Trends Driving Advisors to Future-Proof Their Business

Transcript

Stephen Dover: Let's turn first to you Craig, as chief operating officer of Advisor Engine, you've mentioned three trends that you see happening. First of all, client expectations changing. Secondly, technology and cohesive solutions. And third, demographics. Elaborate on those trends and where you see things going for advisors.

Craig Ramsey: The intersection between financial services and technology, I personally think is one of the most fun areas to work on now because of all the things that are happening. And, you mentioned those three trends, we do see them every day. So, client expectations changing, number one. Number two, the major demographic shifts that are happening. And number three, the technology changes that are just very meaningfully happening in this space as well. Those are things that are impacting wealth-management businesses every single day. And what I would say is that there's a lot of talk around COVID and new trends with the pandemic, but in reality, a lot of what's happening is actually just accelerating what we think would have happened eventually regardless.

And so, it's really interesting these trends, that are there now with COVID in particular. Firms are now having to change a lot more quickly. I think it's actually good for the end client and good for all in wealth management as well.

And, I would end by saying a lot of people will get worked up around disruption in the space, and there certainly is a lot of that, but I also think that there's been no better time to be a financial advisor than today. And so, given all those three major trends and others, I think the winners in this space are going to do far better than in the past. And then laggers, people who don't adopt and change, will really struggle with their businesses. But for firms who are future-proofing, there's never been a better time to grow a wealth management business in my opinion than today.

Stephen Dover: Qub, you have a very different perspective, being you're very client-focused. You lead our retirement and our 529 [college savings plan] business in the United States. From your seat, how do you see the trends that Craig has outlined and what other trends are you seeing?

Yaqub Ahmed: Yeah, I couldn't agree more with Craig's comments. So, he talked about three big ones. I would probably add a fourth, which from a regulatory and legislative standpoint is just enormous. Right?

The ones that Craig called out, the first three are incredibly important, but then when you marry that with the regulatory and legislative environment, that's everything for our industry. Our industry is so tethered to public policy, Stephen, that we need to keep a close eye on it. So, we actually spend a lot of time in Washington, DC, trying to inform the direction of public policy, working with legislators and regulators directly.

We marry that with intel from our clients to really drive our strategic priorities forward and make sure that we have the right level of focus on product development, strategic priorities, and resources that we roll out to the market.

So, one thing I'll just comment on is it's extremely active right now. It's a super-active environment. And so, if you're a regulator or a legislator, you're focused on a few things, right? You're focused on consumer protections, you're focused on leveling the playing field and just overall parity and transparency. And, some themes that we've been seeing coming out of Washington, DC, have been focused around kind of, I would say, just a general modernization of the retirement and insurance and 529 landscape. Right?

So, what does that mean? From an investment perspective, it means more institutional types of vehicles. So, for example, getting things like Collective Investment Trusts into 403bs, but it also means they're focused on democratization of advice. Getting advice out to the broader private sector. There's about a third of the private sector that does not even have access to employer-sponsored plans today. So, they need better coverage of retirement plans to these private sector employees. It's about 30 million people, by the way. So, it's a huge swath of individuals that just don't have access today.

The one area that's come into even more focus more recently, Stephen, has been target date funds, right? So, target date funds have been very, very good for the broader DC [defined contribution] business and industry, right? Post Pension Protection Act in 2006, it got a lot more people into plan and got them invested, got them diversified. It's about $1.5 trillion of target date assets within DC plans today, but they are single-factor solutions. So, there's some challenges there related to glide path dispersion and just additional kind of market volatility that might be around the corner that legislators and regulators are paying close attention to that we think, again, advisors are well-equipped with partnership in collaboration with the industry to solve with technology, with data, to drive personalized more holistic solutions.

Stephen Dover: And let's just turn to Adam on that and talking a little bit about target date funds. Adam, as an investment professional in global multi-asset solutions, I imagine you have all sorts of insights into asset allocation and how it's changed. In a 2019 survey by Broadridge Financial Solutions, 91% of advisors say using models would allow “more time to spend on client facing activities.”

How is asset allocation changing and what are your thoughts about target date funds and where we're moving in the future?

