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Impact Investment Programs: One Size Fits… One

Posted by Buddy Webb, CFA®

A Custom Impact Investment Strategy Seeks to Meet High Net Worth Investors’ Unique Values and Priorities

Working with Ultra High Net Worth families involves tailored strategies in the areas of estate planning, tax planning, and risk management. Custom investment portfolios are also often part of a comprehensive wealth management offering so why should families who are looking to implement an impact investment program go with an “off the shelf” option?

Defining A Legacy – Investing for Impact

Each of our client families has an opportunity to define their legacy. In many cases, this means imparting a particular set of values on to the next generation. In other cases, it means improving the lives of others through charitable giving (both time and financial resources). Most often it is a combination of these ideas, and more and more families want to use their investment portfolios to define their legacy. Each family’s unique values and priorities dictate a custom impact investment program.

Portfolio Return Versus Impact

It was not long ago that a conversation around investing for impact involved the trade-off between earning a market-based expected return and having a positive impact. Finding the “sweet spot” where you could expect both was challenging. Today, the landscape is somewhat different, but families will still on occasion accept a return on an investment that is below market in order to target a specific impact (community loan funds may fall into this category). We feel this option is perfectly acceptable, provided the client has a good understanding of the trade-off and the ramifications for the portfolio in aggregate.

Finding the Right Recipe: What to Include and What to Take Out

As referenced above, the impact investing arena continues to evolve. The idea of “negative screening” (removing fossil fuel stocks from an equity portfolio for instance) is not new–if anything, it has become progressively easier to implement. While it is rewarding to help clients eliminate positions from their portfolios that do not align with their values, often the next step in the process is to help clients proactively include investments that do align with their values (renewable energy for instance). These investments can be public or private and depending on the background of the particular family and the scale of the investment, they can potentially afford the family an opportunity for an active role in the investment. This example is another in which values can be passed across generations.

The Opposite of Set It and Forget It – Revisiting Your Impact Investing Strategy

We have discussed the pros and cons of robo advisors in another post but it should be clear that helping a family articulate and implement their beliefs and values is anything but a “cookie cutter” process. Furthermore, like any investment strategy, an impact investing program should be revisited frequently. Returns should be measured as should impact (to the extent possible). Family values can evolve over time and, as referenced above, the investment landscape changes. Independent wealth management firms that specialize in working with Ultra High Net Worth families are well-suited to help their clients develop and continually improve on these customized programs.


The Changing Landscape of the Financial Investor-Advisor Relationship

Posted by Buddy Webb, CFA®

How Technology and Regulations are Shaping More Personalized Wealth Management Practices

While its fate is currently somewhat uncertain, the Department of Labor’s new fiduciary rule has certainly brought front and center the question of whether financial professionals are acting in the best interests of their clients.

For any investor, and particularly a high-net-worth investor, trusting the financial advice you’re getting is paramount. Hiring a financial wealth advisor is all about being able to take a step back and have confidence that someone is managing your wealth with your future, goals and best interests in mind.

The primary intention of the DoL’s new rule is to require that financial advisors work in the best interests of their clients, and put their clients’ interests above their own. This requirement therefore includes revealing any conflicts of interest, and clearly stating all fees and commissions.

What the new rule signifies, along with new digital advice technologies within the wealth management industry, is a focus on a personalized financial advice standard.

And, regardless of the DoL’s fiduciary rule, financial management has already been trending in this direction.

Advisor Personalization: A New Trend in Wealth Management Expectations

Deloitte reports that one disruptive trend in wealth management we are seeing in 2017 is the idea of a “re-wired” investor–that is, an investor who expects to interact with their advisors in a different way.

“Investors no longer want to be treated as part of a segment,” the report states, “but instead as unique individuals (‘just me’), with specific goals and preferences. Instead they expect to receive advice tailored to their own circumstances.”

Rapidly disappearing are the days of more impersonal investments where the investor was largely uninvolved. Today’s investors, especially younger ones, often want to be highly involved and actively participate in their wealth management. Even baby boomer investors are taking cues from the younger generations and following suit.

What fiduciary accountability and new technology points to is better alignment between the interests of the investor AND the advisor, and these developments drive customized financial advice based on goals and personal circumstances.

Leveraging Big Data and Analytics Capabilities When Managing Wealth

The use of big data has already made a significant impact in industries such as healthcare and higher education. Wealth management is ripe for leveraging this technology as well, to deliver a more insightful and personalized investor experience.

Consider the sheer volume of data created each year–and it continues to grow exponentially. Understanding how to interpret and best utilize this data to optimize clients’ portfolios and provide needs-based advice is key in today’s advisor-investor relationship.

Additionally, unification of perhaps disparate investment data allows for a deeply analytical approach that leverages predictive intelligence around market behavior. In this way, advisors can provide their clients not just with reports from the data, but with actionable insights to inform investment decisions.

Big data and analytics simply provide another way for wealth management firms to provide more personalized client advice to high-net worth investors, thereby optimizing client portfolios based on individual circumstances.

Taking Lessons from the Robo Advisor

While a rapidly rising trend, “robo advising”–which uses technology to deliver tailored investment recommendations–has its own limitations, and there remains significant room for growth. Human advisors will continue to be invaluable, but can leverage the areas in which robo advisors fall short, such as accurately judging risk tolerance or helping weather the storm during volatile market conditions. Doing so complements the technology in ways only humans can.

Technology will consistently be able to provide greater access to data and generate more precise financial models that can meet a client’s needs for both reliability and level of risk. Technological capabilities in the coming years will underscore the changing landscape of trust in and expectations for financial advisors and wealth management.

The existence of robo advisors, especially those that have been implemented at major financial companies, signifies that with or without the fiduciary rule, changes are already underway to ensure clients’ needs are met in the most appropriate way.

At Lake Street Advisors, we already practice highly-personalized wealth management for our clients. Today’s technological climate offers broad investment capabilities that consider your financial and life situations, and short- and long-term goals, and narrow them into even more precise directives to meet your needs through customized investment strategies.

Financial advice today goes far beyond asset allocation. Investors expect customized and holistic financial planning that utilizes mechanized advice, such as robo advisors, comprehensive models based on personal situations and needs, and deep consideration of the future. It is safe to say these practices are already being executed within the wealth management industry, even without the DoL’s fiduciary rule yet in place.