Summary: Some private bankers are trying to better understand the goals of wealthy clients, then customising portfolios accordingly. Investments might be designed to fund children’s college education or for a philanthropic gift. Understanding the reasons behind allocations can help prevent clients from selling in a downturn, bankers say.
Key take-out: Financial advisors hope this fresh focus on asset allocation will stop clients from turning to low-cost robo-advisors.
Key beneficiaries: General investors. Category: Investment portfolio construction.
In order to fend off competition from low-cost technology-driven robo-advisors, wealth managers from Merrill Lynch to BNY Mellon are deepening conversations with wealthy clients to understand their money goals. It’s more than just droning on about asset allocation these days.
In February, for instance, UBS rolled out a new service for wealthy investors which it calls “goals-based wealth management.” UBS’ private bankers segment portfolios into buckets. The first, a liquidity portfolio, insulates a wealth creator’s immediate cash flow needs for three to five years holding, say, cash and short-term muni bonds. A longevity portfolio funds the liquidity bucket, which looks much like a traditional asset allocation. The remaining buckets are customised to fit each client. These portfolios might help an investor save for children’s college education or be slotted for a significant philanthropic gift.
Private bankers pitch this as a win-win for clients and advisors. Understanding the why behind portfolio allocations helps prevent a client from selling during a downturn, says Michael Crook, head of portfolio and planning research at UBS. “It has this behavioural finance component, but it’s more than that,” Crook says. “It’s about getting the right asset allocation for where a client is in their lifecycle.” Advisors are then left to focus on performance and can justify their added fees.
That last point is important. According to a recent Fidelity survey, 46% of Gen-X and Gen-Y investors think professional financial advisors are too costly. So-called robo-advisors, like Betterment, Personal Capital and Wealthfront, are gaining traction in the wealth management industry for their simplicity and relative cheapness. These online-only providers invest a client’s dollars in low-cost exchange traded funds and charge as little as 15 basis points annually to perform functions like rebalancing to a predetermined asset allocation.
That’s appealing to some investors – and shaking up the industry, too. According to Fidelity, of the Gen-X and Gen-Y “millionaires of tomorrow” in their survey, 29% were familiar with digital advisors and 7% already work with one today. Through the first nine months of 2014, the fifteen largest robo-advisors, grew 115% lodging $4.3 billion in assets under management, according to financial industry consultant Aite Group. That’s just a tiny sliver of the wealth management industry. As of June 30, 2014, Penta’s Top 40 Wealth Management Firms have $5.6 trillion in assets for accounts above $5 million. Still, new robo-broker offerings are springing up, and even long-standing financial advisories like Charles Schwab are getting a piece of the action.
These online wealth managers are creating a “race to zero” in terms of fees, argued Scott Welch at a recent CFA Institute conference in New Orleans. Welch is a former chief investment officer at multi-family office Fortigent, which also licenses its technology platform to other investment advisors. “These [digital] providers are commoditising aspects of the job and sometimes do it better than the average broker,” Welch said at the CFA Institute event.
Welch’s solution is also the sort of goals-based investing UBS is offering. He argues that this approach would help advisors justify their 1% annual management fees while showing clients “what they really want to know” about their portfolio – whether they are on track in saving for retirement or not. That’s time better spent, he says, rather than focusing on “the one red line in a performance report that makes up just 3% of their portfolio.” If wealth managers don’t demonstrate why they deserve their payments, disgruntled clients could flee to robo-advisors.
Our take: Robo-advisors will increasingly serve the mass affluent crowd while private bankers take on the complex issues of the super-wealthy. These folks are willing to pay up for that advice.
This article has been reproduced with permission from Barron's.