Adam Petryk: There's a lot that's changing, and certainly, that survey points to how advisors can better leverage their time in building their business, but I think also importantly, in terms of actually understanding their client’s needs and then outsourcing some of the parts of the work that they used to do themselves in terms of building a portfolio. You know, coming up with capital market assumptions and robust asset allocation, which managers were going to put together to actually maximize the potential of achieving our client's goals. Well, an advisor can go and outsource that advice so that they can spend more time in terms of actually understanding their client needs. And that's where, you know, I think the target date part of the equation is an interesting proposition because the target date fund was a fantastic innovation at its time, and was really addressing a real market need, but it is a fairly simplistic solution. It's a one parameter glide path, which is really, just basically, what your targeted retirement date, obviously, or your age might be in terms of determining which portfolio you're going to get allocated to.

You know, an advisor today needs to think about the 401k, the other assets the client might have, the different consumption profiles that a client might have as they both enter and are in retirement. And look at the client's asset pool holistically, encompassing both 401k assets and other sources of assets. And that, in my mind, leads us to a more intimate client experience, a better holistic client experience, but it also means you need to think about the portfolio allocation equation differently. And what's really exciting is that the technology is now available to us to unlock the potential for the advisor to engage with their clients in that different way. And what we're doing then, is thinking about, okay, well then, how do we deliver better investment advice using that extra info so we can increase the chances that a client is ultimately going to achieve their goals?

Stephen Dover: I think it's really exciting: that balance between models and personalization. Talk to us a little bit about goals-based investing, but also again, how that ties into personalization?

Adam Petryk: I think actually, Stephen, when we think about sort of a traditional asset allocation framework, you know, we think about, “oh, well, if you're, if you're a moderate investor, we'll put you in a 60/40 fund. If you're an aggressive investor, we'll put you in 80/20. And if you're conservative, you might have something with a 30% equity allocation.” And you'll notice that all of those terms might not actually be relevant to the end investors’ perspective on what is it that they're actually trying to achieve. And certainly, sort of a risk profile and understanding your client is an important element of the equation. But thinking of all those other variables that might feed into that asset allocation question leads us to a solution that actually can meaningfully enhance the probability that your client will be able to achieve their goals, but it means that you need to have a different approach. And even actually using those types of terms. So you'll notice that I said, “Hey, the probability or the chance that the client's going to meet their goals” like that's a different kind of mindset versus how perhaps most of our industry and candidly look, you know, trained in classic sort of finance CFA and so on, you know, there's a big difference between building that optimal portfolio that optimal 60/40 portfolio, the maximum Sharpe ratio and all the financial terminology that we are all used to. How the heck do you actually translate that to something that's achieving your client's goals? And how do you use what you know about your client's goals, the portfolio that you're allocating for them, the journey that you're taking them on, as an opportunity to sort of be more proactive in terms of your engagement with your client and in the intimacy of relationship that you can have? Because it would be my guess that the more that your client feels like they really know that you understand their goals, that the portfolio you're putting them in is clearly tied to their goals and being able to tell that story about how what you're doing is increasing the chances that they're going to be successful in their goals, I think is a critical element that brings us all together. And that's one of the things that I'm most excited about.

Yaqub Ahmed: And Adam, it speaks to also the unarticulated needs. People don't always know what they need or what they want as well. And, you know, I always think about tech-enabled personalization in kind of the retail space, right? We talked about that, but you know, Netflix kind of knows what you and I want to watch. Spotify knows the music we want to listen to. And we can do for retirement investors and do it on a goals-based perspective and use algorithms, such as your team has developed, to create richer and stickier clients by the way. You know, these clients are much likely to stay with this advisor if they feel like they know them and understand them and get their household versus shoving a single factor solution down their throat.

Stephen Dover: Maybe Adam, some people call it a data lake. You might call it a data swamp, and there's a lot of discussion around having all this data, but you know, how do you use it?

