The Markets November 2, 2016

Predictions of Pain Ahead for Advisers and Managers

Even consistent leaders in the asset management industry will face hardship in coming years, thanks to a confluence of competitive pressures already starting to take hold, a new analysis contends. 
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The beloved American author and playwright Arthur Miller was known for a keen insight into tragedy and human frailty—so it should send a clear message that McKinsey and Company’s most recent asset management industry analysis opens with a Miller quote: “An era can be said to end when its basic illusions are exhausted.”

According to the report, “Thriving in the New Abnormal: North American Asset Management,” the U.S. asset management industry is on the brink of a once-in-a-generation shift in competitive dynamics. The paper’s authors—Pooneh Baghai, Onur Erzan, Ju-Hon Kwek and Nancy Szmolyan—suggest this is due mainly to five converging trends that may be unprecedented in their combined impact.

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“All asset management firms will face challenges in the new environment—including those that have been consistent leaders over the past several years,” the report warns.

The first trend is simply the fact that we are “at the end of 30 years of exceptional investment returns.” According to the authors, any expectation that these returns would continue indefinitely was simply misinformed.

“Research from McKinsey Global Institute indicates that the global market returns of the past three decades have been an historical anomaly and that the macro trends fueling these returns are all fading to some degree,” the report suggests. “The result will be a decline in average returns for equities of 150 to 400 basis points and of 300 to 500 basis points for fixed-income assets. This decline has implications that extend well beyond the asset management industry, but for the industry the impact will be unambiguous.”

Perhaps most troubling, the McKinsey researchers predict asset management firms “will begin to feel the loss of the cushion of beta-driven revenue growth that buoyant markets have been providing for decades, particularly following the financial crisis.”

NEXT: Top to bottom reform on the way 

According to the report, the second major shift impacting the asset management industry will be a shake-up in preferences related to active management. McKinsey expects that “a large pool of benchmark-hugging active assets,” up to $8 trillion, will be up for grabs over the next several years as clients re-examine their core investment beliefs and manager relationships.

“This money in motion will be a battleground over the next decade where low-cost passive managers, high-conviction fundamental managers and innovative alpha generators will compete intensively for share,” the report predicts. “As average market returns from passive products begin to decline, McKinsey expects a surge of innovation from leading active managers … These managers will restructure their platforms for greater efficiency, develop new levers for value creation, and move beyond security selection to grow new capabilities in risk budgeting, sector selection and asset allocation and embed these as differentiators in their products.”

Tied directly to these first two trends, the report suggests a third theme over the next decade or longer will be continued momentum for alternative investments. McKinsey expects that these flows will be redirected heavily toward illiquid private markets, “as investors seek alpha in less efficient segments of the market,” the authors explain. “Several years of underperformance in the hedge fund sector will add momentum to this shift. Real assets, such as infrastructure, represent an especially large growth opportunity.”

As these themes play out, there will also be a dramatic increase in the use of digital advising technology and straight-through processing.

“This is the fourth trend reshaping asset management,” the report explains. “We are witnessing the beginning of a true digital revolution that incorporates advances in data and analytics to expand beyond a narrow focus on disintermediation in retail distribution to become a driving force for radical improvements across the entire asset management value chain, including portfolio management, capital markets activities, and the back and middle office … Digital tools and advanced analytics have the potential to generate vast improvements in the effectiveness and efficiency of operating models.”

NEXT: Investment and operational alpha 

Undoubtedly, asset managers will use digital tools to increase engagement with clients and achieve significant productivity gains, the report suggests. In areas such as product innovation, digital capabilities will help firms develop a differentiated edge in portfolio management, as well as “radical and sustainable improvements in back- and middle-office processes with meaningful cost savings.”

Describing the fifth trend that will dominate asset manager decisionmaking in the coming decade, the research report concludes the industry is entering an “era of heightened regulation.”

The report points specifically to the Department of Labor (DOL) fiduciary rule as a perfect representation of this final trend—especially how regulations targeted at one particular niche of advisers or managers seldom prove to have an impact limited to just that narrow domain.

