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Mayank Goradia: I'm Mayank Goradia, head of Integrated Portfolio Construction at Fidelity Investments. And I'm on a quest. A quest to help advisors profitably grow their book through the art and science of portfolio construction. With expert insights and groundbreaking research, we'll embark on a journey where wisdom meets innovation and every choice counts. So join me on The Search for the Next Great Portfolio.
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Innovations do not occur in a vacuum. Instead, they often happen the moment that independent paths of evolution and ideas converge, culminating in something entirely unique. This episode focuses on a few investment-product innovations that are empowering clients to navigate new opportunities with confidence. Stay tuned as we explain why advisors must now reassess the traditional approaches and start to embrace change in order to remain relevant.
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[Art Card: Scaling personalization and investment innovation]
Today's advisors are asking for more personalization. Typically, personalization and ability to scale don't go together. Can you talk a little bit about how you're using those two to come together to create a differentiated experience for your client?
Jordan Burgess: Personalization is critical. People demand it more now than ever. That's a huge change in the last 10, 15, 20 years. There's a proliferation of product and a level of complexity with market conditions, so it's really hard.
So, how do you do it? One of the ways you do is you look for providers that can help you scale in that process. That's the most important thing. And how would you scale?
Well, you need somebody that can provide a tool—a tool and/or a service. That's absolutely critical. Number two: Is that tool and service actually integrated into the technology platform we just talked about so it's easy to execute whatever that is?
Because as you personalize, you have everything is a segmentation of one. And so you have to manage hundreds and hundreds and sometimes thousands and thousands of accounts in an efficient way. So technology plays a key role in finding partners, particular asset managers and custodians, that can help you solve that in an efficient way—is critical.
Mayank: If we basically go back to the turnkey models, can you just paint the evolution of turnkey models? I think of that as very similar to— Think about any of the managed account target date funds, right? It starts off as a really simple vanilla product of equity fixed, and then you start expanding into the extended asset classes. How are models incorporating some of the emerging capabilities we have, either in terms of asset classes or whether in terms of wrappers?
Amanda Robinson: If I think about the evolution of Fidelity's models business, at first, we were really focused on the wrapper. The first model portfolio that we launched around six years ago was all Fidelity, and it was a mix of active and passive mutual funds, and a traditional target-allocation 60/40 portfolio. And over time, what we started to hear from financial advisors is that they were looking for almost building-block models. And what I mean by that is income models. We have factor ETF models. We even have a sector equity model that follows the business cycle. And we observed advisors start to use those models together. What I've started to observe over the past 12 to 18 months is you're starting to see inside of a standard multi-asset portfolio; new building blocks find their way in there.
So what I mean by that is Fidelity has rolled out a model called a Target Risk Model. It has liquid alternatives. Nearly half of our custom models today have a liquid alternative in them. So that's an area of the market that is growing in interest, and it's now reflected in a portfolio.
We also have a model with SMAs. And so model portfolios, whether that's turnkey or custom, end up being a really strong solution. And I think the benefit of that is it is aligning time savings as well as profitability with clients.
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[Art Card: Which alternative asset classes deliver investment innovation?]
Darby Nielson: We've done a lot of work on including alternative asset classes in a portfolio. We are doing it right now, in some of our own model portfolios. But just backing up to talk about alternatives broadly, and we've done some thought leadership on the topic, we've put them into five different categories, being liquid alternatives, which are typically hedge fund strategies in a liquid vehicle like a mutual fund. We also consider private equity; private credit; real assets, which could include private real estate or infrastructure, or even art or something like that. And then finally, digital assets, like bitcoin, and we can talk about that maybe a little bit more as we go along.
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[Art Card: What kind of allocation should be considered for alternatives?]
The first thing I would say is it depends on the investor, and what I mean by that is it depends on the investor's time horizon, liquidity needs, and eligibility for different alternative structures. Now, our team has just done a lot of research on this. Fidelity just published a paper on how to think about allocations to alternatives in a portfolio depending on the investor type, as I just described.
Mayank: If you think about how many different asset classes is available to a financial advisor across so many different wrappers, how do you think a financial advisor should actually think about consuming all of this in a very curated manner? Because this is not a decision about, if I do this, I shouldn't do this. In some cases, the client is actually using both. But any piece of advice in terms of how they should be bringing this together?
Christian Pariseault: I think you're pointing to mutual exclusivity. I think that oftentimes it can be easy to think that you should go down a path of either active or passive, or all ETFs, or all SMAs, or all mutual funds, when in fact, the decision processes could be a combination of all of those types of considerations. And so when it comes to vehicles—for example, ETFs, mutual funds, SMAs—an ETF and an SMA is going to afford you a lot of flexibility around taxes and being able to harvest tax losses, for example. SMAs, a lot of personalization. With ETFs, you do have the ability to avoid the pitfalls of having to select a share class from the mutual fund. But on a mutual fund, you don't have to worry about minimums, necessarily, when it comes to fractional trading and so forth. So there's a lot of trade-offs. I'll use the active-passive discussion as a point.
So I think some advisors might say, Well, I want to deliver an all-passive experience to my clients because it's a low-cost way of approaching investments and we really want to focus on another piece of the puzzle. And so understanding the trade-off of that approach, which means there are some parts of the market that really lend themselves well to active investing. And we know that across the capital structure that there can be different nuances in market efficiency, the way that certain securities trade, and certain regions of the world. And so giving up on that might be a trade-off that could be easily exploited if you do your homework.
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[Art Card: What role does technology play in personalization?]
Amanda: In terms of some of the drivers that we're seeing in growth is I really think it's this trend around personalization at scale that feels like the hot topic. You're seeing it in the headlines, you're seeing it at every conference. But I think a massive driver is using technology in the right way. Models, SMAs, even advisors that build their own models, use turnkey or custom, all of them are really predicated on utilizing the right technology to do that. An interesting thing that I think about is my team, of course we spend time talking about models, but we oftentimes spend just as much time talking to advisors about the technology that they're using to enable models and the research they need to do to utilize the right tech stack.
Mayank: We learned that in today's fast-evolving financial landscape, investors are more curious than ever about new investment capabilities. As a financial advisor, it's crucial to stay ahead of the curve. By incorporating investment innovation within your practice, you can provide clients with tailored forward-thinking solutions, ensuring long-term satisfaction and their financial success. Thanks for joining us. Until next time, keep evolving and stay ahead.
Next time on The Search for the Next Great Portfolio.
[Art Card: Next time on The Search for the Next Great Portfolio]
Interviewee 1: Advisors are also leaning into a lot of different AI-driven components to really automate their business. So think about the day-to-day operational processes, moving money on behalf of clients, opening up accounts, servicing those accounts.
Interviewee 2: How can you deliver this to your clients and help them understand in a very uncertain world and in a very complicated investment portfolio how it all fits and what we are looking forward to rather than looking back?
Interviewee 3: Yeah, so on the one hand, I would acknowledge that with the advent of technologies like artificial intelligence, one might assume that a one-size-fits-all approach could work for managing client portfolios. However, I would submit that in practice, the opposite is actually true.
Interviewee 1: I think step one is making sure their data is in one place. So we like to call it, in our team, the single source of truth.
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