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Monday, Jan 30, 2023
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Technology, Tax Reform Impact Money Managers

The San Fernando Valley is home to a large population of high-net worth individuals looking for smart ways to invest their wealth. While many have enjoyed substantial returns over the past year thanks to the boom in the stock market, executives at the largest local money management firms say that recent market volatility and the fallout from tax reform have forced investors to think more carefully about how to structure their portfolios. Robert Katch, president of Thousand Oaks-based Manchester Financial Inc., No. 9 on the Business Journal’s annual list of Money Management Firms on page 10, said his clients’ demand for equities has dissipated over the past few months, in part due to fears over market fluctuations. He has assured them that the volatility is not a sign of an impending bear market. “One of the things I tell (my clients) in these corrections is to think of it like an earthquake,” Katch said. “These corrections are like a 3.0 tremor instead of a 7.0 quake. It’s the pressure release that allows markets to carry on.” Still, Katch recommends a balanced portfolio that isn’t overly reliant on equities. Most of his clients’ portfolios are made up of between 40 and 60 percent stocks. As investors look to diversify, Katch said they have shown an increasing interest in the bond market. His team focuses on actively managing bond assets to identify healthy companies with improving credit, rather than buying a broad cross-section of bonds through index funds. “We are big on indexing the stock side of our portfolio to keep costs down, but I think that’s a mistake to do that on the bond side,” he said. Chuck Hastings, director of wealth management at B. Riley Asset Management in Woodland Hills, said that although investing in equity indexes instead of frequent trading has proven profitable as overall stock prices surge, specialized asset management for both stocks and bonds will become increasingly important once the market cools. “Everyone is really focused on passive investing and just trying to get the lowest fee they can out of their portfolio, but that cannot continue forever,” he said. “There will be a time when the market oscillates, and the switch will flip to those who do real work on the underlying names in the portfolios.” In addition to stock market uncertainty, the tax reform bill passed by Congress last year has become a concern for many wealthy investors. The new law limits the deductions Californians can make on state income and property taxes, which increases their federal income tax rate. “Most of our clients’ taxes are going up, so you have to be that much more tax savvy,” said Katch. Investment software To minimize the tax hit, Katch’s firm emphasizes asset management strategies such us buying longer-maturity bonds for Roth IRA retirement accounts and putting stocks in trusts to realize a larger return on capital gains. It utilizes a financial management software called Tamarack to automatically place assets in specific accounts. “We can tell the software what the overall asset allocation needs to be, and we can tax optimize a client’s portfolio,” Katch explained. The rise of this type of financial technology is also changing the way many money managers interact with their clients. Firms have begun employing mobile investing apps, text alerts and even chat bots fueled by artificial intelligence to keep investors in the loop. “We’re preparing ourselves for what the industry will look like in the next 20 years,” said Reza Zamani, founding partner of Woodland Hills-based Steel Peak Wealth Management, the No. 7 firm on the list. Zamani said that as younger generations begin thinking about retirement and look to invest their savings or inheritance, they’re less likely to want to meet with asset managers face-to-face. “They’re going to want something that’s even more robotic and tech-savvy,” he said. “They’re going to want live email, texting and an automated system put in place for their portfolio.” Steel Peak has partnered with Charles Schwab Corp. to create a robo-investing platform to offer an “active, dynamic way of managing money.” According to a report from last year by J.D. Power, 48 percent of millennial investors with at least $100,000 in investable assets who are currently working with a financial firm say they will eventually look for another advisor who can better meet their needs. Compare that to just eight percent among all other generations of investors. “Wealth managers have been slow to focus on millennials because they don’t yet have the assets boomers do, but when looking at potential money in motion — even in the short term — the picture looks quite different,” Mike Foy, director of the wealth management practice at J.D. Power, said in a statement accompanying the report. “With the emergence of robo-advisors and self-directed platforms, investors have more options than ever, both within and outside the traditional full-service channel.” Increasingly, investors will also demand that firms have a fiduciary responsibility to them rather than the company’s shareholders, Zamani said. Many banks and financial service firms are required by law to make investment decisions that are in the best interest of the advising firm and not necessarily a client’s portfolios. A fiduciary advisor, meanwhile, must register with the Securities and Exchange Commission and is required to follow a “fiduciary standard” while advising investors. This includes providing clients with all information that “a reasonable investor would consider to be important,” avoiding all potential conflicts of interest and not managing a client’s assets for the advisor’s benefit. Zamani believes that as investors become more informed, they will turn to independent firms such as Steel Peak that act as a fiduciary to their clients. “More and more investors will ask firms: Do you have a fiduciary responsibility to manage my money?” he said.

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