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

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.

Uncertainty

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.

ETFs

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.”

Cryptocurrencies

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.