Optima Blog

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.



Marketing as a Growing Priority for Leading RIAs

M&A activity in the RIA industry grew rapidly in the second half of last year catalyzed in no small part by rising demand among leading aggregators and other deep-pocketed serial acquirers. While by most measures the industry remains highly fragmented, the consolidation move is accelerating. In fact, we estimate that by the end of last year more than two-thirds of AUM for wealth management RIAs was accounted for by just the largest 5% of firms.

As the consolidation race heats up, so has the urgency among the larger players to reach scale and establish a national presence and brand dominance in the industry. This may result in an eventual shift in priorities among more competitive RIAs. The table below from Advisor Growth Strategies’ 2021 RIA Survey shows the top priorities for 2021 among RIAs. Increasing manpower, client acquisition, and technical resources top the list. Marketing is a distant fifth. We expect, however, that marketing will catch up as firms with national aspirations recognize the need to shift resources to brand building, awareness, and proactive lead generation. 

Source: Advisor Growth Strategies’ 2021 RIA Survey

Robust marketing capabilities among acquirers may also become a more important incentive for prospective sellers. In its recently released 2021 RIA Deal Room report, Advisor Growth Strategies’ points out the ongoing shift in deal structures in favor of increased earnouts and “earn-more” provisions. Sellers considering such provisions are likely to give more value to their potential buyer/partner if that partner provides marketing support and brand awareness to help them achieve necessary metrics.

Do You Need a Good Idea?

“No one can whistle a symphony. It takes an orchestra to play it.”
-H.E. Luccock (1885–1960)Methodist Minister and Professor at Yale

The financial services industry is continually evolving, from an increase in demand for digital delivery to the disruption of FinTech solutions (e.g., PayPal and Square) and the desire for a more personalized user experience. You need fresh ideas to stay competitive. Brainstorming sessions are a valuable tool for generating creative solutions that move your business forward. However, they must be run effectively to spark the creativity required to energize your firm.

Brainstorming Tips:

BEFORE
1. Select a diverse group of participants who are likely to see things from different angles and offer varied perspectives.
2. Keep the group relatively small, so everyone has an opportunity to contribute, with around seven participants as ideal.
3. Send the group a pre-read containing background information, the problem you’d like to solve, and the objective of the session, so everyone shows up prepared. Some people will need the opportunity to think alone beforehand.

DURING
1. Designate a facilitator, someone you feel will be able to guide the conversation in a positive way, build upon ideas, and engage quieter team members.
2. Enforce conversation ground rules, including the elimination of distractions, such as cell phones, and the establishment of a ‘no-judgment zone’ to encourage a free flow of ideas, including those that may seem outlandish. Out-of-the-box solutions can end up being the best ideas!
3. Limit the session to between 60–90 minutes, long enough to build momentum but not so long that everyone is drained. Take a break, when needed, to re-energize.

AFTER
1. Record and evaluate all ideas, creating a pros and cons list for the best possibilities.
2. Dig deeper, doing research, if necessary, to assess the viability of each suggestion.
3. Organize a follow-up conversation with team leadership to implement the next steps.

Address your firm’s challenges, take advantage of potential opportunities, and generate ideas for a competitive advantage through brainstorming. Even if your team is still working remotely, you can hold a brainstorming session virtually.

The Rise of Social Sentiment Indicators

The “Reddit Rally” around GameStop late last year introduced a new phenomenon to the mainstream: significant stock market fluctuations driven by what individual investors said and did online.

The question for many investors, particularly those in the growing cadre of app-driven DIY traders, is how to capitalize on this nexus of social media and the financial markets.

One way is to follow the musings of the new group of market “influencers” whose tweets and posts have had a surprising impact on market movements, at least temporarily, in specific investments. These include institutional investors like Cathie Wood, but also outsiders, like Virgin Galactic Chairman, Chamath Palihapitiya, sports commentator David Portnoy and perhaps most notably, industrialist, Elon Musk. Musk famously started out by influencing Tesla’s own stock price but has since been credited with influencing the dramatic increase in the market value of GameStop and, most recently, crypto-currency Dogecoin. 

A second way to potentially profit from the influence of social media is to invest in products designed specifically for this purpose. Among the first of such social media-based offerings is Van Eck’s Vectors Social Sentiment ETF. This innovative product tracks the BUZZ NextGen AI US Sentiment Leaders Index which includes 75 US Large Cap Stocks selected by:

• Collecting and analyzing millions of unique stock specific data points aggregated from online sources including social media and other alternative datasets.

• Filtering the data utilizing natural language processing technology to determine what the online community is saying and whether the sentiment is positive, negative or neutral.

• Ranking each stock based on positive sentiment and selecting the 75 stocks with the highest sentiment scores each month for inclusion in the index.

