Retail Investing: Finding True Alpha

In his presentation at the FRA’s 8th Annual Managed Accounts Summit, Jack Sharry began with a quick review of changes in investor sentiments over the past thirty years. We’re at a point now where the baby boomers are looking towards an uncertain retirement, he stated.  After the market upheavals of the past few years, the As Executive VP of LifeYield believes that investors are looking for “true alpha” which is comfort, predictability and assurance. Investment alpha is elusive.

A Brief History of Retail Investing and Advice

Jack agreed with Cheryl Nash’s comments that we’re headed towards the UMH, which enables the advisor to look at the whole picture:

  • Data Aggregation – combining household information from multiple custodians, allows advisors to provide more comprehensive advice.
  • Financial Plan – how much income do you need? How best to get there?
  • Product Selection – most investors have a “jumble of stuff” that they have purchased over time. How do you make sense of it? The tendency is to sell whatever didn’t work. Jack expects to see more advances here.
  • Asset Allocation – not just at the product or account level, but at the overall HH level.
  • Tax overlay – we’re seeing great strides here, how do I help my client get more from less with their retirement dollars?

UMH Taking Over Wealth Management

The next generation of wealth management products will be centered around Unified Managed Households (UMH).  This is a prediction made by Cheryl Nash at the FRA’s 8th Annual Managed Accounts Summit.  A UMH provides financial organizations with wider and deeper relationships with investors, she explained.  The goal is a more holistic approach to wealth management.

UMH Lifecycle

Cheryl, Senior VP of Strategic Marketing and Business Development Investment Services at Fiserv, said that Fiserv’s definition of UMH is “a platform for delivery of holistic wealth management advice.”  The platform must be able to inform management of discretionary assets based on a total view of the household versus looking at separate, individual accounts, she advised.

Holistic reporting is a critical component of the UMH platform, Cheryl explained, and she emphasized that advisors must provide custom solutions based on investor needs instead of proprietary products that appeal to mass markets.

Data aggregation technology needs to include both assets and liabilities to get the full picture of the investor’s wallet, Cheryl stressed. It should support discretionary and non-discretionary assets and should include both non-managed assets and liabilities.

Cheryl reported that many Fiserv clients are looking to move from solely holistic planning tools to a holistic planning cycle that includes implementation and monitoring.  An important part of this cycle is for advisors to regularly review their client’s financial plan to ensure that it’s still focused on the client’s goals.  There is also a move by clients towards reporting based on goals and strategies as opposed to benchmarks, she noted.

Cheryl believes that the industry should move away from selling products and move more towards selling solutions.

Break Away from the Status Quo, Gardner Urges

“Doing more with less” is how R. Buckminster Fuller, in his 1973 book Earth, Inc., proposed that the human race improve its overall standard of living by improving efficiency in order to survive.

In his opening remarks at Financial Research Associate’s 8th Annual Managed Account Summit, Keynote Speaker David H. Gardner warned that the managed account industry needs to do the same. We must do it faster, with less risk and higher operating margins as well.  This must be done with less resources considering that 400,000 people laid off from Wall Street over the past two years, with even more to come.

David, a strategic consultant with DTCC/Smart Consulting LLC, also extolled his colleagues to embrace change. “Keep the status quo,” has been our mantra for too long. No other industry has had as long a life cycle as Single Managed Accounts (38 years), he said. The industry has remained largely unchanged even as processing and operational risk has increased, David charged.

We’ve been fighting amongst ourselves for a sliver of this pie, one that has never exceeded more than $1 trillion in its entire history. David pointed out that ETF’s currently dwarf SMA assets.  ETF AUM went over $1 trillion in 2010, while SMA assets are only around half that.  Even our fastest growing segment, UMA models, hardly registers with only $80 billion in AUM, which is less than the expected growth of ETFs this year alone.

David gave three reasons why managed accounts have maintained such anemic growth:

  1. They’re not nearly as scalable or operationally efficient as ETFs, Mutual Funds, etc.
  2. Sponsors have built proprietary infrastructures and haven’t promoted industry standards or best practices.
  3. Operations and processing are largely one-off and rely too heavily on manual intervention.

In the future, SMAs will only be a subset of a larger client portfolio that contains managed ETF sleeves, model-only sleeves, SMA sleeves with active portfolio management, David predicted.  Maybe an income-annuity and possibly a hedge fund sleeve, all optimized by internal or external technology that will be advisor-centric and/or advisor-led.  The Managed Solutions platform will continue to be “the platform” that wraps these disparate offerings into one client solution, he noted.