Top Industry Developments in September
Industry Developments
Investor Trends
Advisor Trends
Retirement
Brief Summaries of the Headlines
Industry Developments
Actively managed ETFs are poised to reach $1 trillion in assets due to regulatory changes and investor preference for lower costs
Actively managed ETFs are poised to hit $1 trillion in assets, driven by regulatory changes and investor preference for lower costs. These ETFs offer a cheaper alternative to mutual funds and have seen substantial growth in recent years. While the industry is still young, major players are entering the market and regulatory changes are expanding opportunities. However, concerns about transparency and the potential for underperformance compared to index ETFs remain.
Overall, active ETFs present a compelling option for investors seeking active management at a lower cost. However, careful consideration of individual investment goals and risk tolerance is essential.
Source: Financial Times
Evalueserve Viewpoint: Asset managers must adapt to the rising popularity of active ETFs by offering more investing options, navigating regulatory changes, and addressing concerns about transparency, underperformance, and tracking error. Increased competition from major players will force firms to innovate and educate investors on the benefits and risks. Those that successfully adapt can capture growth opportunities in this expanding market while offering more competitive and tailored investment products.
Asset allocation model portfolios set to reach $2.9 trillion by 2026, becoming increasingly popular among financial advisors
Asset allocation model portfolios are becoming increasingly popular among financial advisors, driven by a shift towards outsourced portfolio construction. The market for these portfolios is projected to reach $2.9 trillion by 2026.
More advisors are using model portfolios, with 13% of advisor assets managed by model users and 34% of outsourcer advisors planning to increase their use. This presents a significant opportunity for asset managers to offer their investment products through model portfolios. While most model portfolios are currently proprietary, there is growing demand for open-architecture models that use a diversified set of managers.
Source: Cerulli
Evalueserve Viewpoint: The rise of asset allocation model portfolios presents a significant opportunity for wealth management firms and advisors. Advisors can capitalize on this opportunity by broadening their offerings of model portfolios, positioning themselves to meet the growing demand and offering diverse solutions for clients. Asset management firms can build proprietary open architecture platform consisting of multiple model portfolios from different asset managers.
Investor Trends
Gen Z leans on AI and family for money management, faces challenges with money discussions and curbing impulse spending, despite active budgeting efforts
A survey by Cleo found 61% of Gen Z use AI tools for financial management and 51% rely on parental advice for money management. Many find discussing finances difficult and prefer AI assistants. Over two-thirds of Gen Z (72%) find it difficult to talk about their finances, with 40% stating they would never discuss their debts with others.
Despite budgeting, Gen Z faces financial challenges like impulse purchases and neglecting savings goals. While just under three in five (58%) claimed they rarely buy things on impulse, 40% admitted to spending between $100 and $200 monthly on non-essentials. While spending habits have changed, saving remains a priority for many.
Source: Investment News
Evalueserve Viewpoint: The findings from the survey suggests that brokerage and wealth management firms should look to incorporate AI-driven financial management tools and foster family-centric financial education to better engage and support Gen Z clients, who seem to prefer using AI tools and rely on parental advice. Advisors can also provide financial coaching to influence the spending behaviors and build healthy financial habits.
Retail investors increasingly prefer index funds for performance, low fees, diversification and risk management
Retail investors using index funds are more satisfied with their performance than those using non-index funds, according to a FTSE Russell survey. Index funds are favored for long-term performance, diversification, low fees, and risk management. Financial advisors should educate clients about index funds to increase adoption. The survey also found that 94% of investors with advisors are satisfied with them, and 90% are satisfied with their investment performance. However, fewer investors are working with advisors in 2024, especially millennials.
The lack of appropriate recommendations from advisors can prevent investors from using index funds. Common obstacles include unfamiliarity with index funds, not knowing which ones are best suited, and not receiving recommendations from advisors.
Source: Wealth Management
Evalueserve Viewpoint: Asset managers should proactively market index fund offerings to align with the growing investor preference. Wealth management firms should prioritize advisor education on index fund advantages. This knowledge can be effectively communicated to investors. Advisors can capitalize on millennial investor interest by strategically recommending index funds.
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Advisory Trends
Growing demand for financial advice among affluent investors, especially women
According to Cerulli, affluent investors' willingness to pay for financial advice has increased significantly over 2020-2023. Interest in paid financial advice grew from 58% to 63% for men and from 52% to 61% for women.
