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Active Share and the Predictability of the Performance of Separate Accounts
K. J. Martijn Cremers, Jon A. Fulkerson, Timothy B. Riley
Stocks for the Long Run? Sometimes Yes, Sometimes No
Edward F. McQuarrie
Redefining the Optimal Retirement Income Strategy
David Blanchett
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Bond yields are on the rise again, presenting an under-appreciated risk to financial markets as investors demand fresh concessions for excessive levels of government spending and a reacceleration of inflation from policymakers who increasingly seem to have mismanaged the economy and surrendered control of the budget process to political dysfunction.
Since Congress suspended the federal borrowing limit in June 2023, more than $3 trillion has been added to the national debt. In just ten months, Washington has accumulated more red ink than in the first 200 years of the country's existence. No wonder the economy appears robust.
In a coordinated move on the same day last November, the Fed pivoted policy by declaring it was done raising rates, while Treasury Secretary Janet Yellen simultaneously reduced the duration of the Treasury’s borrowing schedule toward shorter maturities. Order was restored.
A year earlier the UK gilt market had suffered a similar meltdown after then-PM Liz Truss proposed a budget of unfunded tax cuts, ultimately forcing the Bank of England to intervene to prevent the collapse of several British pension funds.
Before the era of quantitative easing and financial suppression, the bond markets acted as both judge and jury of a government’s ability to manage its finances, exacting a price for profligate behavior. Well-known political advisor James Carville once quipped that he wanted to be reincarnated as the bond market so he could return to intimidate everybody.
Known colloquially as bond vigilantes, their comeback deserves greater attention.
The premature loosening of financial conditions Powell and Yellen unleashed late last year fueled the resurgence in inflation that we are currently witnessing, rekindling memories of the disastrous stop-go monetary policy of the 1970s Burns Fed that produced a decade of unanchored price volatility.
The only rational explanation for such an obvious misstep is that policymakers are becoming less concerned about inflation than avoiding a fiscal crisis. With the country’s deficit nearing 7% of GDP, and the interest expense overtaking defense spending, it’s a mathematical certainty that the current fiscal trajectory culminates with an unmanageable problem.
In March alone, 42% of what the government spent had to be financed with new debt, a circumstance normally seen only in deep recessions. To call it unsustainable is an understatement for the ages.
So, what’s really at play here is an attempt by officials to keep the bond vigilantes in a box by subduing yields and (hopefully) preventing a doom loop in financial markets that spins into a fiscal crisis of confidence that impacts the entire world.
It worked last year, but now that rate cuts are in doubt the odds for a successful second act are considerably narrower, especially with election-year handouts and geopolitical instability adding to domestic inflationary pressures.
The recent spike in gold and shaky 10- and 30-year Treasury auctions are red flags for sure; signs that confidence in Washington is waning.
Our canary in the coal mine is the shape of the yield curve. An inverted curve, as is now the case, implies a measure of stability for both inflation expectations and the government’s ability to roll its debt. However, if the curve were to flip positive, it would mean either 1) a recession is at hand, in which case the deficit would literally explode 2) inflation expectations are breaking higher, perhaps resulting from a geopolitical conflict or, 3) a growing reluctance to finance the steadily increasing supply of Treasury debt.
Or all three, none of which the markets are currently priced for.
Visit IGM to learn more.
written by Bruce Clark, Senior Macro Strategist, IGM
Dismayed by the government’s lack of fiscal discipline, Fitch downgraded the US long-term credit rating in August, triggering a selloff in Treasuries that drove long yields to 5% before the Fed and the Treasury hit the panic button.
By: David Penn, Author at Finovate
Innovative technologies are proliferating. From the renewed excitement around cryptocurrencies and blockchain technology to the challenges and opportunities of AI, individuals and organizations alike are discovering novel ways to live, learn, and earn.
Banks, financial services companies, and fintechs are no exception – which makes us all the more excited to feature futurist, digital anthropologist, and author Brian Solis as our FinovateSpring Out of the Box Keynote speaker at our upcoming fintech conference in May.
