6 Ways Investors and Their Advisors Can Align in 2020

Investors, as you look ahead to 2020, you’re no doubt wondering where the opportunities will be in the New Year. What will the smart money be doing? What will be driving affluent investors’ and high new worth individuals’ (HNWIs) investment decisions?

What are their financial advisors looking at and recommending?

Here are a few ideas… but first some context.

After a stretch of almost 10 years of good performance, it’s natural that investors are becoming nervous and starting to worry about what the future holds.

The big question on many investors’ minds: How long can the longest bull market since World War II continue?

There are countless unknowns that may introduce greater volatility into the market:

  • 2020 is a presidential election year. Will President Donald Trump breeze to re-election? The opposition is out in force and swinging hard against both domestic and international policies.
  • It’s been more than three years since the UK Brexit vote, and still no resolution. Will Prime Minister Boris Johnson push through a “No Deal” Brexit in 2020? What will be the economic consequences for the UK and EU?
  • As the United States appears to be pulling back in the Middle East, who will fill the vacuum? What will Turkey and Russia do? Will there be a move toward stability or greater unrest?
  • As President Trump continues to set new bilateral trade deals, what will be the long-term impact? Will the US trade balance equalize? Will more manufacturers return to the United States?
  • Will recession show its fangs in 2020? And if so, will it be a global recession? While there is no real consensus, among many economic prognosticators the real unknown is “when,” not “if.”

Expect More Investors to Choose Not to Go It Alone

During the past 10 years, an increasing number of investors have been going it alone. Many savvy amateurs have felt confident making investment decisions without the input of a financial advisor. Others simply claimed that advisor fees were too high and not delivering the value.

With uncertainty, however, expect to see more investors turning back to their advisors for insight and strategies in 2020.

Bob Dannhauser, CFA and head of global private wealth management at the CFA Institute has several recommendations for investors and advisors alike:

“First, as an advisor, I’d focus on investors who are worried about how changing conditions could effect their ambitions for their wealth. Investors have had a sustained bull market on their side in recent years and it has been relatively easy to achieve good results, but in dynamic times, investors will value an advisor who can navigate effectively, manage risks, and keep investors on track.  Some have argued that advice is overvalued in an era of inexpensive passive products, but we think the true value of expert advice will shine through in challenging times.”

“It goes against the narrative that advice is overvalued where passive positions are needed. But these people will need expert help repositioning their portfolios to protect their wealth.”

In Dannhauser’s opinion, the sooner advisors reconnect with investors the better.

“While no one knows if 2020 will be the year the market corrects or we go into a recession, there’s enough unease among investors that this is the time advisors need to be talking with their clients. Not after disaster strikes. Too often the amateur panics and sells at the wrong time.”

Dannhauser went on to suggest some of the trends he expects to see play out in 2020.

Purpose-Driven Investing Will Continue to Grow

Whether you call it sustainable, impact or environmental, social and governance (ESG) investing, investors are developing a taste for this purpose-driven investment. And interestingly enough, this is one market sector where affluent investors—particularly Millennial investors—have led the way.

“CFA Institute surveyed high net worth investors in 2018, and while just 11% of those they surveyed cited sustainable investment as an investment priority, the number jumped to 30% when just younger (aged 25-39) respondents were considered. “For anyone who thought incorporating environmental, social, and governance factors and considering societal impacts of investing was just a fad, the evidence is clearly suggesting that’s not the case” says Dannhauser. “While the quality of how this lens is applied is still pretty variable, the idea that these risks and opportunities are very much worth accounting for is here to stay.”

At the same time, however, roughly 28% to 34% of wealthy investors said that whether or not a wealth management firm offered sustainable investment techniques and solutions might influence their decision to continue working with the firm.

Advisors are recognizing that one of the things that is attractive about this market sector is the fact that it is proving to offer strong, steady growth and relatively little volatility, and 2020 will be the strongest year to date.

Impact investing’s appeal, of course, is the opportunity for concerned citizens to put their money where their heart and conscious are. Among younger investors, it’s about investing the way they live and helping to capitalize on socially responsible ventures in a wide range of sectors, including microfinancing, education, renewable energy and sustainable agriculture.

Early on, much of the impact investing focus was on divestment strategies, which arguably had relatively little real impact on climate change, reducing a company’s carbon footprint or changing the world.

Today investors are looking more to:

  • Disruptive technologies that have the potential to change the status quo,
  • Creative new strategies for solving problems, and
  • Fresh opportunities in new markets and areas of the world.

Impact Investing By the Numbers

While not the most aggressive investment sector, sustainable, purpose-driven investing is far from a losing venture. What it lacks in high returns, it makes up for in impact—something younger investors and a growing number of HNWIs want.

According to Morgan Stanley’s 2017 Sustainable Signals report, across the total population of survey respondents, 75% were either “very interested” or “somewhat interested” in sustainable investing. Among Millennials, however, 38% were “very interested” and 48% were “somewhat interested,” a total of 86%.

This is a diverse market sector that increasingly appeals to banks, institutional investors, government, family foundations and individuals. Without being cynical, they are looking good while doing good.

By the end of 2018, the Global Impact Investing Network (GIIN) estimates the impact investing market at $502 billion. It’s continued good performance will fuel more growth—pegged at around 13% or 14% in 2018. According to GIIN data, 90% of respondents reported that they found investment performance—both financially and in terms of impact—to be in line or to exceed their expectations.

