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.
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.