Embracing Investment Evolution

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Product innovations and tech advances are helping advisors balance performance goals with personalized client preferences.

The ebb and flow of market forces presents a continuing challenge for advisors and their clients. Certain core elements of traditional portfolio management are now being reexamined. Are there different options to explore, outside the standard allocations? And how are client expectations changing? Multiple trends are converging to shake up "business as usual" in the investment industry.

Fundamental demographic shifts in the United States are driving higher client interest in non-traditional and alternative investments. Clients are asking for investment strategies that match their beliefs and goals. And recent advances in technology are driving innovation at both the product and portfolio levels, creating access to products that were once the exclusive reserve of large institutions.

From alternatives to custom separately managed accounts (SMA) to crypto, investors want access.

  • 82% of investors with advisors are interested in personalized products, and 62% are willing to pay more for customization.1
  • 55% of the combined Gen Y and Gen Z cohort believe that "Aligning my investments to my values is more important than getting maximum returns on my investments."2
  • 71% of U.S. consumers expect personalization, and 76% are frustrated when they don't get it.3

This new breed of investment opportunities includes more accessible traditional products, as well as hybrids, along with so-called alternative investments. Many offer the opportunity to pursue returns beyond traditional market benchmarks. With these products, advisors can focus even more closely on the specific goals clients are hoping to achieve, such as income, tax efficiency, progress toward financial planning goals, diversification, or simply enhance a portfolio to more closely match a preferred world view.

We may be at a tipping point. Investor expectations will likely continue to challenge traditional management. Advisors may have to ramp up their product knowledge quickly to prepare for conversations around how client investments might support better alignment with individual client values.

Pursuing diversification, risk-adjusted returns, income, tax efficiency, and the flexibility to match client interests.

The latest wave of product differentiation and democratization is generating creative pathways to portfolio exposure, featuring a blend of emerging and traditional product concepts. Accessibility is the watchword as familiar investment products have undergone modifications to make them more flexible and customizable. Here are few examples:

Alternatives, or "alts," fall outside the realm of conventional stocks, bonds, and cash. Numerous types of liquid and illiquid investments are now more easily accessible, offering potentially enhanced returns, income, and diversification. As demand for alts has increased, minimum investment levels have decreased resulting in greater accessibility for a broader group of clients. These include liquid alternatives, private equity, private credit, real assets, and digital assets.

Active exchange traded funds (ETF) are guided by a portfolio manager who adjusts investments within the fund, aiming to outperform a benchmark. These ETFs have enticed quite a few asset managers to launch active ETF products, providing advisors with more solutions to meet client needs. Active ETFs may feature lower expenses when compared to mutual funds, offer greater flexibility, and could provide tax efficiencies for some clients.

Custom SMAs help advisors provide clients with direct ownership of securities within a strategy, while providing the potential for a new source of alpha, or "tax alpha," that helps advisors add value for clients. Along with the ability to customize based on a client's tax-related goals, these products also offer transparency and a refined degree of customization. Advances in technology, such as direct indexing, help advisors build portfolios that better reflect a client's personal preferences.

Thematic funds offer a clear nod to client preference, enabling investors to zero in on high conviction areas, presenting clients with a way to isolate and invest in specific opportunities that may cross multiple industries. Thematics can also be employed to help capitalize on secular shifts in the economy, such as artificial intelligence (AI). "Outcome oriented" investment approaches, useful for pursuing specific portfolio outcomes, such as inflation-protection or lower volatility,4 are another type of thematic fund. They can be active or indexed and can come as mutual funds or ETFs.5

Cryptocurrency investments are attractive to investors with a conviction about the potential of bitcoin and other cryptocurrencies, such as Ethereum. Investors in cryptocurrencies may be seeking several potential outcomes, including return potential and a possible hedge against inflation. Advisors will likely need to be ready to guide clients into this often volatile and unpredictable territory.6

Environmental, social, and governance (ESG) products, centered on sustainable investing, are designed for clients seeking investments in companies that are committed to sustainable business practices, such as fostering a diverse and inclusive workplace, strong governance oversight, and shareholder-friendly policies.

Portfolio construction tools and consultation help advisors identify and manage portfolio risk and save time by providing a scalable, personalized portfolio construction framework. Analysis tools allow for evaluation of style and sector exposures, determining correlations among holdings, with a view of top risk and return measures.

Custom model portfolios allow advisors to incorporate a client's investment beliefs with their performance needs via access to institutional research and investment capability. These customizations can include preferences for certain managers, active or passive, vehicle preferences, and asset allocation views. Institutional quality portfolio management capabilities can produce tailored, diversified models, freeing advisors from managing individual portfolios and allowing more time for deeper client engagement.

Innovation within reach: more manageable fees, lower minimums, a range of liquidity options, and greater accessibility.

With these expanded investment offerings, advisors will likely need to develop a clear point of view on each, most notably around digital assets. Relying solely on traditional products and portfolio models may no longer be enough to satisfy today's clients. Consider preparing now for all the questions you may be asked. Here are considerations to help you keep pace:

  1. Embrace change—The speed of product development and adoption has never been greater. Open your thinking to include strategies that were once out of reach but could now help clients pursue their goals more effectively. Start a regular meeting with your coworkers to discuss emerging product concepts and opportunities. Connect with subject matter experts at firms you do business with. Access white papers and detailed product descriptions from trusted industry sources.
  2. Increase your knowledge—Clients look to you for insight. Introducing product concepts and relating them to client interests and goals offers a chance to strengthen relationships, as well as set new performance benchmarks. Become a voracious consumer of information on how familiar products have evolved to offer benefits to a broader range of clients. Attend webinars and seminars, reach out to asset managers and key industry contacts.
  3. Develop your skill set—How will you introduce these products to clients? What systems does your firm need to add these products to your services? Engage the proper internal and external partners to ensure that the right products are on your platform. Evaluate product access and agreements; operational and tech connections; Legal, Risk, and Compliance (LRC) and governance; and training and support for your team.
  4. Define your approach—Set up rules of engagement on how to describe benefits to clients and when to recommend these products. Develop a clear set of talking points when introducing products, setting a standard for the way your firm discusses the advantages and limitations of each.
  5. Focus on client expectations—While fresh solutions are an exciting topic worthy of discussion, revisiting a client's primary aims will reveal whether any of these products would make a good fit. What are a client's hopes for returns, tolerance for risk, concerns about tax impact, or needs to align with their personal preferences? The bottom line is that innovative investment ideas are still subject to a client's higher-level goals and priorities.
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