Mercer: Firms Must Evaluate and Adjust to the Shifting Landscape

Wealth management firms need to evaluate and adjust to the shifting landscape as economic, political, and other factors affect markets and investment outlooks, according to a white paper from consulting firm Mercer. In the paper, Mercer offers eight areas of focus for firms to consider in the coming year.

The key areas for 2018 include:

Communicate Investment Beliefs

Establishing and communicating investment beliefs is critical for maintaining relationships with both internal and external stakeholders. Communication channels should be evaluated for effectiveness across different client segments. Digital interfaces are now considered standard, so firms that do not employ them are encouraged to develop them.

Find a Governance Structure that Fits

Governance for advisor-driven models should keep an advisor “on track” in his/her recommendations to clients. Firms with more of a centralized model should ensure that there is a “credible challenge” process in place, and that the right stakeholders are involved.

Monitor Your Rep-as-PM Program

Over the last five years, the registered representative as portfolio manager (Rep-as-PM) segment has grown significantly, signaling both opportunities and challenges to firms and investors. However, the programs also have potential to present risk challenges to a firm since more clients are invested in a model portfolio that the home office may not have fully vetted. Firms are developing programs to both vet new Rep-as-PMs and provide increased monitoring and support to help manage investor and firm risks.

Optimize Through Partners

Firms are best served by focusing on their competitive advantages, and sourcing other duties to partners. This could mean working with technology firms for some middle- and back-office functions, or partnering with a firm to provide investment management capabilities while advisors focus on client service development. When selecting a partner, firms are advised to complete investment and/or operational due diligence, including reviewing potential cybersecurity risks.

Seek Alpha Via ESG

Environmental, social, and governance (ESG) increasingly is being perceived as a strategic, long-term investment expected to yield more alpha over time. For advisors and investors, strong investment options exist in many asset classes.

Implement Risk-Reducing Strategies

With equity valuations reaching new highs, investors should be strategizing how to mitigate market risks for their portfolios. Liquidity and ongoing rebalancing may provide the optimal investment structure moving forward for some. For others, alternative investments such as option overlay and/or hedge fund strategies may be appropriate. Greater analysis and understanding of clients’ overall factor exposures are critical. 

Consider Broader Mandates

Allowing for broader, more global mandates can increase a manager’s available opportunity set and allow them to make tactical decisions between geographies or asset classes. Providing portfolios with broader mandates is consistent with the belief that tactical/dynamic decisions can add value and that managers are closer to the market and thus can more quickly act on market dislocations.

Improve After-Tax Returns

Implementing strategies designed to drive “tax-alpha,” such as digitally enabled tax-loss harvesting, have the potential to improve after-tax returns, while maintaining a client’s target risk profile. Recent enhancements in trading and digital portfolio analysis can allow wealth managers to apply quantitative techniques to client portfolios in a highly scalable and cost-effective manner that can have a significant impact on after-tax returns.