WA MAGAZINE JanFeb PDF A - Flipbook - Page 15
teristics, none of the complicated structure or qualified investor hurdles to jump.
And whether you want to think
crypto or not, your clients definitely
have strong opinions. Spot Bitcoin ETFs
are here. They will change the industry
landscape. They’re pure alternatives.
You don’t need to get exotic to find the
places where innovation makes a difference. Even the asset management complexes that once distributed their ideas
only through managed accounts and
proprietary fund placements are opening
up to the exchange-traded mindset.
An ETF-oriented advisor can now get
access to exclusive strategies from classic
40 Act shops or model-only managers or
closed-end funds, without sacrificing diversification or meaningful performance.
If anything, the legacy 40 Act equivalents can be less efficient in terms of
both fee drag and tax treatment, which
is why so many of these firms are converting big funds to the ETF format.
The goal is as simple as it gets. Once
you have world-class trading and portfolio construction systems designed to
squeeze alpha out of every opportunity,
why not package them in a structure that
meets advisors wherever they are?
And they keep innovating, bringing out smarter cores of their own to
improve on the S&P 500. The approach
is classic but once upon a time would
have been reserved for elite investors:
traders layer options around each index
to generate current income.
A lot of these funds are brand new on
the market, but they have a long history
in other formats. They won’t show up if
you insist on a three-year track record.
You can be early in the game. And
the level of sophistication involved
means that even if you could do it yourself with some degree of confidence, you
probably wouldn’t want to.
What have we learned so far? You
can reach for better outcomes than the
random walk. It’s possible. Over time,
that’s worth something.
And it’s especially important after
“business as usual” hits a wall and
reveals its limitations. We learn. We
evolve. “Modern” portfolio theory is now
70 years old. It’s been refined a lot along
the way and keeps getting better.
THEWEALTHADVISOR.COM
After all, the last decade wasn’t all
about the consolidation of popular ideas
into gigantic fund complexes. The world
changed a lot.
Again, it’s all about finding ways to
beat the benchmark, believe it or not.
The random walk is what it is. It’s table
stakes.Your clients want alpha.
THE NEW EFFICIENT FRONTIER
Whatever broke in the past few years
needs to be fixed. And as part of that
process, every component of the portfolio needs to be tested, refined, and where
necessary, replaced.
It’s a daunting task. But there’s help.
The streamlined passive portfolio
design that seemed “good enough” in the
post-2008 era started showing signs of
fatigue a few years ago and then broke
down when the Fed started tightening.
Suddenly, the fixed income allocation
wasn’t playing the defensive role we
practically promised. Statistical limits
bent and bonds flipped. And with clients
feeling more than a little betrayed,
there’s a sense that assumptions that
failed once could fail again.
Meanwhile, the stock side had its own
problems at the low end of its performance profile. Nothing inherently wrong
with the random walk. It’s usually cheap
enough and simple enough to do good
enough under relatively normal conditions across the long haul.
But your clients just aren’t paying
you to be a passive bystander buying
and holding the same index funds as
everyone else. When you eat, drink, and
breathe the index, that’s all you get.
While portfolios that mimic the broad
market have their strengths, one index
fund will always look and act just like all
the others. There’s no exclusivity around
pouring client money into that ocean.
When there’s no exclusivity, it’s hard
to add value much less claim you provide
differentiated service. Any robot can buy
an index fund. If your clients feel even
minimally motivated, they can do it themselves and cut you out of the equation.
Recommending generic index funds is
no longer table stakes. It’s trivial. Wealth
management revolves around giving
your clients more.You don’t want them to
end up with just average outcomes.
INNOVATION
NEVER ENDS
THERE’S ALWAYS SOMETHING
new hitting every advisor’s screen.
Leland Clemons, CEO of BondBloxx,
just unleashed PCMM, the first
exchange-traded fund that invests in
private credit in the form of collateralized loan obligations packaged by
major underwriters. He says it best:
With the launch of PCMM, investors can now access private credit
with an ETF. The ETF industry has
been a force of continuous innovation
for investors, and I am proud that
BondBloxx is a leader in that innovation in fixed income. We’re thrilled to
bring private credit to ETFs, and we
look forward to redefining what is possible in fixed income ETFs.
The use cases are
many, and now, for the
first time, all investors
have access to private
edit as a portfolio
credit
building block. We’re
very pleased to be adding PCMM to our lineup
of innovative incomegenerating
solutions.
You want them to win, one way or
another. If they want higher returns, you
want to allocate their investments to
make that possible. And if they’re looking for a smoother glide path, you don’t
want to strap them into a roller-coaster.
That’s what the efficient frontier is
all about. When the core of the portfolio
fails to satisfy the conditions you and
your clients have worked out together,
the models that built that portfolio have
failed to correspond with market reality.
Once that core fails to live up to
expectations, it’s hard to maintain
confidence in its ability to do its job. The
solution: refine the models and build a
new core that could have held up better.
We want to be able to tell our clients
that we can learn from bad experiences
and that we’re doing everything we can
to avoid repeating a mistake. Hurt me
once, shame on the market. Hurt me
twice, shame on me.
JAN/FEB 2025 | 15