Adam Petryk: Yeah, no. And I do think that is the next challenge, right? Let's suppose that actually, you gathered that rich data set from your client, you did all that work to really understand their needs and preferences and their wants, desires versus the essentials and so on, well then what's next. And I do think that this is where the opportunity lies ahead of us again, to start to think about the investment proposition differently. If you have all that information, how are you using it to position your portfolios differently, relative to the world when we didn't have that information? And, you know, I think back Stephen to, you know, some of the, let's call it the capital market building blocks that we've got and available to us, rules of thumb like the 4% rule, you know, does that still work in a world where interest rates are where they're at? Bucketing might be a very common approach where you say, okay, well, you know what, if you need to spend the money in the next five years, we're going to put it in low-risk assets. If it's more than five or 10, we'll put it in risk assets and so on. Well, is that really actually thinking about the whole portfolio holistically, or is that just sort of a good, quick step to march you in the general direction of tying the portfolio to the client's needs, but can you do better? And we would posit that indeed you can do better. And in fact, you almost have to do better, because those conservative assets that used to earn a decent return, at least in nominal returns, aren't going to earn the kind of returns prospectively. And so, you need to solve the problem differently. Think about the portfolio holistically. Think about the entire balance sheet of the client. Thinking about the risk profile of that whole picture and how that ties out to the client's needs. Therein lies the opportunity to really differentiate. And then if we can tell the story in a way that resonates to the client back to their goals, back to, “Hey, you know what, this year we were able to increase your chances of you know, achieving that stretch goal that you had in your portfolio, or, you know, what we need to reframe and reset based on how your contribution rate was versus what you were planning.” You know, I think those are the conversations that will lead to that more meaningful interactive relationship with your client and linking the portfolio to those—that's a powerful combination.

Stephen Dover: Craig, I think I'm not out on a limb saying probably most clients don't know what assets they really have. They're in different buckets here and there. How do you gather all those different assets, how do you make that something that advisors can do in a reasonable way, and then, you know, put it together?

Craig Ramsey: Well Stephen, the word I think about is courage. So, the value proposition of the best advisors has continued to develop in a way that doesn't require the advisor to be hanging on to performance of individual securities or even in an asset-class level. Of course, if a client wants to engage at that level, great, but otherwise being able to connect at a human level, to be able to connect at a goals level, that's really where clients often want to start. But as an industry, we don't even give them much choice many times because we don't give them another scorecard to judge us by from a wealth-management perspective. So, no wonder they go to performance and fees in terms of end clients asking financial advisors. The reason I use the word courage is the clients that I think are really putting themselves as future-proofed going forward are in fact really engaging at the goals level, at the relationship level.

And that's not a new thing, right? A lot of these things, people like to act like some of these trends are all brand new. The best financial advisors have always connected at that level, on a personal level. Today, because we have so much data, because we have so much out there, there's pressure sometimes to give clients the super-mega-detailed, ultra-performance report, thick packet. But I find the most confident and effective financial advisors are actually simplifying. And in many ways, that's going back to the beginning of great financial advice and carrying through to today, but it does take courage to do that versus being wedded to always deep performance at every level.

Stephen Dover: That's great. And that leads us to the end of our time today. Thank you.

Host: And thank you for listening to this episode of Talking Markets with Franklin Templeton. If you’d like to hear more, visit our archive of previous episodes and subscribe on iTunes, Google Play, Spotify, or just about any other place you listen to your podcasts. And we hope you’ll join us next time, when we uncover more insights from our on the ground investment professionals.

Podcast Legal Language:

This material reflects the analysis and opinions of the speaker as of the stated date and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton.

The views expressed are those of the speakers and the comments, opinions and analyses are rendered as of September 21, 2021 and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, security or strategy. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy.

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial advisor for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Franklin Templeton (FT) does not provide legal or tax advice. Federal and state laws and regulations are complex and subject to change, which can materially impact your results. FT cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

All financial decisions and investments involve risk, including possible loss of principal.

Data from third party sources may have been used in the preparation of this material and FT has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Distributors, LLC. Member FINRA/SIPC., the principal distributor of Franklin Templeton’s U.S. registered products, which are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation. Issued by Franklin Templeton outside of the US.

Please visit www.franklinresources.com to be directed to your local Franklin Templeton website.

Copyright © 2021 Franklin Templeton. All rights reserved.