Further, 23% of women say their selection of an advisor was either based on a family referral or a choice made by a spouse or parent, compared to 20% of men. As women take on more financial decision making, either independently or on behalf of their families, having a multi-faceted approach to client acquisition can be a major advantage in both attracting new customers and keeping clients’ families in the fold.
Source: Cerulli
Evalueserve Viewpoint: To capitalize on the growing demand for financial advice among women, full-service brokerage firms should be looking to acquire women investors by adopting a targeted marketing approach. Banks can also use a targeted approach to attract women investors, due to their preference for banks to be their primary provider. Marketing strategies by these firms need to be tailored according to the investor population they are targeting.
Advisors remain focused on older generations; just 18% of clients under 50
The InspereX Pulse Survey found that financial advisors continue to focus on older clients, with only 18% under 50. Most assets of younger clients come from jobs, not inheritance. While advisors recognize the need to attract younger clients, many are surprised by their reliance on social media for investment education and their lack of investment knowledge.
Death is the primary reason for losing clients, followed by a lack of relationship nurturing. Advisors who have won business often did so by differentiating themselves through customized portfolios, financial planning strategies, and avoiding common client challenges like listening to bad advice, misunderstanding risk, and having unreasonable expectations.
Source: Businesswire
Evalueserve Viewpoint: Advisors focusing on older clients may have trouble expanding their client base in the future. To attract clients, advisors must stand out by offering unique services and avoiding common mistakes. While traditional marketing techniques remain popular, wealth management firms and advisors should utilize the potential of digital marketing to reach younger, tech-savvy clients.
A small proportion of Americans feel prepared for retirement, but only 19% regularly meet with their advisor to discuss retirement goals
A survey found that only 48% of Americans feel prepared for retirement, while 36% feeling behind. Yet only 19% of Americans regularly meet with a financial advisor. Inflation is a major concern, with 55% fearing it will set back their retirement goals.
The survey also revealed that women are more concerned about running out of money in retirement than men. Younger generations are more confident about their retirement preparedness than older generations, but many still lack retirement goals. Among retirees, common regrets include not saving enough and not developing a comprehensive financial plan. Those with detailed plans often addressed long-term care concerns, estate planning, and philanthropy.
Source: Wealth Management
Evalueserve Viewpoint: The results of the survey indicate a clear gap in engagement methodologies of wealth management firms and their advisors. Wealth management firms need to engage with clients more often to ensure that clients feel well prepared for their retirement. Providing financial education would also help clients stay calm during inflationary phases.
Retirement
Plan sponsors are actively addressing retirement income and personalization as part of their plan offerings
A new study found that plan sponsors are increasingly perceiving retirement income as an integral part of DC plan menu. Consultants & advisors are looking for solutions that offer choice, personalization, flexibility & cost-effectiveness. Personalization, particularly for participants nearing retirement, was a recurring theme in the study.
It found that in 2021, 59% of consultants & advisors reported that over half of their DC plan sponsor clients had no clear stance on the issue of retirement income & personalization; by 2024, that figure dropped to 19%, indicating more sponsors are actively addressing retirement income as part of their plan offerings.
Source: Investment News
Evalueserve Viewpoint: Retirement providers could look to augment solutions which offer retirement income features such as TDFs / Managed Accounts with an embedded annuity contract for in-plan retirement products. In addition, firms could look to offer more personalized solution for participants such as Custom TDFs, Dynamic QDIA which would result in higher adoption of retirement plans amongst employees.
The US retirement system need to evolve to make the case for a "hybrid" system to support retirees
A new report is calling for reforms to the US retirement system, emphasizing the need for a modernized approach to address evolving challenges faced by retirees. Average retiree now spends about two decades in retirement—roughly double the time expected 50 years ago.
With four in 10 Americans at risk of outliving their savings and 57M workers lacking a retirement plan, it highlighted the urgency of developing an evolved system that considers changing times. The report suggests that most effective retirement system, one that's sustainable and secure, should be a "hybrid" blending best of both DB and DC plans.
Source: Investment News
Evalueserve Viewpoint: Retirement providers could look to create a unified platform which support offering hybrid retirement solutions - DB, DC plans together. This would allow plan sponsors to leverage benefits of both the plans. In addition, investment product should incorporate multiple glidepaths to incorporate features of both DC and DB products.
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