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Goals-Based Investing and 4 More Trends for Advisors to Watch

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Despite fears that political instability and a freakishly long-lived bull market would lead to a wild ride in 2017, pessimists (like myself) have once again been proven wrong. The volatility index on equities, derived from prices on future stock market options, simmered along as if there wasn’t a cloud in the sky.

That cloudless complacency was broken in early February, as the Dow Jones industrial average lost more than 600 points on two trading days and logged its biggest-ever intraday drop — 1,597 points.

But while investments themselves were generally boring in 2017 — the investment industry underwent some exciting and significant changes. Financial firms reacted to the threat of fiduciary regulation by shifting product offerings and compensation models.

Many of these changes hastened a widespread movement away from an emphasis on product sales and front-loaded product compensation toward an advising model that favors long-term relationships. And changing advising models means changing investment products. In a series of conversations, industry experts identified the following trends for 2018.

Need-Driven Investments

The consensus among most industry experts is that the number one trend in 2018 will be an acceleration toward goals-based, rather than performance-based, investment advising. Clients are increasingly looking for advisors to provide a customized investment plan rather than simply building an investment portfolio. This also means that the primary job of a wealth manager isn’t just building a portfolio, it’s building a portfolio strategy that most efficiently meets a future purpose.

Many mentioned the impact Amazon has had on consumer expectations of investment advisors and financial firms. When a need pops up, consumers want answers that have been vetted by experts and they want a competitive solution to meet that need.

“Individuals continue to have increasingly high expectations in terms of personalized service fueled by same-day delivery from Amazon and personalized recommendations from Netflix. The same level of personalized service is coming to be expected in financial services,” said Tricia Rothschild, chief product officer at Morningstar.

Morgan Stanley is developing new systems “to touch the next generation … it has a little more of that Amazon feel to it,” according to Associate Regional Manager Bridgette LaQue.

This isn’t just a generational change, however. Many of us are now used to getting a quick, unbiased answer to our very specific need. If I’m thinking about how I should invest for my kid’s college education, I want quick, smart answers that are tailored to my unique circumstances.

“Of course, clients look on our company and rely on us for financial matters,” said Surya Kolluri, managing director at Bank of America. “They trust us to manage their portfolios well, they trust us to come up with financial solutions that might meet their needs.

“By going to a goals-based approach, you’re delving deeper into what the clients want to accomplish — how they want to live their lives, what they want for their families, what they want for their businesses,” explained Kolluri. “It seems to me that if the advisor takes the time to understand that aspect of it, then they can be proactive about the solutions.”

An interesting trend on Amazon is the use of vetting to substitute for costly search by the consumer. If I need a new USB cable, I do a search and one product pops up as “Amazon’s Choice.”

If I trust Amazon to pick the right product to solve my needs, then I benefit from using Amazon as not only a retailer but also as an evaluator of products that will do a good job of meeting my goals. If I want to save for my child’s education, wouldn’t it be great if I could visit a financial services company that I trust to get a customized financial product and account strategy that meets my needs?

If I’m going to place the valuable task of vetting in the hands of a company or an advisor, I’d better trust that they’re recommending the investment that is the best choice for my goal.

It’s likely that trust and reputational capital are going to be increasingly important in a marketplace in which customers are better able to voice their opinion online, and where a breach of trust that flows into social media can have a devastating negative impact on consumer demand.

Trust always appears at the top of the list of characteristics investors are looking for in a financial advisor. It’s never been easier to evaluate whether that trust is justified.

Socially Conscious Investing

“One of the biggest gaps we’ve seen in our polling is that wealthy individual investors have more immediate interest in sustainable investing than many practitioners realize,” said Bob Dannhauser, head of Global Private Wealth Management at the CFA Institute.

Inflows into environmental, social and governance (ESG) mutual funds exploded in 2017 as many investors embraced the opportunity to use their investments to meet an increasingly important goal — benefiting society.

Although many advisors see ESG investments as a potential distraction from the primary goal of maximizing risk-adjusted investment returns, others see socially-conscious investing as another way to help clients meet life goals through their investments.

It’s important for advisors to recognize that most clients who pay for professional advice have more money than they will likely need to fund their own spending goals. This is one of the reasons why the wealthiest investors often value ESG investing more than the advisor expects.

The investor who has an abundance of assets can value goals such as leaving a legacy or improving the welfare of others. Socially conscious investing is a way of leaving a legacy, and there is frankly little evidence that this legacy results in a significant decline in returns.

“A growing body of research also suggests that companies that are more sustainable — those that address material environmental, social and governance issues more effectively — are higher-quality companies with lower risk and stronger long-term prospects,” explained Rothschild. “So it’s really a win-win proposition for investors.”

Kolluri sees the value in engaging clients about the importance of socially conscious investing by developing a process to evaluate this goal and then providing investment products tailored to the client’s preference.

“Imagine you have a slider where on the left-hand side you have the traditional investing approach, with only risk and return,” he said. “Let’s call it ‘doing well.’ Imagine all the way on the right-hand side of that spectrum is philanthropy, and let’s call that ‘doing good.’ We have a spectrum of solutions between doing well and doing good that you could call ‘doing well and doing good.’”

In developing a process for gauging interest in “doing well and doing good,” Merrill Lynch also has developed a suite of products that meet this goal. In a sense, they provide an Amazon’s choice in the form of a financial product.

