Investors and financial advisors alike want to understand the fascinating trends that are transforming the investment industry. Recently, our Chief Market Strategist and Head of Franklin Templeton Investment Institute, Stephen Dover, hosted a roundtable discussing trends at the intersection of innovation and goals-based investing with Yaqub Ahmed, Head of Head of Investment-Only Division-U.S., U.S. Defined Contribution, U.S. Insurance & Sub-Advisory; Adam Petryk, Head of Solutions Strategy and Development, Franklin Templeton Investment Solutions; and Craig Ramsey, Chief Operating Officer, AdvisorEngine.
Finding themselves at the intersection of innovation and goals-based investing, investors and financial advisors alike want to understand and take part in the fascinating trends that are now transforming the investment industry. Recently, I discussed these trends and more with Yaqub Ahmed, Head of Investment-Only Division-U.S., U.S. Defined Contribution, U.S. Insurance & Sub-Advisory, Franklin Templeton; Adam Petryk, Head of Solutions Strategy and Development, Franklin Templeton Investment Solutions; and Craig Ramsey, Chief Operating Officer, AdvisorEngine. Key points:
- Changing demographics with major shifts from baby boomers, millennials, and subsequent generations are shifting expectations for personalized and digitalized customer experiences.
- Not surprisingly, the client experience is driving advances in personalization and digitalization. Investors are influenced by all the experiences they have in their daily lives, not just those they have with their financial advisors.
- Many investors and financial professionals are embracing the power of technology in a man-and-machine framework. This approach is faster, increases efficiencies, and delivers more personalized advice and communications to more investors.
- Digitalization and innovative technologies continue to proactively focus on enhancing the client experience while increasing operational efficiencies, by harnessing the power of data and systematizing complex tasks. Decentralized finance (DeFi) and democratization of asset technologies, such as blockchain, will accelerate investing for more investors and advisors, unlock opportunities for individuals that previously may have not had access to investing; facilitate investments and advisors’ practices geographically to the mass affluent; and enhance just about every client experience to meet personalization needs everywhere.
As early investors in nascent technology, we believe personalization at scale is practical and beneficial. These innovations can contribute to better investor outcomes and enhanced client experiences. By focusing our long-term investment lenses on the implications of new technologies and trends, we gain foresight on where the proverbial puck is going. Please see highlights of our conversation below.
Stephen: Craig, as COO of AdvisorEngine, a real leader in the FinTech space, you’re at the crossroads of technology and financial professional services, and you’ve noted some of the key issues in the industry, namely client experiences, changing technology and demographics. Could you elaborate on those and what you see as the current trends?
Craig: Sure, Stephen. It is a dynamic time in wealth management. Ten years ago, we were having more discussions on why people should change. And now, it’s gotten down to the moment of execution on what should I do and how should I do it? And that’s why I think it’s so rewarding to work in this space now, when you bring together investment management expertise and technology to help wealth management firms. Regarding the trends you’ve mentioned, client experience is a major, major driver of change. Wealth management firms’ clients are not just working with financial advisors. They’re being influenced by all the experiences they have in their daily lives. The second is demographics. Much of the evolution in all that you’ve mentioned is happening with baby boomers, Gen X, millennials, and then the next generation. We need to wake up and serve Gen Z and future generations. And then, lastly, around technology, there are just big differences in terms of what’s available to end-clients now and how financial advisors might offer an experience similar to what clients have in other areas of their lives.
Stephen: We have an ongoing theme here about personalization and tech. Qub, how are you looking at the future in terms of asset allocation, lifetime income, and goals-based investing?
Yaqub: If you think about workplace retirement plans, the majority of the $30 trillion in assets in the US are in target date funds, which consider only a single factor, age. However, as an advisor, your entire wealth management practice is predicated on goals-based investing, which considers a variety of factors. Why do most private employees have 401(k) assets sitting in what is effectively a single-factor solution? You must wonder, can we do better? With the advent of technology with data, we know we can. That’s why we’ve worked closely with Adam and Franklin Templeton Investment Solutions to design and implement a goals-based algorithm that is tech-enabled and scalable. In the DC [defined contribution] space, that’s generally a managed account to deliver personalized solutions. We’ve also incorporated financial wellness on the front end to gather additional data points from investors and their households to inform family goals.
In the DC space, a common convention is to think about people as a snapshot in time. As you get older, your situation becomes more complex and heterogenous. For example, you may have a spouse, kids, additional IRAs [individual retirement accounts], and outside assets that need to be taken into consideration. Different geographies have differing tax rates. All of these considerations should factor into a personalized investment solution. At Franklin Templeton, we’ve given a lot of thought to combining the best of what the wealth management industry has to offer in terms of goals-based investing and bringing that into the DC space so that DC advisors and plan sponsors can offer a more holistic approach to their employees.
Stephen: How does this tie into personalization?
