FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.
One-Third Of Advisors Want To Buy Another Practice In The Next Five Years (Wealth Management)
In the next five years, there will be plenty of buyers for financial advisor practices. According to a Financial Services Institute survey, 29% of advisors are looking to buy in the next few years, compared to 15% who are looking to sell. In the six to ten years, those numbers change to 24% and 29%, respectively.
“David Grau Sr., founder of FP Transitions and author of ‘Succession Planning for Financial Advisors: Building an Enduring Business’, suggests there are probably even more buyers to sellers out there than the survey shows. For example, a fee-based practice in Boston bringing in $US250,000 in income and 70 per cent recurring revenue would get between 50 to 70 interested buyers in less than a week,” Diana Britton wrote in Wealth Management.
“Despite the high ratio of buyers to sellers, practices are not going to go to the highest bidder, Grau said. Instead, sellers look for buyers who are as good or better than they are but are twice the size. They then look at best geography and lastly, price and terms of the deal.”
How To Use Dynasty Trusts To Protect Your Assets (Wall Street Journal)
Dynasty trusts were once used to ensure estate-tax exemption in case of a client’s passing, but they have lost favour more recently, writes Scott Leonard founder of Navigoe LLC in a WSJ column. Dynasty trusts are also very useful in asset protection. “If a client dies, and their children who are the beneficiaries of the trust lose a lawsuit, the trust cannot be forced to pay. If a surviving spouse remarries and tries to disinherit the beneficiaries, the trust prevents that, too,” Leonard said.
He said dynasty trusts also protect against legal loopholes and changes made to the estate-tax exemption. “It’s an emotional, time consuming process,” he writes. “A lot of times, clients don’t want to set up the trust in a way that makes it seem like they are ruling from the grave. However, dynasty trusts can be written with a great deal of flexibility to ensure that future beneficiaries have substantial control over the trust provisions.”
The Securities and Exchange Commission (SEC) is planning to impose new requirements for money-market mutual funds. These new rules are to prevent runs similar to those in during the 2008 financial crisis. The SEC is expected to vote on July 23.
“The plan would require prime institutional funds to float the value of their share price, traditionally set at a stable $US1, which makes them a popular place to park cash. It also would require funds to impose a 1 per cent fee on redemptions and permit them to temporarily suspend withdrawals when liquidity drops below required levels,” Dave Michaels from Bloomberg reported.
“The plan is intended to make money funds, which manage $US2.5 trillion in assets for retail investors and corporations, less vulnerable to investors fleeing funds during a crisis. The rule wouldn’t apply to retail funds or those that predominantly invest in U.S. government and municipal securities.”
Schwab Study Finds RIA Firms Are Growing In Revenue And Strategy (Financial Planning)
According to the Schwab Advisor Services’ annual RIA Benchmarking Study, median RIA firms’ assets under management are growing at an annual rate of 12.8%. Firm revenues are growing at 13.6%. The study showed that RIAs are also focused on strategic management.
“On one critical front, succession planning, it found that 49% of RIA firms have a formal plan in place — up from 44% last year. And 61% firms have executed a strategic plan, compared with 52% of firms last year. Many owners of larger RIA firms are also hiring professional management to run the day-to-day operations of the firm. According to the study, 47% of firms with over $US1 billion in AUM have a chief operating officer,” according to Andrew Pavia at Financial Planning. “The most popular growth strategy, cited by 80% of RIA firms in the study, is using referrals — with 41% of firms relying on client referrals and 39% turning to business referrals.”
Investors have been preparing their portfolios for rising interest rates since the Federal Reserve’s tapering announcement in May 2013, BlackRock’s Del Stafford said. However, this “Fed-Proof”ing approach is leading to some unaccounted risks.
“There are two main problems with the new allocation,” Stafford said.
1. “It increases correlation to stocks. One of the most important aspects of fixed-income investing is that it helps diversify the portfolio from the behaviour of equities. But this is not true for all bonds. The returns of a high yield index, such as the Markit iBoxx USD Liquid High Yield Index, have a correlation of 0.74 when compared to the Russell 3000 Index — even a 15% per cent high-yield allocation will increase the original portfolio’s correlation to 0.42. This is a considerable jump from where it was before — zero on a historical basis.”
2. “It increases sensitivity to credit spreads. Investors adding high-yield bonds expose themselves to greater credit risk — that is, the chance that spreads will change between securities and their reference points (like Treasuries). The 15% addition of high yield to the portfolio leads to almost a four-fold increase, from -0.41 to -1.60, in sensitivity to credit spreads, increasing the risk that the investor could lose money.”
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