What to Watch for 2021 – Investing

What are the key trends in investing as the economy recovers?

In part two of our financial services focused “What to Watch” blog series we will be focusing on the world of investing. The current global pandemic has exposed shifts on all sides – from investment firms, to financial advisors, to investors themselves. The most obvious shift is a high dependence on digital tools, capabilities and services to keep investments moving. New digital tools and applications allowed the industry to keep moving and connected advisors and investors to continue to meet in a socially distanced world.

The onset of the pandemic also resulted in retail investors examining their portfolios and staying close to shifts in the market. A recent Schroders Global Investors Study found that almost 80% of respondents said they made some changes to their portfolio as a result of the pandemic and associated market disruptions. Only 19% said they kept their investments “where they were”. Only 3% were unaware of the turmoil in the markets, and took no action. There is also a generational divide with younger investors more likely to act on market changes. Millennial investors (aged 18-37) were almost twice as likely to alter their portfolios as their parents, the “Baby Boomers” (aged 51-70), the research showed.[1] This could be the result of a general lack of experience, creating the drive to act quickly on changes.

For 2021 we can expect the foundational evolutions that we saw in 2020 accelerate and ultimately alter the entire investment journey.

 

Key Trends to Watch for 2021:

  1. Advice Gets Digital…and Social

At the start of the pandemic some financial advisors were likely rocked by the fact that connections with clients would be disrupted. A personal connection was always a key component of a strong advisor/investor relationship, so the question became – How do we keep personal connections in a disconnected world? Advisors and investment management firms by in large acted quickly, bringing digital tools to the forefront in serving client relationships.

One key market example has been Fidelity Investments who was been actively staffing its digital teams and building out the right technology. The firm’s latest innovation on the institutional side, The Fidelity Managed Account Xchange (FMAX), provides deep integrations with eMoney’s planning and Envestnet’s managed account technologies while simplifying contracting and eliminating manual processes; investing solutions from asset managers along with investment consulting from Fidelity; and a single contact point for inquiries and issue resolution.[2] The goal? Make it easier for advisors to serve their clients to support them in growing their business.

UBS has also set their sights on rolling out new advisor workstations starting now, with the goal of completing in the summer of 2021. The advances will help to strengthen the advisor and provide transparency. One feature, already released, has enabled advisors to give their clients a more accurate picture of their wealth and how they are being billed. The firm now calculates, on a daily basis, the average AUM in their accounts, as is done in the mutual fund industry.[3]

Beyond digital tools, advisors are also integrating social channels to stay connected to clients and identify prospects. A recent Putnam Advisor Study found that 74% of advisors using social media for business were able to initiate a relationship or onboard clients since late February. The positive results will also help to continue momentum. Advisors have demonstrated adaptability with 84% expecting that the changes made to their communication practices will largely remain going forward.[4]

Looking ahead to 2021 we expect to see investment firms and advisors leveraging technology and social to automate work processes and stay connected to investors.

 

  1. Robo Advisory Goes From Novel to Mainstream

When robo advisors hit the scene 10+ years ago they represented the new age of investing by being truly innovative, automated and unique. And the assumption when robos debuted is that they were meant for young, uneducated investors that were starting to dip their toes in the investing waters. In today’s world, that could not be farther from the truth.

According to a recent Hearts & Wallet study on Robos[5]:

      • About 8% of U.S. households report having money in robos as the struggle for the mass market continues.
      • Nearly half (45%) of consumers who are certain they have money in robos consider themselves “very experienced” or “experienced” investors. Over half of these experienced investors (57%) also use financial professionals.
      • Half (50%) of millennials with $500,000 or more in household assets use robos.

Robo advisors have entered the mainstream, and names like Acorns, Mint, SoFi, Robinhood and Betterment are becoming conventional brands in the investing space. In the face of the global pandemic our reliance on digital tools has become more imperative and this has allowed consumers to explore new investment channels.

Estimates for the future robo-advisory market predict between $2.2 trillion and $3.7 trillion in assets to be managed in support of robo-advisory services in 2020. By the year 2025 this figure is expected to rise to over $16.0 trillion AUM—representing ~3x the assets managed by BlackRock, the world’s largest asset manager to date.[6]

As the usage of robo platforms swell so will the technology – moving from automated investing to more predictive rebalancing tools and providing education and PFM advice. For 2021 the expectation is that growth of robos will continue as the offers become more sophisticated and open to wider consumer segments.

 

  1. ESG Enters the Fray in a Big Way

Environmental, social, and corporate governance funds have had a relatively slow build over the past few years…until the Covid-19 pandemic hit. Now investors are re-evaluating their portfolios, specifically looking to investment money in causes they believe in and have a positive impact on the greater good.

