By Mitchell Wonboy & Adam Forbes
The wealth management industry appears to have lost sight of their clients. Look no further than the SEC’s “Best Interest” regulation, which aims to ensure financial advisors working for broker/dealers put their clients’ best interests before their own. It requires b/ds to act more like fiduciaries, which is currently a requirement for all registered investment advisers. This comes after the Department of Labor’s fiduciary rule, which was more severe, was struck down.
If it seems odd that it requires government intervention to force a business to act in its customers’ best interests, it’s because it is.
We believe that successful businesses and future wealth management models will succeed not because of government mandates, but because their product puts what’s best for the investor at the heart of the business. But what is in the “best interest” of a financial advisor’s client? We believe that the wealth management model of the future will be built upon three core principles:
- Align fees with performance.
- Make objective investment decisions.
- Always provide full transparency.
Align Fees With Performance
Across the investment industry we’re seeing a race to the bottom for fees. While the move to lower fees is broadly a positive trend, we feel it still misses the point. Charging fees while still underperforming the market—regardless of how miniscule those fees are—is doing a disservice to investors. Take into account that many investors are paying multiple fees to their advisors and to the mutual or exchange traded fund manager, and the money lost multiplies.
In our opinion, active fund managers and wealth managers truly aligned with investors’ best interests should be held accountable for their performance and only charge fees when their strategy outperforms the market or associated benchmark. Under this model, investors will never underperform because of fees again.
Make Objective Investment Decisions
Warren Buffett’s famous quote that investors should be “Fearful when others are greedy and greedy when others are fearful,” is powerful advice that is hardly ever taken. The reason for this is simple—human emotion and the investor herd mentality too often gets in the way.
We believe the single biggest factor to fund manager underperformance is human bias. This is seen through wealth managers making emotional decisions, trying to time markets or make educated guesses.
Advances in technology and the wealth of data now at our fingertips has ushered in an era where a place without human bias can exist. Instead, we think active managers and advisors of the future will rely solely on empirical data and mathematical-based approaches to stock selection and portfolio construction. Proprietary investment algorithms enable investors to make consistent, data-driven decisions as opposed to following the whims of their peers.
Provide Full Transparency
Consumers are demanding transparency across almost all industries today. They want to know where their food comes from, support only the brands they trust, and have on-demand digital access to information on the products they buy.
Why wouldn’t the same apply to the wealth management industry?
Unfortunately for investors who have a portfolio comprised of mutual funds, or even ETFs, it’s a rarity to see individual holding data on demand. Ask your wealth manager for a statement and it may only be available on a quarterly basis, meaning that investors are always looking in the rearview mirror.
Wealth managers who hope to compete in the future should offer on-demand access to investors’ full portfolios, providing insights on exactly what their clients hold and its daily value.
Investors today have more investment and planning options than ever before. With more options comes more scrutiny, which will force the industry to evolve. As the SEC, consumer advocacy groups and the financial advisory community debate the merits of Regulation Best Interest heading into 2019, we urge the industry to instead look inward and develop investment vehicles and new business models that inherently act in investors’ best interests.
Adam Forbes and Mitchel Wonboy are the co-founders of SGIM, an investment adviser registered with the Securities and Exchange Commission.