Turnkey asset management firm AssetMark has redesigned its investment platform based on principles of behavioral finance to help advisors manage client emotions during extreme market movements by turning the conversation away from "what" investments are in a client's portfolio, to "why" those investments are there.
“It’s really common in our industry to define investment solutions based on the underlying instrument,” Natalie Wolfsen, chief commercialization officer at AssetMark, said. “Unfortunately for investors, that doesn’t resonate with them.” What does resonate with investors, she said, is understanding that a particular piece of their portfolio is there because, for instance, they need exposure to global economic growth through core markets.
“The real change is organizing our whole platform around words that naturally set expectations between advisors and their clients,” she said. For instance, “where there’s no mystery that your tactical limit-loss strategy is intended to limit loss, not enhance returns,” said Wolfsen.
AssetMark currently has 7,000 advisors and $29 billion in assets on the platform.
With its new platform, the firm is trying to be more transparent about what investors can expect from their investments in various market environments, both good and bad. The firm has introduced three primary strategies, each with an intended purpose within the portfolio. The first strategy, “core markets,” is intended to capture market returns.
“This is the portion of the portfolio that’s going to rise and fall with the markets, and it’s going to allow the investor to participate in global economic growth,” Wolfsen said.
“Tactical strategies” is the portion of the portfolio that allows the asset managers to dial up or dial down equity exposure when the risk of the current market is high or low. AssetMark has a long history of having tactical managers on the platform, but investors had misconceptions about what they were trying to do. The hope is that the new strategy will make it more clear to the investor what they’re getting.
“One of the ways that we can have more equity in the portfolio when risk is low is having flexibility for the asset managers to be tactical and dial down that equity when risk is high,” Wolfsen said.
The third bucket, “diversifying strategies,” includes investments that have high impact and low correlation to either equities or bonds. Managed futures, for example, have historically moved in the opposite direction of equities. The idea here is that when things are extreme, there’s a portion of the portfolio that’s working.
The three strategies are made up of mutual funds, ETFs, bonds, individual securities and other investments.
Another new feature aimed managing client expectations is the Portfolio Engine, which will launch March 28. This is a portfolio construction tool that allows advisors to put together components of a portfolio and then evaluate how those portfolios react in extreme market conditions. The tool will also show how the combination of strategies and managers will impact the client’s long-term returns and their goals.
The firm also changed its risk questionnaire and provided advisors with conversation guides on, for instance, the difference between average risk and maximum loss threshold. The questionnaire asks, “What is the maximum amount you could lose over an extended period with no relief in sight before you’ll feel compelled to exit the market?”
“It makes the loss you’re likely to experience in an extreme market environment very real to the investor,” Wolfsen said.