A new Federated Hermes ESG survey of U.S. financial advisors, high-net-worth individuals and families and institutional investors finds a significant majority of all three segments incorporating ESG considerations into their investment decisions.

      • 88% of institutional investors, 77% of financial advisors and 59% of high-net-worth individuals surveyed indicated they utilize ESG considerations when making investment recommendations.
      • 62% of all survey respondents agree the Covid-19 pandemic and accompanying economic downturn have made social considerations central to risk mitigation in investment strategies.[7]

Investors understand the impact that their portfolio can have, and investment firms themselves embrace the growth of ESG. Morgan Stanley CEO James Gorman says the zeal for environmental, social, and governance investments among the bank’s clients is “exploding.” ESG is “an important, if not the most important component” of clients’ investments, Gorman said. “It isn’t a fad. It isn’t going away.”[7]

The consensus may be that Millennials are the driving force behind ESG funds – however Gen X has been driving interest in ESG investments. Gen X’s interest in investments that make a positive ESG impact has climbed faster than that of any other generation in recent years, says Jackie VanderBrug, head of sustainable and impact investing at Bank of America. She says Gen X investors are asking the bank’s financial advisers to review their portfolios for impact more than any other group.[8]

For 2021 we can expect interest and accessibility of ESG funds to grow. This will not only help grow AUM for ESG but can also help shine a spotlight on more universal needs of the world.

 

  1. Thirst for Financial Literacy

In the face of an economic downturn investors can feel lost and are looking for the right tools and education. And investment firms have responded in-kind creating educational tools and resources that offer targeted and personalized information.

In fact, half of Americans reported they don’t know whether buying a single company’s stock usually provides a better return than investing in a mutual fund, per a study from J.D. Power.[9] What is interesting is that the world of financial literacy is wide open and no one provider or firm currently dominates the space.

Enter Google Finance. Google is an example of a tech firm that is making it easier for consumers to find data on stocks and market trends. Google Finance will help answer consumers’ questions, for example, and provide definitions for technical terms on its website. Other investment platforms like Robinhood are also providing educational tools to help bolster consumers’ financial literacy.

Looking ahead to 2021 we expect educational tools in finance to grow and become more personalized. One key example of personalization that we are seeing today is Morgan Stanley’s Women Without Limits platform that looks to close the gender gap with financial literacy by provided targeted education and programs specific to the needs of women today.

In 2021 we can expect to see financial literacy programs grow and come from all angles – from investment firms, tech firms, and advisors themselves.

 

Navigating the Future of Investing—Where ENGINE Comes In

All in all, we expect that the foundational trends of 2020 will continue to build and refine through the start of 2021. Investment firms are laser focused on innovation and upping the game of the entire industry.

2020 has accelerated digital plans of investment firms and pushed the entire industry to new heights. At ENGINE we understand the investing industry and the needs of all stakeholder segments.

Designing the Programs, Offers and Marketing Mix – We work with clients to build insights programs that are focused on building programs, offers and marketing that truly resonates and impacts ROI with target segments. This can be a mix of primary, secondary and strategic industry research to build the right insights program.

Monitoring the Competition – Businesses do not exist in a silo and it is important to stay close to the industry and competition to expose whitespace opportunities. Our competitive intelligence programs are built to specific client needs with a clear focus on actionability.

Understanding your Target Segments – In a very dynamic environment it is imperative to understand your customers and prospects – who they are, what they live, what they like, etc. These are often not easily answered, and it takes clearly defined insights initiatives to get to know your target segments to build products and marketing programs that speak to them. We have experience in building immersive programs to tap into the needs of both B2B and B2C audiences.

 

Written by Amber McCullough, Vice President at ENGINE Insights.

[1] “Market shock: how did investors react to the impact of Covid-19?” Schroders. August 4, 2020.
[2] “Fidelity Rolls Out Comprehensive Wealth Platform for Advisors.” ThinkAdvisor. November 16, 2020.
[3] “UBS: New Advisor Workstation to Fully Roll Out Next Summer.” Wealth Management. October 1, 2020.
[4] “Putnam Investments Social Advisor Survey.” Putman Investments. October 2020.
[5] “Wealthy Millennials and Experienced Investors: Where Robos Are Gaining Traction and Strategies to Capture the Mass Market.” Hearts & Wallets. September 2020.
[6] “The Expansion of Robo-Advisory in Wealth Management. Deloitte. September 2020.
[7] “Morgan Stanley CEO Says Clients’ Enthusiasm for ESG is ‘Exploding.” Financial Advisor IQ. October 20, 2020.
[8] “What Generation Is Leading the Way in ESG Investing? You’ll Be Surprised.” The Wall Street Journal. September 10, 2019.
[9] “50% of Americans don’t know if it’s better to invest in a single stock or a mutual fund.” CNBC. February 19, 2020.