Blog Why Investment Solutions? Why Now?

Posted November 7, 2017 by Saadiah Freeman

The investment industry is undergoing a period of transformation. Asset managers are increasingly shifting their focus from manufacturing products to developing solutions. Meanwhile, in the financial advisory space, goals-based wealth management is becoming the new way to do business.

But why are these changes taking place? What are the drivers behind this industry transformation? Fee compression and product commoditization are often identified as the reasons why asset managers must "up their game" by designing solutions rather than just creating more products. At the same time, shifts in advisor business models are often attributed to regulatory changes. While all of these are relevant considerations, however, there’s an underlying factor that’s arguably even more important: investors’ changing lifestyles and priorities.

Research, Analytics, and Consulting Why Investment Solutions illustration

Historically, designing investment solutions – at least for the majority of mass affluent investors – was seen as a relatively straightforward process. Advisors felt safe to assume that most clients would continue to generate income steadily up until a pre-determined retirement age when they would stop working altogether. Younger clients would be advised to invest more aggressively, with portfolios heavily skewed towards equities. This balance would shift progressively towards fixed income as the client neared retirement, with a complete transition to income-generating assets once the long-anticipated retirement day had passed. A home mortgage and college funds for the kids might raise a few additional considerations, but by and large, the "solution design" (or allocation) wasn’t seen as particularly complex. Instead, advisors would add value by recommending products that they believed would deliver the best risk/return profiles, within the broad framework of a standard portfolio solution.

Now all of that is changing. For starters, the concept of retirement is no longer black and white. Nearly 20% of Americans aged 65 or older are currently in paid employment, and this figure looks set to continue growing, with 66% of American millennials saying they expect to work past age 65, and 32% expecting to work past 70. For many, however, this won’t necessarily mean staying in a single career for a longer period of time. For example, contrary to the popular image of the young start-up founder, almost half of new entrepreneurs are aged 45-64. The structure of working life isn’t just changing for older people, either. And while younger people expect to stay working longer than previous generations, they don’t automatically expect to have linear career paths. Seventy-six percent of American millennials expect to take career breaks of longer than four weeks, while globally, over half of millennials say they’re open to new ways of working in the future, such as freelancing, gig work, and portfolio careers.

All of these changes have significant implications for investing. Portfolio careers, re-training, and career breaks all add up to uneven income streams, which require more complex solutions. Similarly, older investors who don’t plan to quit working completely may not need to shift as aggressively towards income-generating assets as in the past. While these are just a couple of examples, more complex lives and careers require a more sophisticated investment approach. Given this, the shift towards designing solutions that match investor goals is just common sense.



Saadiah Freeman
Engagement Manager
Research, Analytics, and Consulting

categories: investment strategy, millenials, investment product, regulation

The views expressed in this publication are solely those of the author and do not necessarily reflect the position or policy of DST Systems, Inc. or its affiliates, subsidiaries, joint ventures, officers, directors, or management.




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