In Wealth Management

It’s been a crazy year. In the midst of market changes and ongoing uncertainty, the wealth management industry has experienced three impactful trends.

Are any of these impacting you? Read on to find out.

1. Portfolios out of sync with personal investment risk tolerance.

Investors have tended to react to the extraordinary circumstances of this year and the volatility in the capital markets in one of three ways:

1. They’ve realized their portfolio has a higher risk profile than they do.

The volatility of the market this year has led some individuals to reevaluate their risk tolerances. These people may have had high-risk, high-reward investments as a heavy percentage of their portfolio but have realized over the course of the year that their real risk tolerance is (much) lower. They’ve responded to the new reality by “de-risking” their portfolios to prevent future losses.

2. They’ve embraced investing in a volatile environment.

On the other hand, some individuals have viewed the market volatility as an opportunity and have used this year to increase portfolio exposure to high-risk, high-reward investments. They’ve responded to the current volatile capital market environment by actively investing in certain securities for the chance to reap both long-term and short-term gains.

3. They’ve taken no tangible action because of uncertainty.

For some, Fear Of Missing Out (FOMO) has set in, causing an intense desire to do something with some degree of financial risk (and reward), but these investors don’t know what to do and are afraid of making the wrong move.  Others, seeing their portfolios yo-yo, feel like their financial future is not secure, but they don’t know if they can “afford” to be more conservative.  In both cases, no investment strategy changes are made.

For wealth managers, having clients understand their personal risk tolerances and balancing those preferences with their financial plan is many times the single biggest challenge.  Bold financial moves often conflict with balanced, long-term financial planning. Some investors have an appetite and ability to take on financial risk.  For others, this level of risk taking is not prudent.  Likewise, some investors are very cautious and mistrustful of capital markets, however they need to take investment risk to enable higher long-term financial returns that lead to a secure retirement.  The consulting element of wealth management will be increasingly important in this environment.

2. Technology driven efficiencies.

Many of the time-consuming and cumbersome parts of financial service are being eliminated by technology. New financial technology (“fin tech’) is changing how quality wealth management can be delivered. However, it is not always true that being more efficient translates into being more effective.

Here are four ways I see technology impacting wealth management:

Location-independent consulting.

With video conferencing now ubiquitous, human wealth management advisors have been presented with an opportunity: Location-independent consulting.

In other words, it’s possible to offer investors personalized service without requiring face-to-face meetings in the same locale. This enables a greater degree of flexibility in serving a client’s needs regardless of time of day, time-zones, and expertise constraints.  This may lead to increased client choice to work with an adviser with a particular skill set or level of trust and reduce the advantages of geographic proximity.

Documentation.

Technology has improved the ease with which important document & forms can be signed, delivered, and accessed. Increasingly, wealth management clients view reports and portfolio information from inside of secure portals. Even compliance documents are increasingly digital.

Reducing the time (and resources) spent chasing paper is a major positive development in the industry, in my eyes.

Artificial intelligence.

Artificial intelligence has been a buzzword for years now, but it’s increasingly playing a real role in providing wealth management decision making.

For instance, Deloitte notes that, “in 2017, BlackRock announced that it would incorporate internal trade data into its existing market liquidity model, and apply machine learning techniques to more accurately calculate the cost of redemptions and gauge liquidity risk.”

More recently, the investment firm set up a new research center that’s entirely dedicated to new research in AI. At a smaller scale, new technologies are entering the market that are driven by machine-learning algorithms and can be used by independent wealth managers – or even by consumers.

Based on the increasing amount of data available and the increasing power of artificial intelligence, this trend seems likely to continue, particularly for accounts looking to squeeze costs out of the system.

Robo advisors.

Robo advisors often brand themselves as being powered by AI.  Their model is dependent on some investors’ preferences for low-cost service.

As Investopedia notes, robo advisors “are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest client assets.”

In a post-pandemic world, these options can have appeal due to cost advantages. But they, by definition, do not offer the same level of tailored service of a wealth management team.

3. The increased importance of a personal touch.

Finally, I believe that 2020 has provided a reminder of the importance of a personal touch to wealth management.

The data bears this out; people have more confidence in personal advisors. For example, a March 2020 survey by NerdWallet found that, “Given the option, 84% [of investors] would rather work with a human financial advisor to invest their money compared with 16% who would prefer to use a robo-advisor.”

It makes sense. A personalized, tailored approach is the best means of meeting individual goals. Robo advisors are not structured to provide the kind of behavioral coaching support necessary during periods of volatility.  Large wealth management firms often staff smaller accounts with junior level support, who may not have the experience needed to address individualized tax advice, timing of security sales, savings strategies, and estate planning.  Fit is incredibly important.

This year, more than ever, has shown the importance of working with a wealth management advisor that you truly trust.

Ready to Plan for the Future?

I believe that the trends discussed here have created a unique environment for clients who work with personal wealth management advisors. The technology available on the market, in combination with the personal touch of a trusted wealth manager, enables the possibility for customized and effective financial strategies like never before.

If you’re looking for wealth management in Seattle and are ready to review your options, I’d love to hear from you.

A career spanning 30 years of financial service experience has given me a deeper understanding of the risks and rewards of investing and familiarity within a broad range of individual financial contexts.

Schedule a review of your portfolio today, and let’s take the first step toward figuring out what’s best for you. If you’re ready to grow your assets with thoughtful investment advice, we may be a good fit.

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