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Navigating U.S. Wealth Management: Seven Ideas for Financial Advisors and Individual Investors in 2020

We aim to support wealth management firms, advisors, and investors as they assess portfolio strategy and navigate the shifting trends we face in the new year.

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.

Looking ahead

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. Throughout the nearly 50 years of PIMCO’s history, our most successful investment solutions have come through dialogue and collaboration with our clients. We aim to support wealth management firms, advisors, and investors as they navigate the shifting trends we all face, and we look forward to broadening and deepening our partnerships.

Prepare yourself to engage investors on all facets of fixed income by visiting Market Intelligence, PIMCO’s continuing education platform for advisors and their clients.

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Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting www.pimco.com. Please read them carefully before you invest or send money.

A word about risk:  All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing a strategy.

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Buying or selling ETF shares on an exchange may require the payment of brokerage commissions. Due to the costs inherent in buying or selling Fund shares, frequent trading may detract significantly from investment returns. Investment in Fund shares may not be advisable for investors who expect to engage in frequent trading.

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Exchange Traded Funds (“ETF”) are afforded certain exemptions from the Investment Company Act. The exemptions allow, among other things, for individual shares to trade on the secondary market. Individual shares cannot be directly purchased from or redeemed by the ETF. Purchases and redemptions directly with ETFs are only accomplished through creation unit aggregations or “baskets” of shares. Shares of an ETF are bought and sold at market price (not NAV). Brokerage commissions will reduce returns. Investment policies, management fees and other information can be found in the individual ETF’s prospectus.

Private placements and other alternative investments involve a high degree of risk and can be illiquid due to restrictions on transfer and lack of a secondary trading market. They can be highly leveraged, speculative and volatile, and an investor could lose all or a substantial amount of an investment. Alternative investments may lack transparency as to share price, valuation and portfolio holdings. Complex tax structures often result in delayed tax reporting. Compared to mutual funds, private funds are subject to less regulation and often charge higher fees. Alternative investment managers typically exercise broad investment discretion and may apply similar strategies across multiple investment vehicles, resulting in less diversification. Trading may occur outside the United States which may pose greater risks than trading on U.S. exchanges and in U.S. markets.

The PIMCO Models described in this material are available exclusively through investment professionals.

PIMCO Models are based on what Pacific Investment Management Company LLC (together with its affiliates, “PIMCO” believes to be generally accepted investment theory. PIMCO models are for illustrative purposes only and may not be suitable for all investors. PIMCO Models are not based on any particularized financial situation, or need, and are not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other strategy, product or service. Individuals should consult with their own financial advisors to determine the most appropriate allocations for their financial situation, including their investment objectives, time frame, risk tolerance, savings and other investments. PIMCO has not undertaken, and will not undertake, any analysis to determine any specific models’ suitability for specific investors.

PIMCO Model allocations are licensed or otherwise made available to investment professionals. PIMCO Models’ allocations are updated on a defined production cycle. The Underlying Funds are available by prospectus only. Implementing investment professionals may or may not implement the PIMCO Model’s allocation as provided, and actual allocations to Underlying Funds may vary. There are expenses associated with the underlying Funds in addition to any fees charged by implementing investment professionals.

Statements concerning financial market trends are based on current market conditions, which will fluctuate.There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2019, PIMCO.

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