“We’ve finally dispensed with most of the concerns that investors are giving up performance results to access ESG,” said Hyman. “The other thing we’re seeing is that, until recently, many people have felt like ESG investing had to be all or none, but advisors can actually start the process of ESG investing in a single small sleeve within a portfolio and gradually get comfortable with it over time.”
While investors have typically sought outperformance by concentrating their portfolios and using managers with specific expertise and constrained mandates, Hyman believes that 2018 will be a year in which managers with broader mandates and greater generalized investing skills create the most alpha.
Almost paradoxically, Hawley believes advisors will have to specialize more to justify their fees in 2018 as fee compression in investment products and trading costs makes their advisory fees more significant.
One potential area of specialization, given the recent tax reform package signed into law in December by President Donald Trump, is tax optimization.
“Tax alpha is becoming more important,” said Holly. “The more analytics, the more software, the more platforms an advisor has, the better off their clients will be. Clients are absolutely focused on after-tax performance.”
Mercer believes that by implementing strategies that can drive tax alpha, like technology-enabled tax-loss harvesting, advisors could boost their value proposition to investors, said Hyman.
“With the technology available and the clientele interested, we think it’s critical that advisors have some grasp of tax optimization,” he said.
Advisors’ greatest opportunity may lie in the massive $41 trillion transfer of wealth between aging baby boomers and millennials, said Holly.
Yet adhering to old ways of doing business will not attract the newly wealthy millennial generation, he said.
“Does anyone think that millennials will want to continue to relate to their mom and dad’s investment advisor?” he asked. “As a generation, millennials are a different asset and wealth management class with their own communications preferences, goals, experiences and needs. They’re more demanding in general as a community. Asset managers need to continue to invest in that change.