Financial advisors are facing a myriad of challenges from robo-advisors to the DOL changes, to providing viable income solutions for their clients while being appropriately compensated. Current industry options have not been meeting the needs of advisor clients who were looking for reliable income and distributions. Most income products are antiquated and haven’t kept up with today’s technology. Advisors we work with have been asking for new income and distribution solutions.
Investors are also facing challenges. We are in unprecedented times, equities are near all time highs and interest rates are near all time lows. On top of that we are about to see the largest transition of wealth in our country’s history. Social security won’t solve for the fact people are living longer, health care costs are on the rise, individuals have underfunded retirements, and yields are historically low.
We met these challenges that are facing advisors and their clients head-on by providing liquid, modern solutions that just are not available to most investors.
As a fee-based turnkey asset management platform (TAMP) for financial advisors, we are constantly asked to reinvent how advisors can use investment products. For advisors looking for modern income and distribution solutions, we’ve met this challenge by creating two new income-oriented separately managed account (SMA) portfolios: the Strategic Income model is designed to generate reliable income and the Dynamic Distribution Strategy is designed to sustain client distributions. Both income models are scientifically engineered using quantitative propriety methods and managed by multiple managers, that use different strategies, who have passed stringent due diligence processes.
The investments in the Strategic Income model are managed by a combination of strategic and tactical managers and they are designed to capture the upside of the market while protecting on the downside. The goal is to provide advisors and their clients peace of mind that their goals and objectives are being met as best as possible.
The more conservative portfolios contain more investment grade and tactical fixed income which are usually managed by tacticians. The more aggressive portfolios contain more high yield debt, preferred stock, and equities that are both strategically and tactically managed.
Cash for distributions is raised using ‘Smart Distribution’ methodology which uses cash on hand first, then sells securities that are over weighted according to their targets. The highest priced tax lots of each security are sold first for tax efficiency.
The investments in the Dynamic Distribution Strategy are managed by a combination of strategic and tactical managers, but the model places more emphasis on tactical management than the Strategic Income model.
The more conservative portfolios contain more fixed income which is usually managed by tacticians. The more aggressive portfolios contain more high yield debt, preferred stock, and equities that are both strategically and tactically managed.
The Dynamic Distributions Strategy’s greatest innovation is the use of the Tactical Distribution bucket to pay distributions in case of a market downturn or correction. To our knowledge, this is a first in the marketplace. During ‘normal’ times, the strategy will use Smart Distributions, as are used in the Strategic Income model. But, during depreciating market conditions, the Dynamic Distribution Strategy will deploy “Tactical Distributions,” meaning it will use assets in the designated Tactical Distribution bucket that are invested in a tactically managed fixed income portfolio designed for income and preservation of capital. Distributions are taken from the Tactical Distribution bucket during down markets to prevent the need to sell depreciated assets to provide income. When the market returns to ‘normal’ times, the Tactical Distribution bucket will be replenished from the assets that have appreciated.
So, even if a bear market or a stock market correction occurs, the plan is for there to be enough money in the Tactical Distribution bucket to cover a client’s monthly expenses for up to 2 years. When the market bounces back up, the portfolio will stop paying Tactical Distributions and return to paying Smart Distributions. In addition, at that time, it will rebalance accounts back to their target weights, refilling the Tactical Distribution bucket.
This is especially important when there is uncertainty in markets. Will interest rates keep rising? Will the U.S. market’s honeymoon with Trump continue? How will the markets handle the ongoing geopolitical uncertainty? Which way will oil prices go? Will China bring us into a global recession? Now advisors have income oriented portfolios to help investors in the asset accumulation and distribution phases of their investing life cycle.
The information contained herein is developed from sources believed to be reliable and is provided for informational purposes only. Advisory services are offered through EQIS Capital Management, Inc. (“EQIS”) a registered investment adviser. This is not an offer to sell securities or provide investment advice which may be done only after a client suitability review is conducted and appropriate disclosures are made. Certain investment strategies may carry higher degrees of risk and have a level of complexity which may not be suitable for all investors. Before investing you should identify with the assistance of your financial adviser your specific goals, risk tolerance and investment time horizon. EQIS does not provide tax or legal advice. Diversification does not ensure a profit or protect against loss in declining markets. All investments carry with them a degree of risk to include a total loss of principal. Past performance is not a guarantee of future results. EQIS shall select managers for each strategy type and may change the allocations and managers from time to time.
© 2017 EQIS Capital
http://www.public.eqis.com/
Read more commentaries by EQIS Capital
