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With New Year, Financial Advisors Will Need New Approach

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With 2014 coming to a close, it is tempting to think that the market volatility we’ve accepted as normal since 2008 may finally be shrinking in our rear-view mirrors. Corporate earnings show signs of growth and corporate and consumer confidence appear to be back on a steady keel. Investment flows should continue to improve as investor confidence increases.

Still, the global economy remains sluggish at best and concern about a potential tightening of monetary policy in 2015 is mounting. With all of this in mind, now is the time for advisors to reassess the big picture to understand what investors will need in 2015. Advisors need to determine how well their own resources match up to those needs and how to communicate all of this effectively to their clients in the coming year.

We have learned much more about the markets and investors as we enter 2015. The behaviors and expectations of retail investors continue to rapidly evolve, giving rise to increasingly complex demands on advisors. Advisors are dealing with a spectrum of client types, ranging from emerging investors to the mass affluent to ultra-high-net-worth investors, the needs of which variously overlap and diverge. This is putting more pressure on investment models, among other things. For example, preparing for a retirement that is two or three years away is notably different from what it was only a few years ago. At the other end of the scale are Millennials, with completely different time horizons, communication preferences and priorities.

Critical Factors in 2015

Faced with such a complex range of challenges, advisors who command a macro view of their target markets and who can employ the right strategies for the job will be well-positioned entering 2015. One critical strategy that I see taking hold is “investor/advisor alignment.”

Akin to the alignment between general and limited partners in any successful private equity firm, alignment of interests between broker-dealers and advisors, and advisors and their clients has gone from nice to have to necessary. But that alignment is not something one can set and forget. The steady pulse of new and emerging asset types, investment strategies and continually shifting market trends demand that this alignment remain dynamic.

These and other considerations all come to bear on four specific areas for investors: risk, allocation/construction, reporting and distribution of assets.


If we have learned anything after the financial crisis, it is the importance of a 360-degree view of risk. Risk tolerance is arguably topic one between advisors and investors. For advisors, formulating a macro view starts by asking the question: How well does my client understand his or her own risk tolerance? How much downside is your client willing to tolerate in the pursuit of a certain range of growth? Does the client understand the material differences between market risk (broad exposure), structural risk (security-level exposure) and liquidity risk (generally a factor of both of these)? How well would your business continuity communication plan hold up in the face of the next flash crash or a cyber-breach?

Understanding complex risk is more important than ever with the advent of liquid alternatives, a category where risk models are still very much a work in progress. Liquid alternatives are alternative investment strategies that provide daily liquidity, and can be bought and sold daily as mutual funds, exchange-traded funds and closed-end funds. Alternative mutual funds have proliferated and fund inflows have been strong. There were 550 such funds in September 2014, up from 150 at the end of 2008, according to research from Strategic Insight that was presented at a recent complex-products forum organized by SIFMA. Increasingly, advisors are assembling teams to address these and other risks, raising the question of how well these firms are communicating this team approach to their clients. Proactively managing a “risk dialogue” with their clients raises the importance of education and training to ensure that staff is appropriately trained in risk-related decision-making. This extends to local managers focused on compliance-related activities. Allocation/Construction

Balancing capital appreciation with capital preservation in an investment environment where concern about interest rates (among other exogenous factors) is on the upswing, raises the question of what an appropriately structured portfolio will look like in 2015. As U.S. monetary policy normalizes amid modest global growth, the risk dialogue with investors needs to translate into concrete choices concerning where and how to “lay on” and “lay off” risk, from the macro level down to the securities level.

As noted earlier, the complicating factors posed by things like liquid alternatives come into play. According to Joseph Deitzer of EY, speaking at the above-mentioned SIFMA forum, more than 60% of investors are not exactly sure what a liquid alternative is, yet more than 50% of investors would invest in one if their (advisor) recommended doing so. This raises the bar for advisors in terms of having a more nuanced understanding of portfolio structure, models and how these link to risk.


With more retail accounts than ever being actively managed online, the days of investors overlooking monthly statements are long gone. Consequently, advisors are under more pressure than ever to provide more thorough and frequent performance reviews. This is especially true of today’s Millennials, whose “always-on” nature means advisors must remain instantly responsive and up to date. The quarterly face-to-face review is giving way to ad hoc portfolio reviews, spanning multiple scenarios and contingencies, frequently on very short notice. More complex performance paradigms mean more complex pricing of services, adding to the challenges that advisors face in managing and scaling their businesses.


One of the biggest challenges for advisors is how to sequence distribution. Sequencing distribution –  determining when and how to draw money out of a client’s portfolio as he or she approaches retirement age – is a sub-specialty of its own. Clients’ portfolios are more complex than ever before. The secret sauce for advisors will be the ability to help investors make smart decisions about when to withdraw money from certain investment pools, when to recalibrate rates of decumulation along the way, and how best to respond to unknowns, such as future market behavior and lifecycle events. In turn, this will require a comprehensive understanding of the different performance characteristics of each investment and an ability to engage in dynamic decision-making rather than static retirement planning.

Preparing for the complex and unpredictable nature of what awaits investors in 2015 will require unprecedented vision for the advisory business.