The rise of populism, the weaponization of social media and the escalation of geo-political tensions have fomented a level of political, social and environmental activism not seen in half a century. Everyone has an opinion and everyone wants their voice heard: including investors.
At the same time, rapid technology innovation guarantees the pace of change across financial services will accelerate.
In 2020, increased activism and new tech will drive three trends every investor and financial advisor should heed:
1. Values-Based Investing Will Continue Its Rise
According to Morningstar, estimated flows into open-end and exchange-traded sustainable funds reached $13.5 billion through September 2019. As a piece of the fund industry, which is measure in the trillions of dollars, it’s small. However, it’s a huge leap from the $5.5 billion invested in these funds in all of 2018. That’s a growth rate of more than 150%.
Citizen activists are also investment activists. Their commitment to walking the walk to assert their values in everything they do is a harbinger of further momentum in environmental, social and governance (ESG) investing. The number of categories that help investors align their financial commitments with their values continue to expand. Today, the average individual investor can easily direct their assets to companies that demonstrate active commitments to racial justice, disability inclusion and reducing greenhouse gases or divest existing holdings from weapons, tobacco, the prison industrial complex and fossil fuel producers.
Financial advisors, institutions and pension management firms that are not developing, articulating and executing an ESG strategy to meet the needs of this new class of values-based investors put their short and long-term client base and financial performance at risk.
2. The Shift To Customized Investment Portfolios Will Accelerate
Technology today offers investment advisors the ability to customize investment portfolios at scale. Harnessing the power of algorithms, financial data and indices, Dynamic Custom Indexing (DCI) is a dynamic separately managed accounts (SMA) engine that replicates indices by directly purchasing the underlying stocks. The software maps the correlations across the balance sheets of all the tradeable securities in the selected universe. It allows custom changes to be made to the portfolio. It then responds dynamically by breaking apart and rebalancing the portfolio in-real time, ensuring tight tracking of the index.
Investment advisors can rent DCI capabilities from the cloud and use them to buy, manage and transact client investments in real time at the individual security level based on client goals, situation and values. Using any connected device, advisors input their strategic allocation mix, overlay the client's values, select tax optimization, show the client the suggested portfolio, and hit “Go.” DCIs do the rest, including systematic account management and customized reporting, while dynamically adjusting the portfolio based on market conditions. This paves the way for advisors to be more hands-on directly with their clients, while the software does the heavy-lifting on the task-oriented portion of the value they provide.