Optima Blog

HNW Want it Their Way

Capgemini recently released its 25th World Wealth Report. Among its observations and conclusions, which included the fact that over the past five years North America has overtaken Asia Pacific in terms of population and total wealth, were several others of note.

The pandemic crash was unlike others
In a typical post-crash environment, HNW investors take a risk-off approach, generally shifting to fixed income, cash, and other less risky investments. This occurred after the tech bubble of the early 2000s and the financial crash of 2008/2009. Interestingly, this did not occur after the Q1 meltdown of the markets as the pandemic shut down the global economy. In fact, cash holdings decreased slightly, while alternatives and real estate rose. One potential reason may be, since there wasn’t an underlying financial crisis or weakness, the expectation that the real economy would reopen and recover relatively quickly once COVID-19 was under control.

HNW investors want more involvement, especially when the markets are doing well
Investors want the most involvement in their portfolio during bull markets, reflecting an “anyone can do it, can’t lose” attitude. When markets are volatile or negative, however, investors are more likely to seek and value professional advice, looking for transparency, risk management, a rigorous process, and a goals-based approach. Wealth managers must be prepared to accommodate investors’ needs and attitudes in different environments, adapting a dynamic “hybrid” approach that allows clients to choose the model that works best for them at different points in time.

It’s not all about digital
There is no doubt that advances in technology and the ability to serve clients virtually have fundamentally changed the service model for all investors. However, at the same time, HNW clients increasingly demand a highly personalized experience, with “real” people as well as digital access, that is tailored to their specific situation, needs, and preferences. Organizations that can deliver high-quality omnichannel sales, service, reporting, and value-added communications will be the winners.

Competition is everyone
HNW firms face competition from both traditional players and non-traditional players from all over the world. This includes traditional asset managers, banks, trust companies, brokerages, RIAs, insurance companies, and online offerings. As the line becomes increasingly muddled between what firms really are due to acquisitions, partnerships, and alliances, it will be increasingly difficult for single offering, stand-alone entities to succeed.

The wealth management industry continues to grow and evolve rapidly, impacted by both micro and macro factors. Firms that succeed will be those that recognize and embrace the changing dynamics of wealth.

Combatting the Great Resignation

For many firms across various industries, developing and implementing a hybrid or flexible work model is top of mind. And, according to Microsoft’s Work Trend Index: 2021 Annual Report, implementing a hybrid model is not a passing accommodation – it is here to stay. 

Source: Microsoft Work Trend Index Report 2021

The Great Resignation
As many employers begin implementing and employees begin adjusting to hybrid work models, the looming threat of ongoing resignations is putting increased pressure on employers. The U.S. Bureau of Labor Statistics recently announced that 4 million people, or 2.7% of U.S. workers, quit their jobs in April. And, according to the Microsoft report, 41% of the global workforce is considering leaving their current position in the next year. The report also points to a number of pandemic-related issues that may be contributing to this potential mass exodus, including an exhausted workforce, digital overload, and a shrinking social network.

Stemming the Tide
Employers need to be cognizant of these pandemic-related issues that continue to affect workers. Employees should be given ample notice of any change in work arrangements as they may be dealing with childcare concerns, transportation issues, or other circumstances that affect their ability to return to the office immediately. Steps should be taken to begin alternating virtual meetings with in-person meetings to help ease the effects of “Zoom fatigue” and broaden workplace networks. Employers should also look to bring more transparency, openness, and authenticity to the workplace as a way to reengage with their employees. According to the Microsoft report, people who interacted with their coworkers more closely than before, even though mostly virtually, not only experienced stronger work relationships, but also reported higher productivity and better overall wellbeing. 

It remains to be seen how employees will react to the new normal of hybrid work models. We believe leading employers will consider the many factors involved in bringing workers back to the office and devise innovative strategies to reengage employees while also driving higher levels of productivity.

Proving Your Worth

Although you may speak with clients regularly about their goals and investments, you may not be aware of all they expect from you, and they may not be aware of all you do for them ‘behind the scenes.’ In addition, according to research conducted by Morningstar,* client and advisor priorities are not always aligned. 