“While [the DOL rulemaking] applies more directly to wealth managers, the rule will accelerate several current trends in asset management, including the demand for passive strategies and ETFs, the shift from brokerage to advisory programs, the growth of digital advice, and a culling of asset management partners by wealth managers,” the report concludes. “Additional waves of regulation are expected: the potential extension of DOL-like rules to retail assets beyond those focused on retirement, as well as regulations governing liquidity management, stress-testing and the allocation of client expenses.”

The authors conclude the rise of regulation will “only add to the already high legal and compliance costs the industry is currently shouldering, but will also serve as a disruptive force to well-established segments of the market … especially channels with a high share of proprietary products.”

The full report, including rich collection of charts and figures contextualizing these five trends, is available for download here. 

Client Service November 2, 2016

Advisers Can Help Women Build Financial Confidence

Presenting women with ideas rather than promoting products and considering gender-specific goals are among the key requirements to effective service. 
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As financial anxiety among Americans continues to heighten, one major demographic group seems to stand out from the rest: women.

A recent study from Northwestern Mutual, “Planning and Progress Study 2016,” found that half (50%) of single women and 41% of married women reported feeling either a moderate or substantial amount of anxiety regarding personal financial security, compared to 45% and 35% of men, respectively.

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The continuous gender pay gap, issues surrounding a lack of paid maternity leave, and the longer life expectancy for women spearhead this anxiety, explains Allison Engel, director of women’s multicultural marketplace strategy at Northwestern Mutual. She believes a lack of confidence more than a lack of expertise or knowledge is also playing a significant role.

“One of the recurring themes that comes up whenever we speak to women is this concept of confidence,” she says. “Women don’t feel that they have the tools and the knowledge to adequately control their financial future.”

This is where expert advice can make all the difference, Engel says. The data clearly shows women as well as men can benefit tremendously from sitting down with an adviser who can listen carefully to their challenges and enact a personalized financial plan. Confidence is shown to increase dramatically with the support of an adviser, in other words. 

“As an adviser, you can take advantage of those face-to-face moments to really just keep your ears open and to pick up on different preferences that men and women are going to bring to the table,” Engel says, adding that careful listening is the most direct path to building client trust.

Jennifer Openshaw, a partner at Mercer and co-author of the study “When Women Thrive,” recommends advisers steer clear of heavily promoting products or services, especially early on in the relationship. Instead, the focus should be on solutions and strategies, with product-specific discussion limited more to the implementation phase.

“Women tend to feel like they’re being sold products when they build an advisory relationship, and that can damage trust,” she says. “Success is about helping a woman understand why this or that product matters to her and her life at this stage, and making it really relevant and tangible with real-world examples.”

NEXT: Value of personalized assessments 

Nevenka Vrdoliak, director of the Bank of America Merrill Lynch Wealth Management CIO Office and co-author of the research series, “Women and Life-Defining Financial Decisions,” proposes that personalized assessments are highly effective in helping advisers cater to unique client goals.

“It’s a structured approach to soliciting key considerations from a client that works best,” she says. “You must understand the client and what their goals are—and their life priorities.”

Openshaw agrees, adding that advisers should focus on smaller, step-by-step tactics that can both engage clients and elevate trust over the long-term.

“Do not talk about these huge, lofty goals, but again, bring it down to tangible steps that everybody can relate to,” she says. “Trust is really important, and it will continue to be important.”

According to research from the State Street Global Advisors, women tend to be more confident in their adviser’s investing strategies if they are female. Engel believes women advisers can establish more connectivity with women clients not only because of gender similarities, but also because of the perception that they hold better soundness. 

“Women tend to have a good combination of both head and heart when they’re coming to a meeting, and that resonates really well,” she says. “At the end of the day, it all stems from authenticity, and having advisers who are there for the right reasons, and wanting to do it for the right reasons.”

The experts agree that clients and advisers are both increasingly accessible to one another, via the use of social media and 24/7/365 digital advice platforms—implying these platforms can be a powerful stepping-stone to gaining clients’ trust and confidence.

Engel concludes that melding human interaction with technology can create a hybrid experience that will work well for women.

“It’s all about being able to find that fine line where they feel like they’re getting enough of your expertise, but they also have the ability to check on their own accounts, and potentially in some instances have control or make changes if necessary,” she says. “Your biggest tool is not going to come from any technology or any research, but it’s really going to be your ability to connect with your customers in an authentic way.”

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