The 'megatrends' defining the future of investing, per the CFA Institute

Global affairs, ESG investing, technology and inflation are shaping the future of investing, and financial advisors and portfolio managers must confront those challenges to get ahead.

That's the key takeaway from the first report issued earlier this month by the CFA Institute's new Research and Policy Center and called the "Future State of the Investment Industry." A half dozen authors from the Institute — a global association of investment professionals overseeing the standards of the chartered financial analyst designation held by 200,000 certificants worldwide — identified four main themes facing the industry after conducting a poll of more than 3,000 members late last year and holding forum discussions on the future of the field. They are: "diverging worlds, sustainable finance, digital transformation and the end of cheap money."

The research followed a growing breadth of analysis pointing to the rising level of investor interest in alternative products, the need for greater use of model portfolios, concerns about a ramp up of regulation and an escalation of the power held by a few firms in a rapidly consolidating industry. In a webinar session with the media, CFA Institute Chief Economist Andres Vinelli explained how the main trends formed notable contrasts with those of a similar report from the organization tracking the forces affecting the industry's future six years ago.

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For example, the "important implications" of foreign affairs affected by the pandemic, wars, inequality and demographic change include a requirement "to focus on harmonizing different rules and market structures across different jurisdictions as the world diverges into different zones of influence," Vinelli said. Inflation has pushed up money-market yields while "the appetite for risk and for leverage in global portfolios may go down" as a result, he noted. In terms of ESG, investors show "a lot of appetite" for integrating environmental and social impact into their portfolios, but there's also "a good degree of backlash" against those methods, Vinelli said. 

"Now the industry will be able to personalize their thinking around providing solutions to people in finance and building portfolios in a much more personalized way than ever before," Vinelli said about digital tools' impact on investing. "This has many implications about talent in the industry and human capital. We see a skills mismatch, in terms of skills around coding, skills around the analysis of non-traditional data, familiarity with artificial intelligence, the propensity to innovate and fail, but fail fast. Those are going to be key components that are going to be needed by organizations in the industry in the next five to 10 years. So as a result of all these scenarios, we see a more fragmented industry that customizes value to highly idiosyncratic customers in a more fragmented world."

The Institute's report recommended that investment managers and professionals in the industry tap into expertise to eliminate those skill gaps, among other advice. Firms and professionals should embrace "a multistakeholder business model centered on purpose and aligned to a fiduciary mindset," find "the opportunities brought about by new technologies and data" and ensure that they "understand the intersections among finance, data science and sustainability to be agile in the evolving industry landscape," according to the report.

"Together, these trends point to a future state of much greater market segmentation, with more diverse opportunities for firms," the report concluded. "Rather than seeking to be 'one product for all' in their product offerings, firms may gravitate toward the maxim of 'one product for each,' with each customer expecting personalization. In the broader industry, larger firms will apply advanced technologies at scale, and smaller firms will operate in more niche and focused product areas. Through more sophisticated investment products, the industry can deliver greater client value and satisfaction."

The findings reminded Andy Finnegan, the marketing lead for global investment manager GMO's "Nebo" portfolio design platform, which stands for "needs-based optimization," of the importance of personalization, technology and a focus on client needs, he said in an email. Nebo topped $1 billion in assets earlier this month after only one year since its launch.

"We think the future of financial advising is aligning the plan with the portfolio. Today, most assets are outsourced into cookie-cutter portfolios where risk is based on volatility and untethered from the financial plan. Consequently, advisors lack confidence that their clients are in the right portfolios," Finnegan said. "In the future, we think all advisors will be building one-of-a-kind portfolios for every client, featuring a custom asset allocation designed to meet their specific goals."

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Vinelli pointed to direct indexing as an example in which "people can effectively tweak portfolios in a way that it's right for them, not only in terms of exposure, but to take into account their idiosyncratic preferences and realities as individuals."

Despite massive gains in assets flowing to private credit instruments and private equity funds, Vinelli predicted that the "sector is likely to be poised for a correction as non-bank financial institutions receive more scrutiny." Stocks and bonds could have more years like their historically bad performance in 2022 as well.

"Investors, leaders and professionals should really prepare yourselves for greater volatility in this new era, and greater complexity," Vinelli said. "This translates, I think, into important opportunities to serve clients and stakeholders. And the ability of firms to nimbly navigate these waters will determine their success in the next five to 10 years."