What is the future of investing?

Produced in partnership with Dimensional Fund Advisors.

I cannot predict the future, but I am sure about two things: one is that markets are getting easier to access, but increasing choice is adding complexity; two, investors enter the market expecting a good return, but increasing complexity creates ways for it to slip away.

In a future of expanding product choices and rising complexity, in an industry driven by product innovation and distribution, we believe that qualified, trusted financial guidance will prove more valuable than ever before. But how will wealth advisors reinforce and enhance their value proposition to investors, when many people are grappling with what will shape the future of the investment landscape.

Let’s consider some of the things that are changing and challenging the industry, and some of the things that will, or should, remain constant.

Start with investment strategy

Picking the right investment strategy is, and probably will always be, the most important planning decision. The product wrapper, platform, model, access point, etc. are all important considerations, but the underlying investment strategy can make or break someone’s financial future.

A prudent approach is to apply core principles such as low fees, low turnover, and broad diversification, and pair them with flexible implementation that enables a consistent focus on pursuing higher expected returns and managing risk.

This approach lends itself to a wide variety of investment objectives and can be applied by the world’s largest sovereign wealth funds and individuals alike. With a sound investment strategy in place, advisers can adapt this approach to individual needs and free up time to spend on helping people maintain the discipline required to reap the long-term rewards.

Evolving investment structures

In our work with financial professionals around the world, two trends are gathering significant momentum.

1. Exchange-traded funds

Around the world, mutual funds still capture the lion’s share of global investor assets. But the use of other vehicles has been rising. These include exchange-traded funds (ETFs), which were introduced in the US in 1993 and in Australia in 2001. Most ETFs in Australia mechanically track an index, but there has been an expansion of active transparent approaches that seek to outperform market benchmarks.

Within this context, Dimensional’s active ETFs offer the benefits of indexing like broad diversification, transparency and cost efficiency, but aim to overcome the shortcomings of index strategies with flexible implementation that we think makes a difference to long-term outcomes.

As noted above, the strategy within remains more significant than the structure, but the growth of ETFs comes with novel technology and operational architecture which can benefit advisers and investors.

2. Investment models

“Models” describes a broad range of managed investment solutions which provide periodically revised asset allocations. Their rising popularity around the world is driven by three main factors:

• Changes in technology;
• Regulation that has made investing easier to access; and
• The ability to package managed funds, ETFs, a combination of both, and more.

Different model solutions solve different problems for advisers. Some advisers are turning to models to simplify their operations. Some prefer to outsource certain investment and asset allocation decisions. Others find simplicity of a packaged solution frees up time to focus on conversations that matter most and deliver greater value to clients.

Dimensional has continued to innovate in this evolving industry, offering multiple sets of wealth models to give financial professionals more choices in how they integrate this investment structure into client portfolios.

Matching structure, strategy, and client needs

Technology continues to change how advisers connect with clients, allowing for longer, more frequent, and deeper conversations in a virtual setting than may have been possible when meetings only took place in person and often just once a year.

Every generation of investors must navigate a changing financial landscape, while maintaining focus on their goals. This gets harder with every escalation of the hyperactive flow of information that can lure investors into making hasty investment shifts.

One of a financial professional’s most important roles is to teach clients to develop a long-term view of markets, embrace uncertainty and to tune out the noise. For investors of the future to enjoy the rewards of capital markets, advisers must continue to combine technical knowledge with personalised guidance and, perhaps above all, encourage discipline.

Bhanu Singh is chief executive officer of Dimensional Fund Advisors.

This is an edited extract from the Professional Planner Investment Innovation Guide. Click here to read the full article.