According to Kolluri, “We’ve gathered approximately $15 billion and we have a variety of solutions on our platform that meet the needs of social impact investing all the way from mutual funds to ETFs to UITs to separately managed accounts to alternative investments to social impact bonds.”

The primary trend related to investment management is a recognition that socially conscious investing matters to clients. Advisors need to view social welfare as a client goal that should be considered along with other spending goals when developing a portfolio strategy.

And this investing trend isn’t slowing down. “We’ve seen 27 new fund and ETF launches in the U.S. so far this year, and a record level of flows into these funds” said Rothschild.


The biggest investing trend in 2018 is uncertainty, according to David Blanchett, head of retirement research at Morningstar. “There [are] material changes to the tax code, stock markets continue to climb despite rising pessimism, [and] a significant number of state pension plans are underfunded. For investors, this is a dangerous time, which includes the risks for bond and stock investors,” he said.

Investors in 2018 still face the same risk of low interest rates and high stock prices that investors faced in 2017. As Robert Shiller has noted in his studies of the impact of stock prices on the likelihood of a market crash (“Irrational Exuberance”), investors can be forgiven for wondering whether after nine years of a bull market we might be running out of luck.

Many advisors are looking for ways to shelter their clients from a correction, says Scott Stolz, senior vice president at Raymond James. “Protecting clients’ portfolios against the next bear market is a growing concern for advisors,” he said.

“Now that their clients have more than fully recovered from the financial crises, they don’t want them to go backwards,” explained Stolz. “But the traditional methods of protecting the portfolio don’t earn much, and could actually have a negative return if interest rates rise at the same time.”

Fear of a bear market and fear of low yields from fixed income has led many advisors to seek other solutions. “Given this extended low-interest rate environment, investors who rely on their portfolios for income are finding it increasingly difficult to attain that income without taking on undue risk, particularly within the credit markets,” Stolz added.

Many are chasing after yield in bonds, but the price of getting a few extra basis points is a much higher risk without much extra return. The difference in yields between highly-rated Aaa and Baa-rated bonds is less than half the premium that bond investors received for taking risk in early 2016.

Longer-duration bonds underperformed shorter-duration bonds for a long time during the rise in interest rates in the 1970s, so chasing yields by investing in longer-term bonds may provide little relief to investors hoping for a higher return (but a lot more risk).

Of course, alternative investments can seem like a solution when traditional asset classes aren’t attractive. According to Dannhauser, “There seems to be more interest in alternative investments, things like real estate, private equity, hedge funds, among investors.”

Interest in alternatives continues to rise, which means that investors are looking to advisors for advice on whether alts provide a solution to high equity risk and low bond returns. “Even explaining why [they aren't] an appropriate part of a portfolio is advice,” Dannhauser adds.


This year will see “the continuing growth of factor (especially multi-factor) investing and ETFs, ongoing price compression, and a trend toward concentration among active managers,” said Bob Seawright, chief investment & information officer at Madison Avenue Securities.

The trend toward passive investments and ETFs isn’t a new one, but there does appear to be an increasing consensus that core portfolios are a commodity. And fee-compensated advisors don’t have an incentive to delegate management of that portfolio to a higher-cost professional when they themselves can execute research-based strategies through low-cost passive portfolios.

Planners are increasingly evaluating portfolios relative to a passive benchmark, agrees Harold Evensky, chairman of Evensky & Katz/Foldes Financial. “When comparing manager performance forget about category returns, compare to an investable benchmark such as an ETF that reflects the manager’s style. That’s a much higher standard,” he said.

According to Michael Kitces, director of wealth management at Pinnacle Advisory Group, “The rise of ETFs isn’t so much about a shift from active to passive, but simply a recognition that when financial advisors build investment portfolios, we prefer to do it using ETFs as our building blocks rather than individual stocks and bonds.”

Kitces sees evidence that more advisors are not so much using ETFs to avoid managing a portfolio themselves, but as a tool used to execute strategic asset allocation. In other words, advances in financial planning technology, such as rebalancing software, allows advisors to view themselves as the primary asset manager rather than delegating portfolio management to an outside expert.

How should an advisor build a portfolio using ETFs? One trend that will continue to drive asset management in 2018 is the use of evidence-based strategies to build tactical portfolios that are most likely to outperform in the future.

According to Larry Swedroe, principal and the director of research for Buckingham Strategic Wealth, investors are using ETFs for “not just pure indexing.” Instead, they are using them to create portfolios that “don’t engage in market timing and or individual security selection but instead focus on gaining exposure to specific factors” that “add a premium (excess return) that is persistent, pervasive, and robust.”


One final trend that should be mentioned is interest in investing in cryptocurrencies. To more wizened investors, Bitcoin or Ethereum look like a classic bubbles tailor-made for investors attracted to shiny things. But, according to Jamie Hopkins, associate professor at The American College (and our resident millennial), “There is a lot of academic and intellectual support behind decoupling currencies from country-specific risk.”

There are indeed many good reasons why a single currency removed from the significant risks of poor fiscal choices and conflict is a better place to invest than in paper printed by a government deeply in debt. But there is no guarantee that the currency you invest in will ultimately dominate international commerce.

Currency itself is all about faith that someone else will value what is essentially a worthless piece of paper or coin, and investors in Bitcoin are betting that someone in the future will value their cryptocoin. But, then again, investors in U.S. dollars are doing the same thing.

If anything, cryptocurrency reminds us of the fragility of finance and the extent to which our nest egg relies on the faith that we will eventually be able to sell our assets to future investors.




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