more time to respond, such extra time should be requested early along with a reason for the delay.

Answering all questions completely is another important factor. Responses should be well supported by documentation, and the CCO should be prepared to defend those answers.

Lastly, be truthful and transparent. Falsifying records, cover ups, or obstructing responses during an examination can only lead to materially heavier sanctions and enforcement than ‘owning up’ to deficiencies and gaps at the time of examination.

It’s also important to choose your words carefully. Promising a change in writing will trigger a future examiner to check if your firm made that change.

Good compliance is an ongoing effort

With the multitude of daily tasks already on an advisor’s plate, staying up to date on compliance can sometimes take a backseat. This isn’t an excuse to procrastinate. There are a wide range of books, courses, and online resources that can help your firm and its employees understand compliance and their role with minimal disruption to their daily workflow.

Here are a few suggestions to help your firm stay on top of compliance:

Areas where the SEC sees regular issues in audits are published as Risk Alerts. CCOs should regularly review these alerts, share relevant alerts with employees, and adjust the firm’s compliance practices as necessary
Another potential resource is the Practicing Law Institute. The PLI offers over two dozen publications covering important compliance topics
Keep a current book on compliance in the office at all times available for reference. It’s also important that any reference is relevant to your practice. A generic compliance manual won’t help in more complex situations
Compliance requirements evolve over time. The CCO should have a framework in place to continuously educate advisors and staff on current laws and best practices. Any RIA being audited will need to provide evidence of an active training and continuing education program

A word on legal help

Understanding SEC regulations is challenging and it’s tempting to reach out for legal help. However, you’ll want to ensure the attorney you’re speaking with specializes in administrative law.

Attorneys specializing in this area of law have a deeper understanding of the rules and policies of administrative agencies. As a result, they’ll also understand how they operate and can advise you on how regulations may apply to your firm. If you’re still not clear on what the SEC is asking for or how to comply with a request, an administrative law attorney is a great resource.

A word of caution, however: an attorney is not an excuse for ignorance of compliance regulations. As an RIA or IAR, you have a legal responsibility to know these regulations and follow them.

For RIAs, the inevitability of an SEC audit is less a threat and more a regulatory certainty. But for firms that are well-prepared, an audit can affirm the robustness of their compliance culture.

The granularity of preparation—meticulous record-keeping, comprehensive audit trails, proactive compliance programs, and regular internal reviews—can transform an SEC audit from a nightmarish ordeal into a demonstrable strength. Firms are encouraged to tailor their compliance programs to their unique risk profiles and to view the preparation for, and the handling of, SEC audits as an integral, continuous thread in the fabric of their operational integrity.

It's about creating a system where compliance is not reactive, but built into the daily workings of the firm, ensuring readiness not only for the SEC but for the overarching goal of client trust and marketplace stability.

Billing platforms like BillFin help firms meet their compliance goals. To see how BillFin might be a good fit for your practice, explore https://www.redi2.com/billfin/ and request a demo or free trial.

The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Envestnet is not a law firm and as such, does not provide legal or regulatory advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel as applicable.

Ultimate Guide to SEC Compliance for Financial Advisors (Oct 2023)

How to Prepare Your RIA Firm for a Compliance Audit (Jul 2022)

Regulatory Exam Preparation: Audit-Ready Strategies (Aug 2021)

Benjamin Franklin famously said, “Nothing is certain but death and taxes.”

Published Date

Fri, 03/22/2024 - 12:00

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An advisor’s guide to female investors

robert.fundy — Mon, 18 Mar 2024 19:10:47 +0000

An advisor’s guide to female investors

Display Author

Dana D'Auria

robert.fundy Mon, 03/18/2024 - 14:10

In 1987, Congress followed the lead of several U.S. states and passed a joint resolution declaring the entire month of March to be Women’s History Month.¹ As we reflect on equality and the role women have played in our country’s history, it is also a good time to reflect on the gap that exists between some advisors and female investors. Bridging the gap requires more than just acknowledging the presence of women, but also a nuanced understanding of their unique preferences, goals, and challenges.

Opportunity in half the population

Let there be no question that women present a massive opportunity to the financial services industry. If women invested at the same rate as men, there would be at least an additional $3.22 trillion in assets under management from private individuals, a report from BNY Mellon Investment Management found. In fact, because women tend to outlive men, by 2030 women are expected to control much of the $30 trillion in financial assets that baby boomers possess, according to McKinsey & Company. The firm’s 2020 report said it is “a potential wealth transfer of such magnitude that it approaches the annual GDP of the United States.”