Providing informative thought leadership helps you educate clients about what you do and get on the same page with them in terms of priorities. It also allows you to deliver more of what investors want, including a knowledgeable advisor who “Communicates and explains financial concepts well,” near the top of their list.

Source: Morningstar

Thought leadership helps you demonstrate your expertise in a client-benefit oriented manner
Even clients who are successful executives, professionals, or business owners may know little about wealth management or investing. Thought leadership allows you to teach clients about the basics (including the role you and your firm play in helping them achieve their goals), demonstrate that you have the relevant skills and knowledge, and build trust and goodwill.

Thought leadership helps you align values
Many investors think their advisor should be maximizing their returns. Information about asset allocation, risk, reward, and rebalancing will help clients better understand the end goal and appreciate your role in creating a tailored investment strategy aligned with their objectives. They also don’t think they need your guidance to stay the course even though the average investor underperforms the stock market due to unsound decision-making. Information about the risks of emotional investing will heighten their appreciation of your long-run approach.

Thought leadership is a valuable tool for educating clients about wealth management. It provides context that builds trust, guides expectations, and helps clients understand the value of what you deliver.

* Source: The Value of Advice: What Investors Think, What Advisors Think, and How Everyone Can Get on the Same Page, The Investor Success Project, Morningstar. 

Financial Comfort and Planning

Schwab recently released its 2021 Modern Wealth Survey, an annual examination of how 1,000 Americans think about savings, spending, investing, and wealth. 

Two things stood out in the survey. First, Americans significantly revised their views downward since last year on what it takes to be wealthy, achieve financial happiness, and be financially comfortable. This might be expected in the post-pandemic period as many people may have shifted their priorities to those less dependent on wealth. Despite these lower numbers, many people still do not make the cut. According to the Fed’s Survey of Consumer Finances, more than 75% of households in the U.S. fall below the $624,000 mark for financial comfort, not surprising as the median net worth in the U.S. is just $121,000. Even most older households in the 65+ range are relatively financially uncomfortable with a median net worth of less than $266,000.

The second notable finding was the marked difference between those respondents that had a financial plan and those that did not. Planners and non-planners appear to think and act differently when it comes to their finances. Planners appear to be more financially stable and knowledgeable as shown below:

The Survey also showed that only a third of Americans had a financial plan in writing. The most often cited reason for not having a plan is the belief that there are not sufficient assets to merit a formal plan. This represents a significant gap and opportunity for advisors serving the mass market and mass affluent segments.

All About Ric

There’s no question that Ric Edelman is a pioneer in the wealth management industry. Much has been written about how he started from humble beginnings and went on to develop the largest independent RIA in the country. Earlier this week, Edelman announced he is stepping away from Edelman Financial Engines to spend more time with his wife Jean and focus on their other professional and philanthropic pursuits. He will step down as chairman of financial education and client experience at the firm by the end of the year but will remain as a strategic advisor.

For many years, the key to the firm’s success has arguably been based on Edelman’s keen sense of branding and marketing. By promoting Ric’s radio shows, books, and regular media appearances, the firm has created a strong brand that is difficult to separate from its founder.

A brief review of the company’s website reinforces the importance of the company’s namesake to the overall brand of the firm. It includes many photos of Ric, links to his radio show and books, and an “ask Ric” submission form. Ric Edelman even occupies his own section on the website’s main navigation bar. A quick review of the site’s press room shows Ric continues to be the firm’s featured spokesperson and go-to authority for the press.

A Brand in Transition
It’s unclear how the firm will be branded going forward, but it’s safe to say something will have to give. While the firm has undoubtedly made management succession plans, it’s not apparent that the firm has a clear marketing succession plan. Perhaps Ric will continue in some marketing capacity even as his relationship with the firm becomes less formal. Or perhaps the firm will swiftly elevate someone to take on Ric’s marketing responsibilities. According to ThinkAdvisor, the firm has begun efforts to identify a new host for its weekly radio show, with the final episode under The Ric Edelman Show moniker airing this fall. Apparently, Ric will appear occasionally on the show. Either way, the firm will face challenges in evolving a brand that is inextricably tied to its eponymous founder.