Titled The Cycle for Emerging Technologies: Which Will Really Matter to Financial Services Providers and Why?, Solis’ keynote address will encourage financial institutions to be proactive when it comes to engaging emerging technologies. Indeed, the extended title of his presentation warns: “If You’re Waiting for Someone to Tell You What to Do, You’re On the Wrong Side of Change.”
Top Futurist Speaker, Brian Solis Can Help Your Audience Win the Innovation Game
In his most recent book, Lifescale: How to Live a More Creative, Productive, and Happy Life, Solis discusses the challenges of – and solutions to – living in a world of ever-present digital distractions. His upcoming book, Mindshift: Ignite Change, Inspire Action, and Innovate for a Better Tomorrow, is designed to help people navigate, or even lead, in a digital-first, post-industrial era.
Formerly VP of Global Innovation for Salesforce, Solis is currently Head of Global Innovation for ServiceNow. As such, he leads vision, strategy, and programming for the company’s international innovation and Executive Briefing Centers. In addition to his keynote address on Day One of FinovateSpring, Solis will also join attendees for a book signing during the networking session immediately following his presentation.
FinovateSpring is coming to San Francisco, California, May 21-23, at the Marriott Marquis San Francisco. Visit our registration page today to save your spot and take advantage of big early-bird savings!
Referred to as “one of the more creative and brilliant business minds of our time” by Forbes, Brian Solis specializes in the impact of technological innovation on business and society.
FinovateSpring returns to San Francisco! This is your chance to reconnect face-to-face with the fintech community and plot a course for the future. Finovate’s signature mix of innovative demos, engaging panelists, insightful speakers, and high-impact networking will give you the perspective and connections you need to thrive in a changing landscape. There’s no better place to find your path forward. It’s up to all of us to define what the fintech industry is going to look like in the future. Join us at FinovateSpring and make sure you’re a part of the discussion.
The event is set to host 1200+ senior attendees. 600+ from banks and investors. 50+ demoers. 100+ speakers. 15,000+ meetings. The connections and ideas you need are at FinovateSpring.
To book your place and claim a 20% discount click here
If you’d like to demo at the event click here
By Anne Gifford Ewing, Jeffay Chang
Common considerations. Trustees must understand the structure of the life insurance policy, such as whether it’s term or whole life, what the death benefit amount is and whether that amount can vary. The trustee should understand what needs the policy is intended to address and analyze if it’s the right tool for the job. For example, is this policy intended to help pay estate tax after the trustor’s death, and is it geared to do so efficiently and effectively? The trustee must understand how the premiums will be paid and identify the trust’s investment needs accordingly. For example, has the ILIT been endowed with money that should be invested long term to pay annual premiums? Will there be annual cash gifts to the ILIT?
Common pitfalls. Life insurance policies purchased years ago can underperform today. The reasons for needing a life insurance policy can change. A trustor may no longer want to contribute money for annual premiums, may lack the liquidity to contribute annual cash gifts or may have failed to send annual notices of beneficiaries’ right to withdraw annual cash gift contributions (Crummey letters) in prior years.
Common considerations. When a trustee administers a grantor trust, they should include an understanding that the grantor’s personal income tax implications shouldn’t drive investment decisions in the trust, as the trustee’s fiduciary duty is to seek to maximize the trust’s investment return for its beneficiaries. The trustee of a grantor trust may need to consider whether a substitution of assets in the trust is likely to happen. If so, will there be an impact on how the trustee invests the current trust assets? Likewise, if the trustee expects that the trust will switch to a non-grantor trust at a particular time, is there a stronger argument for more aggressive growth investing now while the trust isn’t paying income taxes?
Common pitfalls. Some grantors want the trust’s investments to prioritize minimizing their personal income tax, regardless of the impact on the trust’s beneficiaries. Sometimes, a grantor tires of paying income taxes for a grantor trust but isn’t sure if they’ll want to use a substitution power in the future so wavers on whether to retain the trust’s grantor status. Finally, sometimes the grantor is a resident in a state with high income tax and balks at paying the trust’s income taxes personally, though such payments would benefit the trust and its beneficiaries by allowing the trust assets to grow income tax-free.
