Embracing investment evolution
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:
- 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.
- 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.
- 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.
- 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.
- 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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1. Enhancing Investors Trust: 2022 CFA Institute Investor Trust Study.
2. 2022 Fidelity Investor Insights Study.
3. Excerpted from "The value of getting personalization right—or wrong—is multiplying," November 2021, McKinsey & Company, www.mckinsey.com. Copyright © 2022 McKinsey & Company. All rights reserved. Reprinted by permission.
4. Thematic Investing: What Is It, and How Should Investors Think About It? Fidelity Investments, June 2021.
5. Thematic Investing: Help your clients enhance their portfolios and align their investments to what matters to them. Fidelity Investments, 2023.
6. The Advisor's Guide to Digital Assets. Fidelity Investments, December 2022.
Digital assets are speculative and highly volatile, can become illiquid at any time, and are for investors with a high risk tolerance. Investors in digital assets could lose the entire value of their investment. Digital assets are not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). Investors in digital assets do not benefit from the same regulatory protections applicable to registered securities.
Investing in digital assets, such as bitcoin, is speculative and may involve a high degree of risk. Digital assets can become illiquid at any time and are only for those investors willing to risk losing some or all their investment and who have the experience and ability to evaluate the risks and merits of an investment in bitcoin.
Semi Transparent Active Equity ETFs are different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. These ETFs will not. This may create additional risks for your investment. For example: You may have to pay more money to trade the ETF's shares. These ETFs will provide less information to traders, who tend to charge more for trades when they have less information. The price you pay to buy ETF shares on an exchange may not match the value of the the ETF's portfolio. The same is true when you sell shares. These price differences may be greater for these ETFs compared to other ETFs because they provide less information to traders. These additional risks may be even greater in bad or uncertain market conditions. The ETFs will publish on their website each day a "Tracking Basket" designed to help trading in shares of the ETFs. While the Tracking Basket includes some of the ETF's holdings, it is not the ETF's actual portfolio. The differences between these ETFs and other ETFs may also have advantages. By keeping certain information about the ETFs secret, these ETFs may face less risk that other traders can predict or copy their investment strategy. This may improve the ETF's performance. If other traders are able to copy or predict the ETF's investment strategy, however, this may hurt the ETF's performance. For additional information regarding the unique attributes and risks of these ETFs, see section below.
Additional information for Active Equity ETFs: ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses. The objective of the actively managed ETF Tracking Basket is to construct a portfolio of stocks and representative index ETFs that tracks the daily performance of an actively managed ETF without exposing current holdings, trading activities, or internal equity research. The Tracking Basket is designed to conceal any nonpublic information about the underlying portfolio and only uses the fund's latest publicly disclosed holdings, representative ETFs, and the publicly known daily performance in its construction. You can gain access to the Tracking Basket and the Tracking Basket Weight overlap on Fidelity.com or i.fidelity.com. Although the Tracking Basket is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the Fund at or close to the underlying NAV per share of the Fund, there is a risk (which may increase during periods of market disruption or volatility) that market prices will vary significantly from the underlying NAV of the Fund; ETFs trading on the basis of a published Tracking Basket may trade at a wider bid/ask spread than ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility, and therefore may cost investors more to trade, and although the Fund seeks to benefit from keeping its portfolio information secret, market participants may attempt to use the Tracking Basket to identify a fund's trading strategy, which, if successful, could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the Fund and its shareholders. Because shares are traded in the secondary market, a broker may charge a commission to execute a transaction in shares, and an investor may incur the cost of the spread between the price at which a dealer will buy shares and the price at which a dealer will sell shares.
Alternative investment strategies may not be suitable for all investors and are not intended to be a complete investment program. Alternative investments are investment products other than the traditional investments of stocks, bond, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, real estate, and promissory notes. Some of the risks associated with alternative investments are: Alternative investments maybe relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis maybe required before buying. Costs of purchase and sale may be relatively high.
Fidelity Model Portfolios are made available to intermediaries on a non-discretionary basis by Fidelity Institutional Wealth Adviser LLC (FIWA)®, a registered investment adviser, or by Fidelity Distributors Company LLC, a registered broker-dealer. Investment performance of the Fidelity Model Portfolios depends on the performance of the underlying investment options and on the proportion of the assets invested in each underlying investment option over time. The performance of the underlying investment options depends, in turn, on their investments, which will vary day to day in response to many factors. Asset allocation strategies are subject to the volatility of the financial markets, including that of the underlying investment options' asset class.
The 2022 Fidelity Investor Insights Study was conducted during the period August 8 through September 2, 2022. It surveyed a total of 2,490 investors, including 673 millionaires and 1,520 investors with advisors. The study was conducted via an online survey, with the sample provided by Brookmark, a third-party firm not affiliated with Fidelity. Respondents were screened for a minimum level of $50K in investable assets (excluding retirement assets and primary residence), with additional quotas by age and affluence levels.
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice, and you are encouraged to consult your own lawyer, accountant, or other advisor before making any financial decision. Investing involves risk, including risk of loss. Specific securities mentioned are for illustrative purposes only and must not be considered an investment recommendation or advice.
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