Practice Guide : 10 Questions for Advisors

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What every financial advisor should ask at the start of 2022

Winter caught up to us fast in Sheridan, Wyoming. We had an unusually warm fall.  It was over 70 degrees on December 1st – then a frigid -9 degrees when I woke up this morning. If you’re not familiar with Wyoming weather, it can be unpredictable and can change quickly—just like financial news, markets, and trends. Rain or shine, you must be prepared.

As we enter the third year of the COVID-19 pandemic, I wonder what 2022 will bring and what concerns the financial industry and advisors should be prepared for—like inflation, volatility, and taxes. While not all change can be foreseen or planned for, it’s the trends, opportunities, and risks that an advisor is not ready for that can leave them in the dust—and potentially do the most damage to their business and clients.

With that as the backdrop, here are the ten questions I’m pondering and ones I believe advisors should ask themselves to help prepare for the unknowns of the year ahead. You may not have the answers—and that’s okay. But I challenge you to think through them. And join the conversation by engaging with us on LinkedIn. We’ll be unpacking the questions throughout the year and want to hear your thoughts.

I wish you all a wonderful and prosperous 2022.

Ten Questions for Advisors to Ask:

  1. Are my clients’ portfolios positioned to handle a down market?

After a year like 2021, when the S&P 500® went up by nearly 27%, it may be tempting to believe the trend will continue. But as history has shown, what has performed well in the past doesn’t always continue. Will there be some sort of catalyst—whether it be a slowdown in economic growth, inflation, or Fed moves—that drives a market selloff? And if so, do you have the right tools or strategies to handle a market downturn?

  1. If we continue to see outsized returns from U.S. large cap stocks, will my clients’ market expectations become unrealistic?

According to a 2021 survey by Natixis[1], individual investors have big expectations for investment returns – expecting long-term average returns of 17.5% above inflation from the U.S. stock market. Whereas financial advisors expect 6.7%. What scares me the most is that 67% of advisors said their clients were unprepared for a market downturn. So, not only do I believe there’s an opportunity for advisors to reset clients’ return expectations, but to also make sure they educate on the risks of the current markets.

  1. Will inflation be a problem?

One of the greatest debates of 2021 was whether inflation was here to stay or not. While the debate rages on, there’s one important point that my colleague, Geremy van Arkel, CFA recently made. And that’s that “historically, rapidly rising inflation has set into motion a chain reaction of events that have often led to recessions.” Many investors are concerned too. In fact, according to a recent survey[2] by CNBC, the biggest worry of investors in 2022 is inflation. While in the near-term investors may see higher returns on stocks due to increasing prices, if inflation keeps rising, the Fed will have no choice but to act by raising rates. And if that happens, the stock market can negatively be impacted.

Against this backdrop, advisors should help clients protect their investments against inflation – investing excess cash in a diversified portfolio that fits their goals and time horizon or by investing in a portfolio that seeks to mitigate inflation risks.

  1. Will taxes go up? And if so, am I providing my clients with what I believe to be the best tax-managed strategies?

People hate to pay taxes. Advisors who focus on how to maximize after-tax returns will likely have an advantage—especially with tax increases being very possible in the future. However, because not all tax-managed investment approaches are the same, advisors should educate themselves on the various tax-managed strategies available to them. Many common tax managed investment approaches focus on minimizing taxes. But there are many other factors to consider beyond just trying to make taxes zero— including risk and return. Do your research. And choose wisely.

  1. Does cryptocurrency have a role in a portfolio?

As investors sought outsized returns in 2021, cryptocurrencies surged in popularity. With the demand came new investment products and a debate over whether digital currencies are a legitimate asset class.  Will these digital assets take a step closer to gaining a credible slice of the asset allocation pie or will their continued volatility keep them out of financial advisor portfolios? While arguments in favor point to the substantially higher return and increased diversification potential of cryptocurrencies, arguments against point out the speculative and risky nature of these investments. Keep an eye on these investments in 2022 – time will tell what role they may have in a portfolio.

  1. Will there be greater transparency of fees in 2022?

Greater fee transparency is likely to continue to be a theme in the industry – especially with increasing client sensitivity and awareness of how the perceived fee and actual fee paid can be very different. Make sure you can explain to clients the various fees – even the “hidden” fees and costs – and justify your fee.

  1. Should you outsource your investment management?

According to a 2020 study by FlexShares[3], “85% of advisors plan to reassess and possibly consider using external investment managers because of COVID-19.” The pandemic put financial advisors to the test – and many advisors are asking, “Do I want to spend time on researching and managing portfolios? Or do I want to spend time with clients and growing my business.” I expect the migration to outsourced investment management to continue – and for other services to be outsourced as well.

  1. Am I prepared to offer hyper-personalized investment advice, services, and solutions?

Investors’ desire for hyper-personalized investment advice, services and solutions is on the rise. As an advisor, you should no longer assume a one-size-fits-all solution and service model will work for all your clients’ needs. Instead, to differentiate yourself from the pack and to help prevent clients from moving to low-cost providers like robo-advisors, consider providing advice, services and solutions tailored to your client’s expectations.

  1. Do I have the right advisor technology stack?

The explosion of the FinTech industry is giving us more technology solutions than we ever thought possible. But where do you start? First, ask yourself what you want to be really good at that will help you differentiate yourself. For example, if you want to be known for your white glove service, you may want to look at a robust CRM system that can help you keep track of every point of client interaction and communication. If you want to be known for catering to younger, tech-savvy clients, you may want to invest in a state-of-the-art client portal. Or maybe you want to be known for risk-management. In that case, look to invest in risk-analysis solution technology. Once you’ve identified what you need, look internally to see what resources are readily at your disposal. If you can’t find what you’re looking for, there are many advisor fin-tech solutions out there to research and consider – or ask another advisor what tech stack they’re using.

  1. Do I have the right marketing content?

“Content is king.” I’m sure you’ve heard that before. Smart financial advisors employ a content rich marketing strategy to not only attract clients, but to engage and retain clients. Providing timely, relevant content helps differentiate yourself from other advisors, increases your brand recognition and helps initiate conversations with clients. But how do you find the right content? An easy option is to look to your asset management partners. Most asset management firms have readily available market commentary, blogs, and tools for you to easily and quickly disseminate content.

[1] 2021 Global Survey of Individual Investors, Natixis
[2] Delivering Alpha Survey, CNBC, December 2021
[3] “The Race to Scalability,” FlexShares Exchange Traded Funds
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