Interestingly, investing is most popular among younger women—71% of Generation Z women and 63% of millennials invest.²

Lots of similarities, some differences

Last year, Envestnet and The Center for Generational Kinetics conducted research into generational opportunities for financial advisors, looking at the mindset of affluent American investors (read the report here). This month, we went back to the raw data from that survey and compared the responses of men and women.

Overall, men and women were within a few percentage points of each other on most of the questions in our survey. Other than a few key areas that we’ll highlight below, investors are investors, regardless of gender.

The data did show that women may feel differently from men in their financial confidence, market skepticism, and technology use.

Confidence

One of the biggest key differences noted in research is that women aren't as confident as men in their investing abilities and demonstrate lower levels of investing knowledge.³ Our own survey identified that women are less likely than men to feel confident in their ability to achieve financial wellness (63% women vs. 73% men). Our survey also found that women are slightly less likely to have prepared for an upcoming inheritance or prepared to transfer wealth to upcoming generations.

It is important to note that this lack of confidence is not founded in reality. Women investors actually achieve better investing returns than men, with studies finding differences of 0.4% to nearly 1%.⁴ So while women tend to have concerns or hesitations about investing, it is not because we ultimately make poor investment decisions.

One possible explanation for the difference in investing outcomes might be because women tend to trade less. This often surprises women I speak with who believe that their husbands know more about stock markets and therefore might be better at investing. But the reality is that once you have identified a solid strategy for accessing capital market returns, resisting the temptation to tinker and trade on your impulses is generally the best strategy for long term wealth creation.⁵

Skepticism

Women may have less trust in financial services overall. Our survey found that:

61% of women surveyed are skeptical of investing due to recent market fluctuations (vs. 48% of men)
63% of women have heard of crypto, but haven’t considered investing (vs. 40% of men)
81% of women are skeptical of crypto (vs. 65% of men)

Women are also less likely to have a “successful investment portfolio” as a financial goal (69% of women listed this as a priority vs. 81% of men). Our survey doesn’t delve into why this might be the case, but it could be that women are more focused on what they gain from the portfolio (e.g., financial security, financial freedom, opportunities) vs. the portfolio performance itself.

There is also research that suggests women have a bigger interest in sustainable investing than men.⁶ It may be the case that if you can incorporate social preferences into a portfolio allocation without sacrificing potential return, you may be able to better engage investors and keep them disciplined, which can make for a better investment experience and also longer run returns if they stay invested through the ups and downs. About 74% of sustainable funds ranked in the top half of their respective investment categories in the five years leading up to 2022, according to Morningstar.⁷

Technology

Technology is an interesting category where women investors seem to feel differently than men in a few areas. Our data showed that:

40% of women have heard of budgeting tools, but they haven’t considered using them, e.g., Mint, RocketMoney, CoPilot Money (vs. 35% of men)
40% of women surveyed hadn’t even heard of robo advisors and have not considered using them (vs. 18% of men)

But women are more likely to be comfortable with transactional/day-to-day task-oriented technology (vs. planning or investing apps):

90% use credit cards (vs. 81% of men)
78% use apps to send money, including Venmo, Zelle, etc.
70% use credit score tools (very similar to men)
Approximately 60% use tax tools and insurance tools (very similar to men)

These numbers could suggest that women may be more focused on tools that increase their efficiency and productivity, rather than planning for the future or investing specifically. As our educational system embraces personal finance curriculum, I’m hopeful that more women will become more interested in exploring budgeting, planning, and investing tools.

How to better support female investors

If I’ve sold you on the opportunity women present to the financial services industry, you may be wondering how to apply these research findings to your own practice. Here are a few takeaways to keep in mind:

Women may be more skeptical of less traditional investment vehicles. For example, you may not want to lead with crypto unless they bring it up. Gain a clear understanding of their goals, expectations, and preferences before you make even casual recommendations.

Women have used technology as it directly applies to their daily lives, but are slightly less likely to have used it for budgeting, planning, and investing. Ask what tools they use and how they feel about them. Listen to their answers and then proceed accordingly.

Women may be less likely to give you a gold star for portfolio performance. Their goal is less likely “to be a great investor” and more likely related to their personal lives and values. Deliver value with behavior coaching and support. Being a steady guide, particularly during times of market uncertainty, may help female investors feel more confident that they can meet their long-term wealth objectives.

Finally, I don’t think it is possible to discuss female investors without also touching on female advisors. Most U.S. financial advisors are male — just 35% were women in 2022, according to the Bureau of Labor Statistics. One can imagine that there are a lot of women who might prefer to invest with a woman advisor. I am hopeful that we will see our share of the advisor community continue to grow to capture this opportunity.