Interestingly, according to GIIN, about two-thirds of respondents seek out impact investments exclusively. At the same time, although the returns and asset classes range from below-market to market-rate investments, 66% are looking for market-rate returns.

Investors Looking for a More Comprehensive Value Proposition

A forgiving Bull Market isn’t the only thing that led investors to go it alone. Many felt that the traditional value proposition that focused on performance wasn’t enough.

“Sustainable investing isn’t the only area where investors and their advisors have had divergent viewpoints,” says Dannhauser. “In fact, as part of the effort to bring investors back into the fold, advisors need to close the gap with investors and revisit some of the long-accepted truisms. There may well be opportunities to better serve investors.”

Therefore, whether creating a differentiated value proposition, identifying new business opportunities or trying to boost investor loyalty, advisors need to take into consideration what investors consider important.

They need to align their priorities with those of their clients… while still delivering the benefit of their experience and expertise.

Referring again to the findings of the CFA Institute/Scorpio Partnership study, The Value of Premium Wealth Management, some of the points of divergence have included: philanthropic services, alternative investments (e.g., hedge funds and private equity), credit advisory services and brokerage services that allow direct investing in stocks and ETFs.

While advisors generally have a narrower view of financial business, investors increasingly want a value proposition that addresses the full spectrum of their financial lives. They want one-stop shopping from a single advisor who can strategize as well build the ideal financial plan.

Rethinking Income in the Retirement Portfolio

Another point of divergence between advisors and investors nearing or in retirement is how to build income into the retirement portfolio. As Dannhauser points out, “The old truism of gradually shifting assets to fixed income as you get older doesn’t work nearly as well in a sustained, low-rate environment.”

Traditionally, investors and advisors alike have approached retirement planning as a strategy to save enough money to simply live on the interest and dividend income without touching the principle—clipping coupons.

That may no longer be the best solution. With more people living longer and staying active throughout retirement, your clients may need more income during retirement. And given interest rates, it may be difficult to save enough to rely solely on interest and dividend income from conservative assets.

Investors are eager for thoughtful advice for alternatives. From the advisor’s perspective, the more sophisticated ones will know to take into account their clients’ risk vs. need (i.e., the amount of risk they need to assume to be able to grow their clients’ assets to achieve their goals). Experienced advisors will also consider behavioral risk tolerance and risk capacity (i.e., the investor’s ability to tolerate interim losses without endangering liquidity needs or realization of goals). 

These considerations might lead advisors to encourage investors to consider more or less portfolio risk, and perhaps to consider alternatives to investment-grade fixed income for a portion of the portfolio—perhaps munis, private credit instruments or some other alternative risk-managed structure. Such analysis and structuring might be too sophisticated and out of reach for going it alone.

The need to work together should motivate investors to seek expert advice, thus turning a point of divergence into a true alignment.

Dannhauser observes “old-school advisors pitched products that sometimes missed the mark in addressing clients’ larger needs. Modern advisors are taking a much more holistic approach and working on strategies that bring together investing, planning, and the fundamental aspirations that people have for their wealth.  For those considering working with an advisor, this comprehensive, strategic approach should be attractive.”

Advisors can work with investors to rebalance the asset allocation of their retirement funds to continue growing the retirement portfolio conservatively but in alignment with what they need to live.

Investors who follow this strategy will also want tax-planning strategies to minimize taxes on the investment income that will be liquidated for living expenses.

Rethinking Whole Life Insurance

Among advisors, the smart money has been on buying term life insurance for financial protection and relying on IRAs, 401(k) plans, stocks, bonds and mutual funds for investment purposes.

The term life premium is small and designed to provide financial protection over a specified period of time. Permanent insurance—most commonly whole life policies—is an expensive, undiversified investment tool with high premiums and low payouts, making it a poor option for most people.

That was the traditional thinking. And it’s still true in many cases.

But for affluent investors and HNWIs who have maxed out contributions to their IRAs and 401(k) plans, whole life could be a viable investment in 2020 with the added benefit of providing insurance. Similarly, risk-averse investors who don’t need higher payouts may also favor the addition of a whole life policy. And because premiums are fixed and guaranteed not to increase, whole life may provide a hedge against inflation—a potential plus when the future is uncertain.

Advisors who are not experts in insurance can align with specialists who will work to structure the best policy and help integrate life insurance into a comprehensive financial risk plan. There are even advisory firms that specialize in turnkey insurance investment services.

The year ahead promises to be interesting, at the very least. It could be another year of growth. It could usher in a recession. Or it could present the investor with greater volatility. The best strategy is for investors and advisors to work together to make 2020 as rewarding and safe as possible.

Going in the new year, investors should consider:

  1. Returning to the fold—Investors should commit to working with an experienced financial advisor before their fortunes change…and before the market turns down. A sophisticated advisor will analyze the signs and help clients prepare accordingly.
  • Seeking alignment—While advisors have experience and expertise, you have opinions—particularly about your goals. Look for an advisor who differentiates the value proposition to align with your goals and objectives.
  • Signing with advisors willing to remain open to new ideas—Markets, investment products and services change. This is why investors need current advice. Look for advisors who have the spirit to be remain at the top of their game and actively listen to their clients. The advisor willing to rethink market truisms may open new opportunities.

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