Asking the right questions helps advisors curate personalized investing strategies

By Alex Laipple

‍

Think about what makes you unique. It’s not simply your age, gender, or socio-economic background but the events that have shaped you, your belief system, and your core values. And those beliefs and values have likely evolved over the years as your perspective and life circumstances have shifted. 

Now think about investing. Is it important that your investment strategy reflects your values? What about your other investments, plans for the future, and risk profile? 

When it comes to investment preferences, we are all unique. Yet many wealth advisors find it challenging to translate value into a portfolio, which may result in providing similar investment, rather than personalized investment, strategies. This also happens within households even though values, life circumstances, and risk profiles may (and often do) differ between partners or spouses, adult children, and other members of the family.

Advisors may find it difficult to personalize their offerings to clients because it takes time to understand what makes each client unique. Historically, advisors simply assessed a product based on its risk and return profile. Values weren’t a part of the conversation — they weren’t incorporated into the onboarding process or the product selection process.

Another issue is scalability. Without the right process or products,  it's not scalable to ask each person what their point of view is related to issues and causes. It’s critical for advisors who want to build a personalized investment offering to be able to report at scale. It's also hard because, historically, advisors have been trained to understand a client's risk and return profile, which is measured on its ability to deliver strong returns. 

‍

A Way to More Fully Understand Your Clients

We know how much time advisors spend trying to understand their clients’ risk profile as well as what clients want to accomplish in the short term (up to two years), medium term (two to five years), and long term (five to ten years). Do they want to buy a house, get married, finance college for children, or buy a second home? What are their goals for retirement? 

Onboarding a client is a critical moment in understanding what a client cares about. Here’s how we approach it at Ethic. First, we begin with a Value Mapping Exercise (VME) to better understand the issues and causes clients care about. We then create a diagnostic tool to show the client their investments today and where their money aligns and doesn’t align with their values.

‍

Co-founder and president Jay Lipman gives an overview of the VME.

‍

From there, we create a more sustainable portfolio that better aligns with their values and show them the impact of that transition. We then do a quarterly assessment to keep track of life changes, such as having a first child or additional children, and adjusting income or other factors as needed along the way. It’s also a good idea to do an annual reassessment. This is the best way to fully understand your client and create an investment plan that is unique to them. 

Finally, we report on four things on an ongoing basis: impact with tangible divestment equivalencies; proxy, which shows clients how they vote for or against management when they own specific companies; performance, which includes reporting on how a SMA strategy is performing relative to its benchmark; and, for tax managed strategies, we quantify the after-tax value-add on an account basis.

‍

How to Build a Personalized Investment Offering

Once you understand your client’s needs, there are various solutions you can offer based on their risk profile. Asset classes include fixed income, public markets, and alternatives (such as real estate, private markets, private equity, private debt, and cash), and product structures, which include off-the-shelf ETFs and mutual funds, individual securities, and customized solutions (SMAs). There are different price structures that expose clients to the various asset classes. 

Now look at the pros and cons of each. For example, ETFs versus direct indexing. ETFs provide an efficient way to diversify your portfolio across asset classes. Benefits of this offering include lower expense ratios and fewer operational headaches because it is one-size-fits-all. The cons include tax implications (it doesn’t allow tax loss harvesting because the investor owns one product) and the fact that it’s a cookie-cutter solution — the same for everyone — so it doesn't take into account the client’s personal beliefs and values.

The benefit of direct indexing is that it is fully customizable: The client owns individual companies so their risk profile, personal values, and taxes can be factored in with their goals. The trade-off is that the fee structure is higher, and it’s more work operationally for the advisor because each portfolio is unique. Some investors are also concerned that direct indexing is not as well established as ETFs and has less of a track record.