A Boon for ESG Investing

It is no secret that ESG investing has grown substantially in popularity in the U.S., and according to data from GSIA and Bloomberg, it could exceed European ESG assets by 2022. According to US SIF: The Forum for Sustainable and Responsible Investment (US SIF), ESG investments now represent 33% of “total U.S.-domiciled assets under management.”

Historically low ESG in retirement plans
ESG asset growth potential could receive a huge boost if proposed legislation regarding ESG investing in ERISA plans is passed. To date, ESG investments in ERISA plans have been sporadic, with a lack of clarity around whether investing in ESG is compatible with guidelines and with the requirement to act as a fiduciary and in the investor’s best interest. Policy tends to change with each new administration and shift in Congressional power, and current times are no exception.

Times may be changing
A recent bill, The Financial Factors in Selecting Retirement Plan Investments Act, proposed by two senators and one member of the House of Representatives, would reverse a similarly named bill enacted not long before the elections, The Financial Factors in Selecting Plan Investments Act. This proposed bill would allow plans to consider ESG factors when selecting investments, although still in a prudent and fiduciary manner, just as a plan would evaluate non-ESG investment criteria and choose investments. The bill would also formalize the principle that plans may apply ESG factors as “tiebreakers” when considering comparable options. While this approach was informally understood to be in place previously, it was officially repealed by the late 2020 policy enacted. This bill, if passed, could prove to be a huge benefit to investment managers offering ESG investment options, as well as provide companies with plans that could be potentially more attractive to a younger, more diverse work force.

Long road ahead to passage
The path to passage, however, is by no means certain, and the bill will most likely face opposition from those who were advocates of the previous bill. It remains to be seen if and in what form the passage of a bill will take. The bill does have the support of a number of industry groups, including the Securities Industry and Financial Markets Association (SIFMA), US SIF, the CFA Institute, Morningstar, and the American Retirement Association, which could add pressure to pass it.



Changing the Message

Last February, Vanguard published a white paper titled The Case for Private Equity. The broad conclusion of the paper was that “Private equity represents a distinct and growing segment of world equity markets that, because of its significant illiquidity and other market dynamics, offers suitable investors the opportunity to earn long-term excess returns while increasing portfolio diversification.” The paper further put private equity “At the forefront of Vanguard’s mission to broaden access to world-class strategies that have the potential to improve investor outcomes.”

Fast forward to last week. True to its mission, Vanguard announced that the firm will begin private labeling the HarbourVest private equity funds to accredited investors this summer. Shortly after this release, it will make the funds available to qualified advised clients through the Vanguard Personal Advisor Series program. 

Vanguard’s support of private equity is consistent with the firm’s long-time goal of democratizing investments. But a case could be made that the move in many respects runs counter to Vanguard’s founding principles of embracing very low cost, highly liquid, well-diversified, and fully transparent portfolios. Indeed, on the cost issue alone, Vanguard’s private equity report says that private equity investments could cost as much as 600 basis points while the HarbourVest funds are expected to come in at a still healthy 125 basis points. These price levels would likely have had Jack Bogle wondering whether this was a different Vanguard than the one he founded.

With Vanguard’s size and clout in retail and institutional markets, it’s unlikely that embracing private equity will compromise the firm’s growth or positioning. But for smaller or less well-established investment firms, it is important to carefully evaluate when and to what degree it is advisable to stray from core messaging and potentially compromise hard-won, but often easily lost, brand value. 

Wealth and Asset Management Trends to Watch

Look at almost any publication on wealth and asset management current trends and you’ll notice some common themes. Not surprisingly, these concerns are also often ones we find ourselves helping our clients address by identifying practical and implementable solutions. Four key themes:

1)     ESG – for both asset and wealth managers, this is a top concern with many implications for how business is conducted and how money is managed. Clients increasingly want to know what the company’s values are, how it interacts with the community, shows regard for its employees, and promotes social change within the company, including diversity, sustainable practices, and supplier or vendor relationships. For investment management, it is important to have a viewpoint on ESG and an explanation of how this impacts portfolios, whether you use an overlay, it’s an integral part of the investment management process, or customized based on an investor’s values and beliefs.