Common considerations. When diversifying, how much of the concentrated stock should the trustee sell? At what pace should the concentrated stock be sold—is it better to sell what needs to be sold as quickly as reasonably possible or to sell it in a measured way over a prescribed period? Is the trustee or a hired investment manager equipped to carry out the sale plan in a way that seeks to minimize any negative impact on the stock price?
Common pitfalls. There may be sensitivities to selling a concentrated stock because the trustor or beneficiaries have an emotional attachment to the stock, the family is still invested in the stock elsewhere or family members still work at the company. Alternatively, those involved may support the sale in theory but want the trustee to wait for the “right time” to sell and attempt to time the market. A high stock price may lead to concerns over locking in capital gains, and a lower stock price may lead to a desire to wait for a rebound in the stock price.
Common considerations. The trustee must understand whether to sell the real estate to diversify the trust or hold it to potentially generate rental income and long-term growth in the underlying value of the trust. If the trust will hold the real estate long term, does the trustee have the expertise to manage such holdings? Should a limited liability company, property manager or other management layer be considered? Is this a property that a trust beneficiary might occupy? If so, are there any special agreements or disclosures needed? Should the trustee be directed whether to hold the real estate?
Common pitfalls. The trustor or beneficiaries might have an emotional attachment to the property and resist selling at an advisable time. Other common challenges include potential liabilities, such as an onsite injury, environmental problems, market changes or a beneficiary who wants to occupy at no or below-market rent when it isn’t clear that the trust allows such occupancy. Sometimes, trust-owned property is locked into long-term leases that have become less advantageous. A trustee may struggle to keep enough liquidity in the trust to pay for necessary upkeep and unexpected damage. Long-held properties may see their use and value affected by water rights, commodities prices or climate, among other factors.
Common considerations. Trustees must weigh their understanding and comfort with investing in specialized, often illiquid investments such as private equity. Should the trustee consider being directed? If the illiquid investment is considered, what’s the proper allocation to the investment within the trust’s overall portfolio?
Common pitfalls. Illiquid investments often require a long time horizon to see the net investment result. During the long lock-up period, it’s usually difficult or even impossible to change the trust’s investment. For this reason, illiquidity can present challenges to the trustee if distributions need to be made to beneficiaries or if trust assets need to be valued periodically. In addition to planning for distributions to beneficiaries, the trustee needs to ask whether there will be capital calls or other cash demands to support the illiquid investment and whether the trust can support them.
Common considerations. The trustee must consider whether to sell some or all of the assets to invest trust assets to the target asset allocation. If selling, the trustee needs to balance the need to sell with capital gains realizations. What will the trustee’s timeline be for selling and shifting to the target asset allocation? Will selling occur over an agreed period of months or years, with the trustee watching for market opportunities during that time? Is there a budget for gains to realize per year? If the trust is a grantor trust, are there opportunities to substitute low basis securities instead of selling?
Common pitfalls. The grantor or beneficiaries may complain about capital gains tax resulting from asset sales. But delaying realizing capital gains may lead to holding assets after a market cycle shifts.
Common considerations. A trustee may want to set a schedule to buy into the market at an agreed cadence over a period of months or years, perhaps watching for market opportunities during that time, with a commitment to finish investing the cash in that period. The trustee and beneficiaries should understand the value of time in the market versus attempting to time the market. The trustee should determine at the outset how much of the trust’s value should stay in cash.
Common pitfalls. The trustor or beneficiaries may complain that trust cash was invested when the market was too high. They may also complain when securities must be sold with gains later to raise cash: “Why didn’t we just keep the cash we had?”
Common considerations. When acting as a trustee for a trust that distributes net income but has different remainder beneficiaries, start with trust investment decisions around producing income versus growing valuations, with the understanding that producing tax-free income (usually at the cost of some amount of growth) is a priority. If the trust is a unitrust, the trustee must consider how to think about investing for total return, which may better align the interests of the unitrust and remainder beneficiaries. If the trust isn’t a unitrust, the trustee may consider whether to convert to a unitrust to allow for total return investing.
Common pitfalls. The current and remainder beneficiaries have oft-conflicting needs and wants and different timelines.
