What You Need to Know
- As interest rates remain low and investors gravitate to tech platforms, advisors must evolve or die.
- Few ultra-wealthy investors have all their assets managed in one place. Grow your share of wallet and strengthen your relationships.
- Consider adding alternative investments, via outsourcing if necessary.
Adapt or die. Over the past few decades, we’ve seen a handful of digital players completely upend the business landscape, rendering large companies — and entire industries — obsolete. But the shift isn’t over, nor is it limited to entertainment and consumer-oriented brands.
According to Statista, the number of investors using robo-advisor financial planning services is expected to rise to 393.7 million by 2023, “nearly three times more than pre-pandemic figures.”
If financial advisors want to not only survive but thrive amid the greatest intergenerational transfer of wealth in history, they’ll need to think long and hard about the value they provide to their clients.
Here are six steps that will help RIAs grow their businesses and provide added value to their clients.
1. Forget the 60/40 Rule
For most of the past 50-plus years, investors could balance their risk profiles simply by putting their money in a 60/40 stock-bond allocation. But that equation no longer adds up. In low-interest rate environments, traditional safeguards like bonds fail to provide an adequate buffer against volatility.
With most asset classes becoming highly correlated during periods of market stress, financial advisors need to look elsewhere to protect their clients against the real risks of a market downturn — and many RIAs are employing a strategy long used by their institutional counterparts: risk mitigation or tail hedging.
With tail hedging, investors effectively insure a portion of their portfolio. As an example, when that “insurance” kicks in, the 10% of your portfolio that is allocated to the protection program can move to 30% and allow you to reallocate capital, buying stocks at lower, more attractive prices. Not only do you cushion the downside volatility for the entire portfolio, you become a buyer when everyone else is a seller.
2. Create Yield in a Near-Zero Interest Rate Environment
As investors demand income, advisors are between a rock and a hard place. Rates are suppressed, and even junk bonds are now officially generating negative yields after inflation. Private credit, a near $1 trillion industry, has filled the vacuum that banks created by pulling back from corporate lending due to regulatory changes.
These loans can produce significantly higher yields (close to 8% on average according to several sources) and are often floating rate instruments, which make them less sensitive to inflationary concerns. Accessing top-tier credit managers will often come at the expense of immediate liquidity, but this is also why these vehicles can produce superior risk-adjusted returns.
3. Consider Adding (More) Alternatives/Private Investments
According to a 2021 survey by KKR, ultra-high-net-worth investors have more than 40% of assets in alternatives, with just over 30% in equities. The average investor, and even most high-net-worth individuals, are heavily weighted to equities and have less access to unique alternatives.