Wealth managers still cling to to tenets of modern portfolio theory that have failed twice over the past decade and likely to fall short again, according to a new report.
Based upon its survey results, Risk 3.0 Asset Management say many wealth management firms are in a “state of denial,” unwilling to adapt to major shifts in the global and domestic financial markets. Instead, they're determined to stick to their existing risk management formula when advising clients on how to invest.
“Advisors have not understood the impact of what can only be seen as an historic and seismic shift in global financial markets and what that means for their clients and their business,” says Mitchell D. Eichen, CEO of Morristown, N.J.-based 3.0 Risk Asset Management LLC. "Markets have changed dramatically for the forseeable future."
Conducted between May and June, the survey covered 130 wealth managers representing a cross section of the wealth management industry. Firms ranged in size from less than $100 million to over $1 billion in assets under management.
Advisors’ steadfast reliance on traditional vehicles and strategies for portfolio construction and risk management will provide a recipe for disaster for both clients and the advisors’ business. Eichen says.
"When you ask [wealth managers] how they're investing their clients' money, some of them say that they're still investing the same way that they did in the 80s' and 90s," Eichen says. "They're still applying modern portfolio theory; they still think that diversification is the answer and is going to save them, even though diversification didn't save anybody in 2008."
Eichen also says that wealth management advisors can no longer rely on the excuse that "this is just another cycle market" and that staying on course will reap healthy financial returns. "Nor can they rely on the failed axiom that basic diversification and asset allocation strategies will save them the next time the market goes south sharply," he says.
The primary goal of today’s advisors, says Eichen, must be twofold: preserve clients’ capital while finding ways to consistently hit “singles” and “doubles” rather than "home runs"—the best one can hope for in a global economic and market environment which continuously teeters on the brink.
“It's our belief that wealth management firms that adapt effectively will thrive in the new market environment,” Eichen says. “While those that don’t will experience limited growth or simply just wither away."