Wealth management firms are revving up to lead their advisors and clients into the 2020s. This week, Mercer weighed in with recommendations on five emerging issues that are expected to affect the wealth management industry’s long-term success.
1. Diversifying between active and passive strategies.
In 2019, market gains were strong, and continued to favor passive strategies in many asset classes. Mercer noted that when active management falls out of favor, advisors and their clients are tempted to abandon active management in the search for higher returns. However, history has shown that diversified portfolios that use both active and passive strategies are key to constructing durable portfolios.
Mercer recommends that advisors continue to help clients understand how passive strategies can facilitate access to certain market exposures, and evaluate which asset classes are more conducive to active management. Active and passive strategies can complement each other in diversifying risk. Advisors and clients should consider the expected market environment and why active strategies might mitigate portfolio risk.
2. Searching for brighter returns.
How to generate returns for clients when absolute interest rates across the globe are at historical lows is a primary challenge for advisors. So wealth management firms are looking with keen interest at strategies once available only to institutional investors that are expanding into the retail segment. But given the complexity of some of these strategies, Mercer cautions advisors in their role as fiduciaries to be highly vigilant in their due diligence.
For one thing, this means understanding both how the investment will behave on its own and how it will contribute to the client’s portfolio in different market environments. In addition, for private market opportunities, advisors should evaluate the manager’s experience in sourcing investments and executing their strategy through realization.
Key elements of the due diligence are the fund’s structure, term, liquidity and fees, as well as the operational risk of the manager’s organization.
3. Have obstacles to private markets gone away?
As private and public markets mature, new trends are emerging that may influence future investment approaches. Investors have been pouring into private markets to capitalize on growing direct-financing and pre-IPO opportunities. U.S. companies are staying private longer, resulting in a big drop-off of listed companies, which has led to more capital for fewer companies in public markets. At the same time, retail-accessible vehicles have made private markets more viable for individual investors.
But with opportunity, Mercer says, comes risk. Both clients and advisors need education, it says. They should build diversified alternatives portfolios to lessen risk through exposure to a variety of investment strategies and managers. And they should participate in different market environments.
4. Looking to model portfolios.
Wealth management firms are finding it beneficial to outsource portfolio construction and investment selection, and many asset managers are taking advantage of this trend by building model portfolios using proprietary funds and ETFs. Mercer says these offerings present inherent conflicts of interest, and advisors in the role as fiduciaries must ensure that the model providers they select have proper governance in place.