FAs cite municipal yields, market complexity as top survey concerns

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Yield and market complexity are the top concerns of financial advisors when establishing municipal bond exposure for clients, according to a survey released by Columbia Threadneedle Investments on Wednesday.

Of the 111 financial advisors surveyed, 43% said their biggest concern with the muni asset class is finding the right amount of yield to align with their clients’ goals and preferences.

Those who had no concerns totaled 20%. However, the next most highly-cited concern at 14% was complexity in the muni market after the 2008 Great Recession.

“Financial advisors are concerned about yield and market complexity when it comes to allocating client dollars to the muni space. This market has changed significantly in the last 10 years, but there are still smart ways to invest in it if you know what to look for,” said Catherine Stienstra, head of municipal investments at Columbia Threadneedle.

Additionally, 12% of the FAs were worried about the unintended consequences of benchmark investing while 12% were concerned about an inability to conveniently access all sectors of the muni market.
“Traditional benchmark indices exclude viable investment options, are debt-weighted and can be over-concentrated in less attractive sectors. This puts advisors in a tough position when they try to balance cost-efficiency with investment opportunity,” Stienstra said. “As passive investing continues to grow, rather than simply accept an imperfect benchmark portfolio, municipal bond investors with a preference for passive solutions should think about adopting a smart beta approach.”

Credit and interest rate environments also had a noteworthy impact on financial advisors’ municipal investment recommendations, the survey showed.

Eighty-five percent of respondents said credit and interest rate environments have a moderate or large impact on their muni investment decisions. While 60% of advisors reported their decisions were moderately affected by these factors, credit and interest rate environments are more likely to have a large impact than a limited impact for 25% and 15% of respondents, respectively.
Although 54% of survey respondents favor actively managed investments, interest in a municipal bond strategic beta ETF is strong, according to the survey, while 55% said they would consider investing in a muni bond strategic beta ETF or are already invested in these products and would consider others.

Cost continues to be an important issue when allocating to a strategic beta fixed income solution. In the last year, price increased as a top consideration, rising to 39% in June from 34% in June 2017.

“Financial advisors are being pulled in multiple directions as they remain committed to doing what’s best for their clients,” said Marc Zeitoun, head of Strategic Beta at Columbia Threadneedle. “The competing priorities of price and preference for active management are a good example of the balancing act they face. Strategic beta ETFs present a great middle ground between ‘best thinking active investment insight’ and passive implementation. It’s no wonder that track record and a firm’s expertise as an active fixed-income manager remain the most important factors when considering strategic beta ETFs.”

Columbia Threadneedle Investments is Ameriprise Financial, Inc.’s asset management brand and has about $482 billion of assets under management.

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