The wealth management industry is a dynamic landscape. Each year, new financial products emerge, and other funds shutter. The job of the wealth manager is to achieve a fine balance between exciting new products and reliable investment powerhouses which have stood the test of time.
Client’s like to see their wealth manager including new innovative products and trending ideas within their portfolio. This reduces the fear of missing out and will confirm their view that they are entrusting their money to wealth managers who are at the cutting edge of the industry.
New concepts such as Exchange-Traded Funds were novel and even controversial when they first arrived on Wall Street in 1999, just before the financial crisis. Now, 13 years later, ETFs have shrugged off criticisms about their risks to the financial stability of markets, and have attracted consistently high inflows over the last five years.
At the same time, conservative clients may eschew the new and even wealth managers themselves may hold reservations about untested asset classes or wealth management products that haven’t yet proven themselves to be investment grade.
Corporate bonds and government bonds could be considered ‘dull’ investments by clients. However, the academic research by finance professors conducted over the last 50 years means that they’re a very known quantity. And in the business of protecting wealth, predictable financial instruments will be selected over unpredictable assets time and time again.
Below, we’ll review two specific trends which have emerged in the wealth management world, and discuss what is next for these innovations in the context of professional portfolio management.
2016 - 2021 has seen a plethora of new banking and trading apps hit the app marketplaces. Designed for consumers with little investing experience, these apps provide simple banking services as well as exotic investment opportunities.
Examples of such apps include Moneybox, Monzo, Starling, Robinhood, Etoro and freetrade.
By placing tremendous savings and investing power in the hands of users through their mobile phones, these slick apps have removed an invisible barrier between retail investors and the financial markets.
Wealth management firms who generated fees from the reassurances of ‘let us handle this difficult investing business for you’, are under threat as investors begin to see investing as a simple and quick activity. Why pay management fees when I can do it myself?
Of course, the answer to this question is that there is a big difference between buying shares and managing a sustainable portfolio with an advantageous sharp ratio. Wealth managers will need to articulate loudly why their services are still essential for those with large pots and little appetite for adopting a DIY approach to investment.
Portfolio management for lower volatility
In recent years we’ve seen a large number of funds launch with a new investment strategy and marketing spin. They’re called ‘absolute return’ funds.
An absolute return fund aims to return a non-negative return in every year of performance.
The name and concept echo the hedge funds mantra, but absolute return funds are in fact UCITS regulated investments that are open to non-sophisticated investors.
This means that they do not borrow to fund their positions, and they are limited in the derivatives they can use to take positions in the market.
The rise of absolute return funds has driven a lot of conversation within the industry about whether this emerging fund variant actually has a technical edge or just a marketing edge. Either way, if the clients demand, the clients get. It remains to be seen whether these funds can actually weather a storm as smoothly as their prospectuses suggest.