Van Eck’s Social Sentiment ETF was just launched last month, so it’s too early to judge the performance and value of the approach. However, the ETF has already attracted over $300 million in AUM, indicative of interest in this type of strategy and suggestive of the likelihood of similar competitive products to follow. 

A Look Into Consumer Beliefs and Behaviors

Getty Images, one of the largest most well-respected stock photo agencies in the world recently published a global report based on findings from 10,000 consumer surveys taken across 26 countries and its extensive proprietary database. The report shows what kind of visuals marketers globally are looking for. We live in a visual world, and it’s important to know what is meaningful to consumers, whether they are looking for cars, clothes or financial services. Getty calls the endeavor “VisualGPS” and promises to keep updating its findings. Below is a brief overview.

Getty has discovered four, what they call “Forces,” that influence the way consumers behave and ultimately make purchases. Wellness, Technology, Sustainability and Realness.

The term describes more than physical health, it includes mental health, spirituality, family, relationships and being more in tune with ourselves, living a more mindful and intentional life. 

The top three things people care about:
61% say the health and well-being of family members
60% say personal health and well-being
58% say financial security

The people who are more likely to feel strongly about Wellness are women, those who value kindness and joy in their lives, and those with higher incomes. 

What this means for financial services: It’s not just about accounts and numbers, it’s about one’s entire well-being.

Technology plays an enormous role in our everyday lives. It involves so many things, from cars to tracking packages being delivered to your house when you’re not home to connecting with friends and family with multiple apps on your phone.
79% of those surveyed said technology makes them feel connected to other people
82% said technology keeps them connected to what is happening in the world

However, the report also found a lot of worry around cybersecurity.
71% globally believe their country will experience a cyber-attack
76% of those in North America fear a data breach
88% said they need companies to prove they are protecting their privacy and data

What this means for financial services: the privacy and security of your clients’ data is extremely important to your business, so be sure your clients’ information is protected and they know you’ve got it covered. Provide guidance to help them keep their financial and personal information secure. 

Sustainability is something we hear a lot about, but it’s helpful to hear the way the United Nations described it 30 years ago: “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

On average, Getty found consumers are willing to pay 10-15% more if the company selling a product or service does the following*…
• Use sustainable practices
• Are aligned with their values
• Have transparent business practices
• Care about the well-being, safety, and security of customers

Sustainability proves to be important to almost all demographics universally, but its visual representation is no longer just windmills and solar panels. The resale market is growing, as evidenced by the growth in companies like Thred Up, and consumers are getting behind sustainable items such as reusable water bottles and straws. 

What this means for financial services: Help your clients invest according to their principles and be able to educate them on impact investing options.

Being our authentic selves at all times, accepting the differences among us, and having empathy for others is what Getty means by Realness. Consumers are concerned about how companies are representing themselves in categories of inclusivity, transparency and authenticity. The way to describe this from a visual standpoint is “diversity” or “unretouched” or “not Photoshopped.” 
80% said they want companies to show people with different body shapes and types
76% of Gen Z and Millennials want to buy products and services from brands that showcase diversity compared to 61% of Gen X and Baby Boomers  

In part, people who feel strongly about Realness are more likely to look for brands that:
• Exemplify honesty and transparency
• Celebrate and practice diversity
• Aren’t faking being real

What this means for financial services: Understand your brand personality and promise and be true to it. Be honest and transparent and communicate regularly with your clients so they get to know the “unretouched” you.

Read full report here

 *Source: Getty Images Visual Report

Don’t Forget Your Most Important Audience

Organizations often strive for a high touch model, focusing on constant communication and contact with their target market along the customer experience journey. In doing so, however, the most important audience, internal staff, is often overlooked. If employees, the standard bearers for your firm, feel uninvolved and uninvested in the future of the firm, this impacts the end customer experience negatively. Fortunately, three simple tactics can help to ensure everyone is on the same page:

Communicate– Let your employees know what’s going on in the company. As much as possible, communicate major developments or future plans so that everyone feels like they are in the loop and know what’s ahead. This is particularly critical in the current environment. An article published by Human Resource Executive early in the pandemic noted that almost 70% of employees surveyed by mental health provider Ginger responded that COVID-19 was the most stressful time of their entire professional career, leading to increases in new prescriptions, as well as lost productivity.

Involve– While not everyone can be a decision-maker, choosing representatives from all levels of the company to be involved in key initiatives can help everyone feel like they have a voice. Considering a major change in technology? Make sure the evaluation and implementation workstream includes both the end users of technology as well as the big picture strategy people. Getting ready to move offices? Include representatives that will be sitting in cubicles as well as those in an office. Each brings an important perspective and helps to build buy-in and consensus.

Recognize-This is a time when many employees have been going above and beyond in all aspects of their lives, both personally and professionally. Celebrate career milestones firmwide, such as work anniversaries, promotions, and awards, and congratulate individuals on personal accomplishments (with their ok of course), such as a marriage, birth of a child, winning a contest or completing a challenging athletic or other endeavor. This demonstrates your sense of community and that you care about each other beyond work relationships.

