Liquidity Factor Investing

The Future Of Equity Investing Is Personalization

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The future of equity investing is changing and will soon be driven by personalization. Discouraged by the lack of personalization in many ETFs and mutual funds, clients will move towards direct indexing and customized separately managed accounts (SMAs).

Indeed, the demand for personalization has already shaped the future of many consumer industries.

Imagine yourself in line at the salad chain Sweetgreen. While the long counter of mix-in ingredients looks enticing, your eyes drift to the menu-board above, tastebuds lighting up as you weigh the merits of the “Guacamole Greens” and the “Kale Caesar.” Or consider yourself slumped on your favorite chair, settling in for Friday-night Netflix. Instead of searching for specific shows from the company’s vast library, you rely on Netflix to mine your viewing history and the preferences of others with similar tastes to suggest five options that all look interesting.

The same process happens when shopping for wine at a specialty store, when you’re given a small group of suggestions based on your favorite regions, styles and price point.

Whether you’re picking out a salad, choosing a movie, selecting a wine, or shopping for almost anything, you’re experiencing a fundamental shift in how we consume goods and services. We’re bombarded by endless options and information, so we take comfort in concisely curated menus.

Sweetgreen, Netflix, Amazon and countless other companies are built on providing variety to customers. But they have realized that while an abundance of choice is good, it weakens our ability to choose and to know what we’re choosing. Their solution? Understand the customer and the market, and find a way to best marry the two by delivering a guided experience.

This phenomenon, in which consumers are provided with specialized recommendations based on preferences and behavior, is known as personalization. While it’s permeated many consumer industries, it’s still fairly nascent within financial services.

But that’s about to change. Advisors need to be on the right side of it.

Consider how the demands of today’s clients are nudging the advisor playbook in this direction. Fueled in part by increased information access and a damaging loss of trust from the 2008 financial crisis, clients are seeking greater transparency and values-alignment with their underlying holdings. That means that, much as advisors had to adopt financial planning – including tax advice – after ETFs and mutual funds democratized market access, they must adapt again to face rising demand for environmental, social and governance concerns.

Growing interest in this space is clear: Sustainable investing open-end funds and ETFs sealed their third straight year of record net inflows in 2018, despite poor inflows into the overall U.S. fund universe, according to a report from Morningstar. At a time when advisors face fee compression and a constant need to justify the cost of their advice, the ability to identify and integrate client values into portfolios is a key differentiator.

But off-the-shelf investment solutions for passive equity portfolios make personalization difficult. ETFs and mutual funds, while excellent at providing cost-effective and broad market exposure, offer limited ability to tailor client preferences such as tax, risk and sustainability concerns. They’re a one-size-fits-all approach to a customer base with unique values and needs, requiring a solution personal to them. Complete customization, on the other hand, offers highly tailored choices at each step of the process. This works wonderfully for the financial advisors who distinguish themselves by building client portfolios from scratch, but for those with clients unfamiliar or uninterested in the daily details of their portfolio, customization can be a choice overload and a headache. Such accounts are difficult to scale across a client base because advisors need to know the specifications of each and every individual.

Read the full article here by Alex Laipple, Melissa Mittelman – Advisor Perspectives


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