Van Etten ConsultingConsultants to the Financial Services Industry
…the financial services industry is in the early stages of a major transformation in how advice is delivered and portfolios are constructed. Factors including globalization and indexing have made markets more highly-correlated than the past, rendering traditional diversification techniques less effective at controlling risk in the portfolio. At the same time, today’s investors are more risk-averse, having experienced two ‘100 year floods’ since 2000 but are also confronted with a low return environment with poor risk/return trade-offs.
What are the implications?
The industry will shift from a focus on asset allocation to a focus on risk allocation. Under this new framework, the advisor will explicitly manage risk in the portfolio using a combination of skill-based trading strategies and actively adapting exposures to market betas. This will be a significant pivot for the financial services industry but offers the potential to both improve investment outcomes and keep investors committed to the investment plans. Advisors who embrace this shift to risk-management will have a significant advantage over their competitors as investors will increasingly reject paying high fees for outdated ‘cookie-cutter’ asset allocation and ‘buy and hold’ advice.