Scale vs. Service: How technology can allow wealth managers to personalize and deliver “outcome-oriented advice”
This is guest blog by William Trout, Director of Wealth Management at Javelin Strategy & Research, ahead of the Wealth Management EDGE, May 31 - June 3.
Operationalizing goal-based planning
Personalization has become the holy grail of modern wealth management. Investors and advisors want access to bespoke products and services, as well as a user experience configurable to their needs. Access to such an experience can fulfill the need to feel special, to enjoy benefits or advantages not available to others. A yearning for exclusivity long has fueled retail investor interest in private equity, for example.
A personalized user experience can also serve as a leg up or source of competitive advantage. For the advisor, a configurable dashboard or workflow can enable greater efficiency. Client-facing portals allow investors to tweak assumptions, visualize scenarios and relay shifting investment preferences. Such a preference can be as narrow as the realization of tax gains, or as comprehensive as the realization of an environmental, social, or governance (ESG) agenda within the portfolio.
From an investment management standpoint, the rise of direct indexing constitutes the culmination of client demands for personalization of the portfolio. These demands reflect the demands of a new and socially-conscious generation of investors, and the alarm with which investment managers view the commoditization of portfolio manufacturing and maintenance functions in general.
Ascendance of Direct Indexing
Direct indexing, for those unfamiliar with the concept, enables the replication of the market-tracking function of the S&P 500 or other index, but without the mutual fund or ETF packaging. Ownership of individual securities makes it possible to replace unpalatable stocks with securities that have comparable performance characteristics, but are otherwise more appealing. Calibration of the portfolio to a specific client mandate is achieved by the use of rebalancing tools that enable management to tax or other relevant criteria, such as ESG or the presence of concentrated legacy positions within client holdings.
Ownership of individual securities makes it possible to replace unpalatable stocks with securities that have comparable performance characteristics, but are otherwise more appealing.
The rise of direct indexing has been largely a US phenomenon, one that reflects built-in opportunities for tax-loss harvesting. That said, direct indexing is gaining ground in non-US markets, such as Japan, with investor desire for built-to-order portfolios (composed of funds and/or individual securities) a driver. As trading costs dwindle, and fraction-share trading capabilities expand, interest in direct indexing will accelerate. ESG represents a particularly appealing use case in Europe, where interest in socially responsible investing among retail clients is well established.
Not all advisors will be fervid adopters, however, particularly as investor focus expands beyond interest in climate-related issues (the “E” pillar) to social (“S”) and governance (“G”) concerns. Lack of awareness or understanding can make it difficult for some advisors to adapt investment strategies to ESG concerns; instead, they prioritize alpha or apply their personal understanding of ESG to portfolio management. Multi-factor ranking engines from vendors like Morningstar-owned Sustainalytics and Aladdin-aligned Clarity AI help solve this problem by enabling advisors to customize positions and auto-set trades to specific client requirements.
Portfolio management, of course, reflects only a slice of investor needs, which center more broadly on the accrual, management, and disposition of wealth. A holistic approach to wealth management will incorporate micro-savings, analytics, and automated money movement as part of a proposition that embraces all sides of the client balance sheet, including credit and insurance.
The complexity involved in shepherding the client along his or her personal wealth journey will require major investment in operational infrastructure, not least around data. Generating prompts and a coherent road map for the investor requires a client-level view of income, spending, account balances, and savings, as well as an understanding of investor liquidity across taxable and retirement accounts. Financial planning software will provide a framework for marshalling this information, i.e., as part of a long-term plan.
Capturing and sanitizing information is another story, one that requires different tools. Increasingly, limitations on quality and availability of internal and external data sources are hamstringing wealth managers’ abilities to deliver compelling advice. These sources range from data captured by account aggregation software to alternative data used to enable ESG ratings. Other commonly accessed data information sources include data from clearing firms, custodians, trust accounting systems and product providers such as insurers.
Capturing and sanitizing information is another story, one that requires different tools. Increasingly, limitations on quality and availability of internal and external data sources are hamstringing wealth managers’ abilities to deliver compelling advice.
The proliferation of API’s in recent years has presented an opportunity to make progress in terms of both access to information and best-in-class, third-party tools. In the past, integrations were not always what they promised. Choppy data flow, fragile flat-file integrations and re-coding requirements undermined the objective of plug-and-play. Streamlined API protocols and API marketplaces like those offered by Fidelity Investments, InvestCloud, and Riskalyze offer a means to attack these challenges, even in the face obstacles thrown up by firewalls and consultant-configured enterprise platforms.
The Emerging Data Wars
Some sort of unified data environment will be a prerequisite for robust data consumption. Cloud-based data warehouses like Snowflake and Amazon Redshift represent a step up on traditional, centralized databases, which are static and lack the flexibility to support modern analytics requirements. These include the ability to access and query data on an ongoing, even real-time basis. Leading advisor technology platform Orion Advisor Solutions recently announced it planned to use Redshift to accelerate reporting capabilities and supercharge the flow of information to advisor dashboards. In addition to supporting data oversight and governance, centralization of storage within Redshift will provide Orion access to context-based analytics and machine learning capabilities offered via Amazon Web Services.
Integration of onboarding, risk profiling, compliance and other third-party systems and tools into a unified data environment will also support need-based selling. “Next Best Action” (NBA) platforms have met with skepticism by many advisors, but offer a powerful use case, insofar as they can enhance (rather than replace) the human connection. These platforms consume data from discrete tools (e.g., portfolio management systems and text and messaging apps) as a means to prompt or nudge the advisor, typically via the CRM. Cloud-based data platforms offer the enterprise an alternative to the CRM-centric approach, in that they more directly address the scalability involved in rolling out NBA. Implications are equally profound at the client level, in that the real-time capabilities of these platforms help operationalize goal-setting. Portfolio manufacturing and planning become tightly and inextricably linked once the set-and-forget-it approach is replaced by rebalancing-on-the-fly.
Hear more from William during his session, Scale vs. Service: How Technology Can Allow Wealth Managers to Personalize the Delivery of Planning, Investments and “Outcome-Oriented Advice” at Wealth Management EDGE this June.