New portfolio strategies and the 60-40 debate
Alternatives gained ground recently as inflationary pressures and swaying markets led investors to lose confidence in the traditional 60-40 stock-bond portfolio mix to provide the desired diversification and returns. However, 71% of advisors say they expect the 60/40 stock and bond portfolio to continue to provide returns similar to what it’s seen historically, according to the 2023 Trends in Investing survey.
The study also said that among advisors recommending or investing in alternatives for clients, 55% say they do so because the products provide diversification, and 41% cite risk mitigation. However, the same study said advisors’ concerns about alternatives include the lack of liquidity (48%), fees and expenses (41%), and identifying suitable opportunities (38%).
Shifting demographics opens up opportunities
According to a recent report by Acuity Knowledge Partners, intergenerational wealth transfers of $84 trillion are expected through 2045 in the U.S. Staying ahead of the curve in capturing the younger client base could be a key business accelerator for wealth managers.
Younger investors are more likely to switch into active investments during volatility, with 50% of respondents increasing allocations compared with 22% of baby boomers, according to the 2023 EY Global Wealth Research Report. In addition, women represent the next phase of growth in wealth management. According to Morgan Stanley, women now control a third of U.S. wealth, and by 2030, that number is expected to balloon to about $30 trillion.
The advantages and momentum of direct indexing
Direct indexing strategies also are reaching the mainstream and gaining the attention of mass affluent investors. According to Cerulli Associates, direct indexing assets are expected to grow at an annualized rate of 12.3% over the next five years – outpacing ETFs, mutual funds, or retail separate accounts – and make up 33% of the retail separate account market by 2026.
A direct indexing strategy can provide greater customization than can be achieved with ETFs or mutual funds while helping to minimize taxes through tax-loss harvesting, trim highly appreciated stock positions, plan charitable giving, ESG, and values-based investing, customize fixed-income ladders, and more. In addition, it can provide advisors with yet another way to add value while freeing up time to focus on financial planning and client servicing.
Making a difference through personalization and scale
Most (55%) of firms’ relationship managers report an increasing demand for personalized services and engagement. Many tasks related to client-centric services can be automated through updated technology and process automation, improving efficiency. Automating and digitizing manual processes can reduce costs and errors, allowing advisors to focus on more valuable tasks and client interactions.
Advisors who customize their services while also being able to scale quickly will be able to meet diverse client needs more efficiently. An effective rebalancing solution should offer flexibility in modeling, considering factors like restrictions, compensation, and target overrides, while also handling alternative assets. Regardless of the complexity of clients and portfolios, the rebalancing process should be seamless and simplified.
Powering today – and the future
Investors will need to position their portfolios for the challenges and opportunities ahead and are now seeking professionals who can assist them in navigating uncertain times. That means wealth managers and advisors must adapt faster than ever amid unprecedented levels of volatility and global uncertainty, changing how people invest in the short and long term.
Ongoing market volatility has highlighted the importance of owning a diverse investment portfolio that caters to different needs like risk management and inflation protection. Today’s clients demand greater transparency, reduced tax burdens, wealth and asset preservation, socially responsible investing, and the flexibility to include alternative investments. Advisors who can offer diversified portfolios to meet various goals will stand out.
With the increasing popularity of alternative and thematic investments and the need for greater personalization, implementing an advanced rebalancing solution is crucial to reduce friction in service and scale—allowing advisors to dedicate more time to delivering value to clients.