And to all advisors, I hope that by this time next year we’re talking about how your business has grown, at least in part because you’ve addressed the needs of female investors. Their success is our industry’s success as well.

Visit https://newsroom.envestnet.com/ to access our research, perspectives from industry experts, and the latest news from Envestnet.

¹https://www.nationalgeographic.com/history/article/why-the-us-celebrates-womens-history-month-every-march

²https://www.fool.com/research/women-in-investing-research

³The Motley Fool: Women in Investing Research

⁴The Motley Fool: Women in Investing Research

⁵Financial Times: Article Title

⁶CNBC: Women Prefer Values-Based Investing - Here's How That Impacts Their Wealth

⁷CNBC: Women Prefer Values-Based Investing - Here's How That Impacts Their Wealth

It has become increasingly evident that women play a pivotal role in driving investment decisions and shaping the future of wealth management. Let’s look at what research says about women and wealth, and what opportunities might lie ahead for advisors.

Published Date

Wed, 03/20/2024 - 12:00

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Market momentum: M&A revival, Nvidia, & ongoing inflation

robert.denis — Mon, 18 Mar 2024 16:19:46 +0000

Market momentum: M&A revival, Nvidia, & ongoing inflation

Display Author

PMC Global Macro Team

robert.denis Mon, 03/18/2024 - 11:19

2024 is off to a fast-moving start. Many investors are confused about today’s market conditions, unsure of whether to focus on positive or negative indicators or both.¹ For even the most experienced among us, there is a lot to unpack right now. This month, we’re taking a look at the strong momentum of the 2024 M&A market, the power and impact of Nvidia and AI overall, as well as America’s ongoing battle with inflation.

2024 M&A market revival

The Mergers and Acquisition (“M&A”) market has had a strong start in 2024. According to Bloomberg, year to date, as of February 20th, the total value of announced deals reached $425 billion, a 55% jump from 2023 at this point of the year. The breadth of the market is also quite healthy – deals are not only happening in the popular areas like technology and health care sectors but also across a wide variety of sectors and industries. The largest deal announced so far this year is a $35 billion merger between Capital One and Discover in the financial sector, a highly regulated industry that has historically not seen many large deals.²

Despite the strong performance of the stock market, 2023 was a slow year for M&A activity, with total deal value below $3 trillion for the first time in a decade. One reason was due to the concentration of stock market gains. For the most-watched S&P 500 Index, most of the index gains in 2023 was driven by the Magnificent Seven stocks. The other reason was that most of the gains took place in 4Q/2023. For example, the equal-weighted S&P 500 Index returned 11.9% in 4Q/2023 and 13.8% in 2023, respectively. As a result, for most companies, the stock market bull market has suddenly arrived and they are beginning to look into the M&A market for further opportunities. This strong momentum of the 2024 M&A market is likely to continue. In addition to the pent-up demand mentioned above, companies have plenty of “dry powder” to do deals. According to Morgan Stanley, public companies currently have around $5.6 trillion in cash and private equities have another $2.5 trillion. Moreover, despite some delay, the Fed is still on its path to start cutting its policy interest rates later in the year.³

By: Frank Wei, CFA, CAIA Senior Investment Analyst - Alternatives Research

Meteoric rise for Nvidia and its impact on active management

The stock price of AI-chipmaker, Nvidia (NVDA), has experienced a meteoric rise over the past 18 months, which has created an uphill battle for active large cap growth managers. Nvidia was one of the key drivers behind the stock market’s sizeable gains of the past year. In 2023, NVDA gained 239% helping to push the Magnificent Seven to a gain of 107%, and the Russell 1000 Growth Index to a 42.7% return. The company’s Wall Street success has carried into 2024, behind a blowout quarterly earnings report in February, making it the one of the most enviable stock holdings.

Financial results from Nvidia continue to impress and the stock has grown into its valuation. In the most recent quarter, Nvidia reported revenue of $22.1 billion, easily surpassing the average analyst estimate of $20.62 billion, and a 265% increase from revenue one year prior. Driving the strong sales was the continued surge of specialized chips, which are key components that help power artificial intelligence within AI chatbots, such as ChatGPT and Google’s Gemini. Nvidia responded by surging 16% on the day, or a gain of $277 billion in market capitalization, a record one-day increase. In the days following earnings, the company eclipsed the $2 trillion market cap level, up from $280 billion back in October 2022, and is now ranked as the third largest company in the world. For the Nvidia skeptics, concerns are geared towards the company’s ability to sustain this high earnings growth in the future. While Nvidia continues to enjoy a dominant market share in the higher computing power GPU market, higher earnings growth may get arbitraged away if competition increases.⁴⁵⁶