Taking the time to engage this key market “segment” will help to energize your sales and marketing efforts to your clients, prospects, and COIs.

Bring in the Professionals

It’s beginning to sound like a broken record: M&A activity in the RIA market is booming with no signs of slowing. According to the Q1 2021 edition of Echelon’s RIA M&A Deal ReportTM, RIA deal activity reached (yet again) an all-time high. According to Echelon’s data, 76 M&A transactions were recorded in the quarter, besting the previous record of 69 deals in Q4 2020, which itself topped a record 55 deals in Q3 2020.

While the continued frothiness of this market may not come as a surprise to many, it is interesting to note who is responsible for the lion’s share of these transactions. The handful of buyers who dominated deal flow in Q1 share a common characteristic: they are largely professional buyers (platforms, consolidators, or aggregators) whose business models require continued M&A activity to drive their growth and expansion.

Overall, strategic buyers continue to proliferate and gain momentum, as strategic acquirers account for 46% of the deals announced in Q1 2021, compared to only 32% in 2020. Conversely, RIA-to-RIA transactions continue their comparative downhill slide as pure-play RIAs represent only 22% of the quarter’s transactions, down from 40% of all transactions in 2020.

Furthermore, professional buyers continue to acquire larger and seemingly more mature firms, while traditional RIAs are buying primarily smaller firms. RIA acquirer deal size averaged only $450 million AUM, while professional buyer deal size came in at $2.2 billion AUM in the quarter.

Clearly, the era of the professional buyer is upon us, with a multitude of firms including Mercer Advisors, Beacon Pointe and Focus Financial each executing at least four transactions in the first quarter. While we don’t expect RIA-to-RIA M&A activity to disappear any time soon, it’s clear that the competition to acquire larger, more mature firms is primarily among the professional acquirers. We expect RIAs looking to make a play on the larger end of the RIA spectrum to face stiff competition from a burgeoning group of professional firms with deep pockets and substantial resources devoted to sourcing and executing deals of significant size.

See What Erica Can Do

Capgemini’s recently released World Retail Banking Report 2021, focuses attention on the fundamental transition in banks to digitization accelerated by the pandemic.

The report claims that “banking as usual is evolving into a digital-first, seamlessly integrated banking experience via coexisting digital channels and modernized branches” that includes “a shift to enhance the customer journey by enriching last mile delivery” and “product centric innovation that gives way to customer-centric intelligent transformation.”

The schematic below outlines the elements of this digital-first shift.

There are many examples of steps being taken by leading banks to travel the road to digitization, but one recent initiative by Bank of America’s Merrill division is especially noteworthy. Early this month, Merrill launched a new reporting tool called Digital Wealth Overview. Digital Wealth Overview is a three-minute, personalized, interactive video presentation narrated by Merrill’s AI chatbot, Erica. It offers a real time aggregated view of a client’s banking and brokerage accounts and allows for the client to consume the information at their own pace and to drill down in areas where more detailed information is desired.

Digital Wealth Overview does not replace the advisor, but it does function as a client-centric enablement tool that deepens engagement by being accessible, interactive through natural language and responsive on the client’s terms. It also is a first step to bringing the bank/brokerage branch experience to the customer digitally as ancillary services are added to the platform.

While the Digital Wealth Overview tool will give Merrill a competitive edge for the moment, we expect other leading banks/brokerages to up their digital game as they strive to enhance their clients’ digital journeys. 

The Personal Touch

A lesson that has been reinforced in the last year, given the lack of in-person contact, is the importance of communications. From online presentations, webinars, podcasts, and emails to social media, wealth and investment firms have been leveraging the power of digital technology to stay in touch and keep clients informed on perspectives and thoughts on the markets, topical issues, and investments.

But while you’re letting clients know what you think the latest market move means or why it’s time to consider rebalancing their portfolio, it’s ok to get a little personal sometimes. Your clients miss you, and they want to “see” you and find out what you’ve been up to lately. So, mix in some communications about employees, perhaps around a theme, such as what people are reading to keep entertained, new hobbies undertaken during the pandemic, or how you are staying connected internally, along, of course, with photos to bring it all to life. Commemorate life events, weddings, new babies, and even new pets! Let your audience know when new employees have joined or someone has been promoted. All of these give a glimpse into your work and professional lives and show that hopeful events are happening.

And don’t be afraid to be a little whimsical every now and then. Some examples include National Pet Day (April 11th) or National Garden Month (April again). Put out a quick post and put your pets or beautiful gardens or plants on display, because who doesn’t love a playful pet or a calming landscape? Obviously, it’s a balancing act, and if there are too many personal or lifestyle communications, then your audience may not view you as “serious” about what you do. Focus on the professional, but sprinkle in the personal. Your clients and you will feel closer than ever!