Common considerations. Understand whether the relevant state allows for directed trusts and what parameters the state sets on directed trust rules. Directed trusts in California will look different than in Delaware, for example. Directed trusts may be a good solution if the grantor wants a party other than the trustee (who may have been selected solely for state situs purposes) to continue to control the investments. Directed trusts may also be a good solution to protect the trustee if the trust will hold concentrated assets or assets in which the trustee doesn’t have expertise.
Common pitfalls. The grantor, beneficiaries or investment director may assume that, because the investments are directed, the administrative trustee won’t need to be involved with the investments. But, the administrative trustee generally still needs to inventory the asset, retain certain information and conduct other due diligence on the asset, periodically value the asset and potentially be able to custody the asset.
Common considerations. The trustee should understand ahead of time which assets will likely be subject to estate or GST taxes at the time of distribution or at the deaths of certain individuals. This information may impact a trustee’s decisions about investing the trust assets for growth of principal and whether to hold an asset long enough to get a step-up in basis at a certain individual’s death. It’s also critical that the trustee understand any implications for state income tax inclusion. Is a trust asset producing state source income, such as real property earning rent? Could the state residency of a party to the trust, such as a distribution advisor or a trust protector, cause that state to tax the trust based on the party’s relationship to the trust?
Common pitfalls. Conflicts of interest may exist among present and remainder beneficiaries or other parties impacted differently by different tax outcomes when administering tax-included assets.
As the saying goes, “People are funny about money.” We hope that the insights shared above can help trustees have a meaningful impact on families that have entrusted them with managing wealth while also avoiding the common pitfalls.
— This article represents the opinions of the authors as of the date published and does not necessarily reflect the opinions of Capital Group or its affiliates.
What are some common considerations and pitfalls for particular types of trusts?
By Ali Hibbs
The RIA M&A market is shifting. In 2023, M&A activity dropped for the first time in 12 years, down 5.6% from 2022, according to Echelon Partners. Yet, a recent survey by MarshBerry and WMIQ, WealthManagement.com’s research arm, shows wealth management firms are still very much engaged in dealmaking, but in a more selective way.
The fall survey of 445 firms found that a third were engaged in at least one transaction over the previous 24 months. Moreover, 77% planned to do a deal by the end of this year.
Related: The New World of RIA Firm M&A: A 2023 RIA Edge Study
Buyers and sellers revealed what kind of deals they’re pursuing, what would sink a transaction and what they prioritize. They also weighed in on the market environment and perceived value of their own firms.
“Buyers are getting more rational and disciplined in really understanding what it is they’re looking to acquire,” said MarshBerry Managing Director Kim Kovalski.
Related: Echelon: RIA M&A Fell in 2023
“Sellers are starting to see different kinds of value-add in partnering with someone sooner in their life cycle,” she said during a recent webinar discussing the results. “I think we’re starting to see some interesting trends emerge which, to me, make a lot of sense and make me feel like we’re in a very rational, sensible place.”
Nearly three-quarters of respondents in the MarshBerry/WMIQ study are with registered investment advisory firms (43%), dually registered firms (18%) and independent broker/dealers (13%). The remainder work at regional and insurance firms, bank brokerages, wirehouses, and “others.” More than half (51%) are in senior management positions, 36% are advisors and the rest are insurance agents, brokers, trust officers, CPAs or “other.”
About a fifth of responses came from firms managing less than $50 million and 9% from firms with more than $20 billion. The median AUM was $175 million, and the mean was $3.1 billion.
The survey segments some responses by ownership interest in their firm, which was split evenly across the sample with 53% identifying as owners. Notably, the research found stark differences in the goals and expectations of owners versus non-owners of firms currently on the market.
Unsurprisingly, the data shows respondents without ownership interest tend to be “notably” farther from retirement.
While respondents involved in at least one deal over the previous 24 months were most likely to say it was an acquisition involving another firm, differences emerged regarding how equity owners look at these deals versus employees.
Despite a decline in M&A activity in 2023, 77% of wealth management firms expect to do a deal by the end of this year, according to a MarshBerry and WMIQ survey.