2)     Technology – the winners last year were those who embraced technology solutions along the entire customer journey. From stepping up communications to enabling both staff and clients to conduct business safely and effectively, firms were able to operate in an almost seamless, “business” as usual manner. While the personal and in-person is always valuable, most companies found that a mixed approach provided an enhanced experience, a trend that is likely to outlast the current environment.

3)     Scale – we continue to see industry consolidation as firms seek to operate more efficiently and build the resources necessary to survive during uncertain periods. PwC estimates that over the next five years, “mega-firms will consolidate further and control some 68% of AUM” versus 53% in 2019. This is an indicator that the M&A market will remain very active for the foreseeable future.

4)     New administration – most firms are trying to assess and prepare for changes that the new administration has proposed or may take that will affect wealth and asset management. In particular, changes in individual and/or corporate tax rates and tax policy could influence how businesses are run, as well as estate planning and investment management for wealthy individuals and families. Interest rates and inflation are also an area of focus, as the search for yield continues balanced by the impact that increasing rates will have on securities’ prices.

More New Records for Sustainable Fund Flows

Morningstar just released its latest cash flows report for sustainable funds/ETFs. The data for U.S. products suggests that the popularity of ESG investing continues to accelerate as inflows hit a new record of nearly $21.5 billion for the first quarter. That total was a slight increase over the prior period’s $20.5 billion and more than double the inflows of any earlier quarter. 

As strong inflows continue, assets in sustainable funds are on a steady growth trajectory. By March 2021, U.S. ESG funds reached $266 billion, almost twice the total at the beginning of the year. 

While sustainable funds are gaining traction in the U.S., they are rapidly becoming a core holding in Europe. Inflows into European sustainable funds hit a record $147 billion in 1Q21, roughly 7 times the U.S. figure for the quarter. In fact, for the second quarter in the past year, sustainable funds captured more inflows than conventional European funds.  

We expect growth in ESG to continue to accelerate in the U.S. as:
• New funds specifically devoted to this category are introduced
• Current funds and related investment vehicles introduce ESG screening criteria as an enhancement to their existing investment processes.

David Swensen’s Lasting Impact

Source: Wikimedia Commons, Henry Farnam Hall, a freshman residence hall on the Old Campus of Yale University, February 8, 2014

Much has been written over the past week about David Swensen, the longtime Yale University Chief Investment Officer, who died at age 67 on May 5, after a long battle with cancer. The father of the “Yale Model” was a pioneer. His approach of allocating large portions to alternative assets has been widely adopted by non-profits, as well as by individuals and families with substantial assets.

A legacy of strong performers
What might be an even greater legacy is the indelible mark he has left on those that he mentored throughout his years at Yale. According to Swensen’s longtime deputy investment officer at Yale, Dean Takahashi, of the top 15 endowments ranked on their 10-year performance numbers, six are led by Yale Investments Office alumni. And, according to data from OCIO search firm, Charles Skorina & Company, that includes the top two spots. Both Paula J. Volent at Bowdoin and Seth Alexander at MIT are Swensen disciples.

Source: Charles Skorina & Company

Promoting gender diversity
Swensen and investment committee members at a number of leading endowments and foundations across the United States also seemed to realize that promoting gender diversity in the top ranks makes for strong returns. Findings from a 2020 Credit Suisse study found that companies with more female executives in decision-making positions continue to generate stronger market returns and superior profits.

In fact, half of the top 20 performers in Skorina’s latest OCIO report are women, with Wesleyan’s Anne Martin being yet another of Swensen’s former mentees. Other industries that continue to struggle to promote women to senior finance roles, including financial services, would be wise to follow the example set by these institutions, and Swensen in particular.