Navigating U.S. Wealth Management: Seven Ideas for Financial Advisors and Individual Investors in 20

by Eric Mogelof of PIMCO, 12/6/19

SUMMARY

  • Key market and industry themes in 2020 include reviewing portfolio exposures to equities and credit, considering short-term allocations in light of commission-free ETF trades in many platforms, and assessing retirement distribution strategies. We think it’s also critical to consider allocations to alternatives, municipal bonds, active bond strategies, and model portfolios.
  • At PIMCO, we are committed to delivering attractive risk-adjusted performance, industry-leading client service, and innovative tools and forward-looking solutions to help our advisors and individual clients meet their goals in any market environment.

The wealth management industry is constantly evolving. Investment managers, wealth management firms, and financial advisors need to assess the changing landscape and develop ideas and solutions to help meet client objectives. As we head into 2020, here are seven ideas to help advisors and investors navigate market and industry trends.

  1. Review exposures to public equities and lower-quality credit in portfolios. At PIMCO, we believe the global economy is about to enter a low-growth period as we head into 2020. While we think growth will recover later in the year, we see risks to our baseline view from continued political and policy uncertainty. Given this, we suggest investors carefully consider exposures to public equities and lower-quality corporate credit. If investors wish to maintain their risk exposures, consider holding on to traditional bond allocations, which have the potential to damp market volatility and help protect portfolios. For investors who reduce equity and corporate credit exposures, we generally favor shortening the duration of bond portfolios.
  2. With major platforms eliminating trading commissions on ETFs, make sure your cash is working for you. Now that many investors can trade exchange-traded funds (ETFs) without paying commissions, it’s even more attractive to actively manage cash allocations. Rather than automatically allowing cash in brokerage and retirement accounts to be swept into low-yielding savings accounts or money markets, consider using actively managed short-term bond strategies to enhance return potential of liquidity-focused investments. While there is some additional risk, an investor can potentially generate attractive additional return for stepping outside of money markets and pure cash allocations. At PIMCO, we offer a variety of actively managed short-term bond solutions.
  3. Speaking of active management, remember bonds are different – we believe they should be actively managed. There are some compelling reasons to invest passively, but not in fixed income markets. Bonds are different in several ways that favor active management: Fixed income market participants include noneconomic buyers, the new issuance market is more important for bonds, and index weights are determined by bond issuers as opposed to bond investors. This can make passive investing more risky than anticipated. Historically, actively managed bond strategies have tended to outperform their benchmarks, according to Morningstar data. And in a lower expected return environment, generating excess returns is even more important to help investors meet their financial goals.
  4. Consider increasing allocations to alternative investments in an effort to capture illiquidity premiums. By many measures, traditional stock and bond valuations are looking less and less attractive. Investors should consider increasing allocations to alternative investment solutions that seek to enhance returns and diversify risk by investing in private markets. For many years, institutional investors have been pursuing these investment strategies that aim to capitalize on illiquidity premiums. PIMCO is focused on democratizing access to these investment solutions using innovative investment structures and technology. Investors who are able to give up some liquidity and take on additional risk should consider increasing allocations to alternatives via interval funds, closed-end funds, and private fund strategies.
  5. Revisit portfolio construction through the lens of after-tax returns, and consider increasing allocations to municipal bonds. Many financial advisors and investors are not focused enough on tax-efficient investing, in our view. Although the Tax Cuts and Jobs Act of 2017 reduced federal marginal tax rates, it limited some itemized deductions for state and local taxes and mortgage interest. Some investors still have a marginal tax rate on their investment earnings that is well over 50%. Investors should look at their investments on an after-tax basis, which could prompt them to increase allocations to low-turnover equity strategies and municipal bonds.

    It’s critical for investors to understand that the municipal bond market is diverse and offers a wide range of investment opportunities. Most investors are familiar with and many own investment grade muni portfolios, but investors can also potentially benefit from constructing higher-yielding portfolios. These strategies carry more risk, but can offer higher after-tax returns that could be more compelling than other risk assets, with generally lower default risk than equally rated taxable bond strategies. And finally, financial advisors and investors should consider utilizing professionally managed SMAs (separately managed accounts), which provide greater flexibility to manage tax-related considerations. PIMCO offers a variety of municipal bond strategies, including SMA solutions that can be customized to target individual investor needs.
  6. Rethink distribution strategies in retirement; avoiding early mistakes can mean dramatically better longer-term outcomes. Many financial advisors and individual investors are struggling to determine the appropriate withdrawal strategy for investors in retirement. Financial advisors and investors should utilize a simple and intuitive process for decumulation, one that seeks to help investors set and automate regular withdrawals, protect against sequence-of-returns risk, and embed better guidance around optimal strategies for claiming Social Security benefits. PIMCO’s Income to Outcome framework focuses on ways to address the desire for predictable income streams, which may help investors feel confident in maintaining growth-oriented investments and deferring Social Security benefits, which may lead to greater advantages down the road.
  7. Outsource portfolio construction to increase the potential of achieving financial goals, minimize the range of outcomes, and have more time for higher-value activities. Historically, managing portfolios required conducting independent asset allocation research, developing forecasts for global market returns, and researching individual stocks, bonds, and funds. Today, financial advisors and individual investors have access to significantly more portfolio construction resources than ever before. Rather than build their own portfolios, financial advisors and individual investors should consider utilizing professionally managed model portfolios.

    Using model portfolios saves time, seeks to generate more predictable outcomes, and helps protect against the cognitive biases that can cloud investment decisions. Many financial advisors are already using model portfolios that enable them to spend more time with their existing clients, add value through financial and estate planning, and cultivate new client relationships. For individual investors, using models provides access to portfolio management expertise, allows them to invest more confidently, and gives them more time to spend on other activities. PIMCO offers our own goals-based model portfolios free of charge to help financial advisors and individual investors, but there are many different model portfolio providers in the market today.