This news service talks to one of the world's largest asset management houses for its views on investment trends, the current volatile market environment, whether "60/40" portfolios are an endangered species, and more.

This news service recently spoke to Fran Kinniry, CFA, head of the Investment Advisory Research Center at Vanguard. Kinniry oversees the global team that produces research on trends shaping the advisory industry. As one of the world’s largest asset managers (about $7.8 trillion of assets under management), insights from Vanguard obviously deserve attention. 

Family Wealth Report: What are the most important trends in the advisor world that you’re seeing? (Please give some examples and reasons for these trends being what they are.)     
Kinniry: The two most common trends in the investment advisory space are the same trends we are seeing in all industries. Namely, the rapid diffusion of technology and more discerning consumers who have more transparency into relative advantages between service providers. This has led to a hyper competitive environment across industries. Financial advice is not immune. As a result of these trends, advisors must establish a dependable and predictable value proposition.

Advisors increasingly focus on wealth management, tax planning, and behavioral coaching – the core tenets of what my team calls Advisor’s Alpha. Advisors with a narrowly focused value proposition of outperforming the market via security selection, market timing, mutual fund rotation, or market forecasting may have trouble adapting in a rapidly evolving advice market.

How have the trends in the industry that you talk about been affected and shaped by rising interest rates and associated market reactions?
The unprecedented rise in inflation and interest rates, coupled with concentrated positive returns in equities, have demonstrated how difficult it is for advisors to rely solely on market forecasting as the core of their value proposition. The movement of advisory value to wealth and tax management, behavioral coaching, and relationship management continued to accelerate given the market environment. 

You stated that advisors can boost net returns for clients through using Vanguard Advisor’s Alpha™ concept and firm research. Can you explain in some detail why you think this? Can this be tested in any way?
Financial advisors understand the importance of adding value to clients' investment experience. However, quantifying that value can be a challenging task. That's where the concept of Advisor's Alpha comes in. By embracing and implementing the principles of Advisor's Alpha, advisors can not only enhance their clients' outcomes but also differentiate themselves in a competitive industry.

Advisor's Alpha is a framework developed by Vanguard that focuses an advisor’s value on relationship-oriented services such as financial planning and wealth management, portfolio construction, after tax outcomes, behavioral coaching, and relationship management as the primary objectives of an advisor's value proposition. 

Changes to stock, bond and alternative markets, coupled with market volatility, have raised questions about the so-called 60/40 portfolio and what sort of asset allocation makes the most sense? What’s your view on where we are in this debate? Will rising bond yields affect the conversation? 
“Is the 60/40 dead?” is a commonly misunderstood question. It is important to understand the context. At the highest level there are low, medium, and high-risk investments. For example, money markets carry the lowest form of capital depreciation risk, with stable net asset values, but have high purchasing power risk, which is the risk of not keeping up with inflation. Relative to money markets, bonds carry higher market depreciation risk. But to compensate for that risk, they have higher risk premiums than money markets and as such carry lower purchasing power risks than money markets over the longer run. Stocks carry much higher market depreciation risks compared with bonds, and as such carry higher expected risk premiums to compensate allocators for such capital depreciation risks. Therefore, the 60/40 allocation is not for every investor, but simply one asset allocation among hundreds of allocations.

The asset allocation for any specific investor should be based upon the investment goal and objective, time horizon, and unique risk tolerance of each investor. The 60/40 portfolio is one of thousands of potential asset allocations that may meet the needs of a particular investor. With that context in mind, the 60/40 portfolio has performed well and, as expected, both over the past few years and over the longer term. It has proven tough for even the best professional allocators to beat. Despite a tough market environment over the past decade, with an equity bear market in March 2020 and an historically bad bond market in 2022, the annualized return for the 10 years through 2022 was 6.1 per cent for a globally diversified 60/40 portfolio.

Do you think clients’ investment time horizons are going to be longer or shorter as a result of all the recent turmoil?
Investment horizons should be based upon when an investor will need the money and should not change in response to market events. They should be stable and slow moving. That said, decision horizons are often shorter than investment horizons.

Decision horizons are the time frames in which investors make decisions and are often based on loss aversion, emotions, and recency versus long-term thinking.

The good news, however, is that we have recently seen investors and their advisors embrace stay-the-course behaviors. For example, in Vanguard’s latest Risk Appetite Speedometer, allocations between equities, bonds, and money markets have remained very steady over the past five to 10 years, despite wild market volatility. Cash flow and investor behavior look very different from the prior 30 years, which showed investors and their advisors chasing returns and not staying the course. 

Do you think advisors need to help clients reframe their return expectations? Are there insights from areas such as behavioral finance that you would draw from, etc? 
Markets are forward-looking. New, unexpected information that differs from consensus expectation drives the market. If new information was expected, it would be priced in and would not move the market much. As a result, setting client return expectations can prove difficult. 

Based on our research, advisors can better serve clients by helping them understand historical context. For instance, understanding that volatility and drawdowns are not anomalies, but rather, a near-inevitability for long-term investing. A crucial aspect of an advisor’s job is preparing clients for potentially stressful situations to keep them on track for their long-term goals, regardless of short-term market conditions. Insight from our work is that many, in fact most, especially those deemed as experts of a craft, like to believe that they have control or have a process to form a realistic expectation.
 
On a positive tack, do you see opportunities in the investment advisory area that are perhaps not being understood at the moment? 
Advisory firms increasingly embrace the positive value creation activities within Advisor’s Alpha that I have been describing for more than two decades. This is not only positive for advisory clients, but also for the advice industry as a whole. We expect advisors will continue to focus their time and attention where they have a high probability of improving client outcomes, as explained in Advisor’s Alpha. As such, we remain very bullish that the advisory business will continue to thrive as the activities provided are needed and adding to advised investor outcomes.