The speed and size of the company’s historic growth has created challenges for active managers. The decision to hold the stock, or whether to enter now if they have missed the run, is a hefty decision to make and one that can’t be ignored as Nvidia now comprises such a large share of their benchmark. Nvidia, Apple, and Microsoft now comprise roughly 30% of the Russell 1000 Growth Index, and the full roster of the Magnificent Seven is now roughly 50% of the index. Active managers often have limits on exposure to individual stocks and seek to position their active approach as being distinct from the benchmark. However, the lack of exposure has been challenging and has weighed down significantly on relative performance. In 2023, roughly 70% of active large-cap growth managers trailed the performance of the Russell 1000 Growth Index. Thus far in 2024, Nvidia is off to the races again, with the stock up over 80% YTD through early March, and active managers are battling to keep up.

By: Tim Murphy, Vice President, Senior Portfolio Manager

Ongoing battle with inflation

Most recent data report an inflation rate of 3.1% for January, down from 3.4% from the previous month. While the reduction is encouraging, it was not as large as expected and suggests that the war on inflation may not be over. This matters as current restrictive monetary policy by the Federal Reserve Bank was largely expected to ease this year. However, should inflation prove sticky, market participants may see prolonged monetary tightness.

While inflation has come down over the past month, it remains above the Fed’s 2% target and is not falling as quickly as expected, with January’s inflation forecasted to be 2.9%. When digging into the January data, prices for gasoline, clothing, and used vehicles all experienced notable price drops, while prices for services are seeing steady increases. The economics of service pricing is closely linked to local conditions such as wage rates and spending, both of which are constantly above pre-pandemic levels.⁷

Restaurant and grocery costs have also been increasing, with prices at eateries up 5.1% in January when compared with 2023, and grocery bills also increasing 1.2% over the same period. When looking at food expenditures as a percent of disposable income, Americans spent 11.3% in 2023, the highest level since 1991. This is unlikely to change any time soon, as restaurants and grocery stores deal with a tight labor market, and shortages of food goods.⁸

While the recent inflation number represents just one month of data, many are concerned that further reduction of inflation may be more difficult than expected. In fact, market participants have already adjusted expectations, and are now forecasting rate cuts to begin in June, as opposed to May.⁹ Recent comments by Chair Jerome Powell convey the Fed’s belief that interest rate cuts later this year are still appropriate, provided evidence of further slowing inflation.¹⁰

While there is much uncertainty about future levels of inflation, what’s certain is that the Fed’s war on inflation is not yet over. With the effects of high inflation still fresh in the memory of Americans, the inflation rate and the Fed’s response will be a closely watched as any further drift from the expected outcome is likely to have large ramifications for the markets and economy.

By: Scott Keller, Portfolio Manager

¹ https://www.pbs.org/newshour/show/why-many-americans-feel-unhappy-about-the-economy-despite-indicators-of-improvement

² https://www.bloomberg.com/news/articles/2024-01-04/goldman-s-feldgoise-says-m-a-comeback-hinges-on-private-equity

³ https://www.bloomberg.com/news/articles/2024-02-20/m-a-races-past-400-billion-mark-after-capital-one-discover-deal

⁴ https://www.bloomberg.com/news/articles/2024-02-23/nvidia-set-to-top-2-trillion-valuation-in-first-for-chipmakers

⁵ https://www.wsj.com/livecoverage/stock-market-today-dow-jones-08-11-2023/card/nvidia-in-2023-vs-cisco-in-2000-xfzhHhDEPnCNWoxAez93

⁶ https://www.bloomberg.com/news/articles/2024-02-21/goldman-s-rubner-says-nvidia-is-most-important-stock-on-earth

⁷ https://www.wsj.com/economy/consumers/what-to-watch-in-the-cpi-report-will-inflation-fall-below-3-ffc5859a?mod=Searchresults_pos1&page=1

⁸ https://www.wsj.com/economy/consumers/its-been-30-years-since-food-ate-up-this-much-of-your-income-2e3dd3ed?st=zbq9q9qj0gh66qv

⁹ https://www.economist.com/leaders/2024/02/22/do-not-expect-americas-interest-rates-to-fall-just-yet

¹⁰ https://www.wsj.com/economy/central-banking/powell-says-fed-on-track-to-cut-rates-this-year-52e5feb3?mod=hp_lead_pos1

Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you better support your clients.

Published Date

Mon, 03/18/2024 - 12:00

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