Yaqub: People often need assistance identifying what they want as well. And I always think about tech-enabled personalization and how it could help inform those decisions. Netflix knows what you and I want to watch. Spotify knows the music we want to listen to. And we can do better for retirement investors and do it with goals-based perspective and algorithms. This technology will also allow advisors to support their clients better as a household versus the target-date approach of recognizing age as the only factor.
Stephen: Craig, from an advisor’s perspective, they’re looking at a lot of different components, not just asset allocation, but how they operate, how they source data, how they use data. Can you talk a little bit about the platform and how the platform might work to help advisors integrate these different parts of their business?
Craig: I’ll speak to some operational gaps that AdvisorEngine, now part of Franklin Templeton, observes when firms come to us and say, “Can you help us with these challenges?” I’ll give you a few.
The first is an investment implementation gap. A lot of firms are saying, essentially, I have financial planning. I have portfolio construction, and I have trading and rebalancing. They’re very disconnected. I feel proud of what I’m doing across those things, but how do I bring them together? Combining financial planning into designing and building a portfolio, and then finally implementing and trading—that’s one core challenge.
The second is a data actionability gap. The secret that people don’t like to talk about is that firms sometimes are further along on data collection and normalization and organization, but they’re not doing anything with the data. So, the teams who are actually getting client data and information, it’s not being fed into the communication side.
And the third is a communication gap. As a wealth management firm, you can do great things for your clients, but far too often, they don’t know about it. It’s not enough to do the annual meeting or the semi-annual meeting, or even the quarterly meeting. Are you communicating it through a client portal experience? Are you texting with your clients in a compliant way? Are you finding different touch points so that clients feel your value every single day versus twice a year, once a year?
I’m really proud of the work Franklin Templeton is doing with clients. These are hard issues to solve for, and the firms which I think are doing the best are actually wrestling with these three gaps, they’re not just brushing past them. Culturally, those gaps require a lot of changes from firms to get it right on the investment implementation side, a lot of coordination, the data actionability side, and then finally communicating with the clients. Those all end up linking to goals-based planning, because it is at the heart of financial advice.
Stephen: Adam, with all of this discussion around access to data, how do you use it?
Adam: Using the data is really the next challenge. Let’s suppose you’ve managed to gather a rich set of data from your client on her needs, preferences, wants, and desires, above and beyond the essentials. What’s next? How can we use this opportunity to truly think differently about the investment proposition? Candidly, I would challenge everyone with this question: Are you using it to position your portfolios differently?
I think about the capital market building blocks available to us. Do general principles like the “4% rule” still work in a world where interest rates are where they are now? Bucketing might be a common approach, where a five-year time horizon calls for low-risk assets and a longer time horizon implies risk assets and so on. While that may move us in the general direction of tying the portfolio to the client’s needs, we can do better by thinking about the whole portfolio holistically. In fact, we have to do better because those conservative assets that used to earn a return—at least in nominal terms—are no longer doing that.
In the same vein, we need to think more expansively about the client’s entire balance sheet. Social Security and other types of guaranteed income deferred, tax deferred, and taxable assets can all affect the client’s overall risk profile as it relates to her needs. Therein lies the opportunity to really differentiate. Think about how much more meaningful it would be to have an interactive conversation with your client linking the portfolio performance as well as your proposed recommendations to her goals. It’s a powerful combination that should resonate deeply.
Stephen: That’s great. You’re advocating for using data to arrive at a broader and more nuanced view of a client’s portfolio. Qub, could that more expansive view include more access to private investments as well?
Yaqub: We believe that the best way to introduce private investments is through multi-asset solutions, either through target date funds as an example, but I think more appropriately through managed accounts through technology. This will allow you to understand the risk preferences and liquidity provisions of an individual investor in their household, so you can introduce the right set of private investments. Those private investments can be contained within the ecosystem of the managed account or the in-plan robo-advisor to inform the portfolios on the correct allocation. We think this will be a game changer in terms of democratizing access to private investments and achieving better returns and outcomes with less risks for retirement investors.
Stephen: Adam, you advise institutions as well as advisors and individuals. Of course, institutions are significantly invested in private investments. Is there an opportunity to bring these
investment capabilities to advisors and individuals?
Adam: As an investment opportunity set, it’s certainly exciting. You can embrace a true goals-based mindset towards the asset allocation exercise in the context of a multi-year horizon, and taking liquidity needs into consideration. As Qub pointed out, it would be an attractive overall proposition to offer private investments, with multi-asset solutions as a tool to generate a more progressive asset allocation that could be offered to investors more broadly.
Stephen Dover: And that leads us to the end of our time today. One of the things that I picked up from our discussion is that technology allows us to proactively focus on enhancing the client experience. Technology and data utilization allows us to connect asset allocation more closely to individual client needs and circumstances in a goals-based investing framework. Tech-enabled advice can help advisors reach new markets that have been historically underserved—younger and mass-affluent.
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