by Tony Davidow, CIMA
The financial services industry is at a key inflection point. Wall Street firms are under scrutiny due to built-in conflicts of interest, and robots threaten to replace financial advisors. Financial advisors are trying to remain relevant and valued by investors, and their fees are coming under pressure. Many are evolving to become wealth advisors which requires an expanded set of capabilities. There have been a plethora of new products coming to the markets, and advisors and investors need help using them effectively.
In the current market environment, wealth advisors need to evolve their approach to investing, to better serve their clients, and Goals-Based Investing provides a framework for addressing client needs. Wealth advisors need to expand the number of asset classes to identify investment opportunities and to adequately diversify the risk in the portfolios they manage. “Modern Portfolio Theory” is no longer modern and even “Post-Modern Portfolio Theory” is passé. The financial markets are more interconnected than they have ever before: what happens in China impacts the global markets. Markets respond to such issues as geopolitical risks, demographic shifts, technological advances, and social tensions around the world.
Fortunately, investing products have evolved significantly over the past few decades—which makes it easier for advisors and investors to access various segments of the markets and unique asset classes like hedge funds, private equity, private credit, and real assets. Exchange-traded funds (ETFs), registered funds, and feeder funds have helped to democratize investing. Goals-Based Investing considers some of the structural trade-offs of new products coming to the market; and examines how wealth advisors can effectively incorporate these new tools when building and managing their clients’ portfolios. Wealth advisors need to evolve their practices and value proposition to keep pace with the rapidly evolving industry, or risk becoming commoditized and left behind.
Responding to these challenges
I have been researching, writing, training, and speaking to tens of thousands of advisors over the years on such diverse topics as working with high-net-worth investors, advanced asset allocation, factor investing, and the role and use of alternative investments. For most of my 35-year career, including stints at Schwab, Guggenheim Investments, Morgan Stanley, and Kidder Peabody, among others – I have led with education so both advisors and investors are better informed. I have worked directly with hundreds of high-net-worth and ultra-high-net-worth families to develop and implement asset allocation strategies; and I began my career working for a large Family Office.
Throughout my career, I have sought out those wiser than me, and often challenged conventional wisdom, whether it pertains to investment theory or how to engage clients. I have had many mentors who have shaped the way that I viewed the world; and in turn, I have mentored many young professionals on their journey. I have been fortunate to meet many Nobel Laureates over the years including Harry Markowitz, Bill Sharpe, Eugen Fama, Robert Merton, Richard Thaler, Daniel Kahnemann, and Myron Scholes. I have been in awe of their genius, and thankful for their contributions, as the industry has evolved from academic theory to practical implementation.
These experiences have shaped my philosophy and informed the way that I engage wealth advisors and the clients they serve. Goals-Based Investing provides me with an opportunity to share my experiences and perspective with advisors and investors. It is written for advisors who are lifelong learners – seeking to evolve and respond to this ever-changing industry. My book also provides valuable lessons for HNW investors who chose to invest on their own.
Goals-Based Investing provides a framework for engaging high-net-worth investors and helping them achieve their goals and objectives. It addresses the expanding toolbox available to advisors and investors; and provides guidance regarding how to use it appropriately in the current market environment.
HNW families are focused on more than their portfolios. They are focused on meeting their family’s goals; tax planning strategies; transferring wealth to future generations; funding charitable endeavors; and setting up trusts to protect their wealth, among other issues. They likely invest in hedge funds, private equity, private credit, and real assets among other complex investments. HNW families may have an affinity for sustainable investing, aligning their portfolio and purpose.
Goal-Based Investing is designed to provide a framework for addressing family needs in an ever-involving environment and to bring some of these concepts to life, I interject personal experiences and case studies.
The above article originally appeared here.