The Rise Of Evidence-Based And Passive Investing

Headlines:

1. Challenges of balancing regulatory compliance with personalised client service delivery highlighted, with a focus on consumer duty regulations.
2. Importance of data aggregation and customised systems to enable scalable, client-centric services emphasised.
3. Client segmentation strategies discussed, with debate over comprehensive versus tiered service approaches for varied client needs.
4. Bridging the advice gap through innovation and alternative models like financial coaching, guidance, and tech-based solutions explored.
5. Feedback channels with regulators suggested to align compliance with positive client outcomes.
6. Opportunities to streamline data integration and enhance reporting capabilities through customised system solutions.
7. Referral networks and adviser collaborations considered to ensure appropriate service levels across diverse client segments.
8. Promoting financial well-being across generations, with a focus on engaging younger clients and underserved groups.
9. Best practices in customised systems and data-driven approaches shared for efficient and personalised advisory services.

Discussion points:

Drivers of the Shift to Passive/Evidence-Based Investing
Several potential drivers behind the shift to passive and evidence-based investing were discussed, including regulatory pressure on advisers to demonstrate value, cost considerations, and the difficulty of active managers consistently outperforming benchmarks over the long term. The COVID-19 pandemic was also cited as a factor that challenged the notion that active funds could protect investors during market downturns.

Defining Evidence-Based Investing
Evidence-based investing was defined as a process of making decisions based on decades of research, historical empirical data, and long-term market observations. The approach involves tilting portfolios towards factors that have historically outperformed, such as small-cap and value stocks, without making short-term market predictions. The goal is to achieve market-like returns or potentially outperform by exploiting mispriced securities.

Active vs. Passive Management
The meeting discussed the differences between active and passive management approaches. Active management was described as forecasting and investing in securities with the goal of outperforming benchmarks based on research, analytics, experience, and skill. Passive management, on the other hand, was defined as a rules-based, transparent strategy that aims to match an index without identifying individual securities.

Cost, Simplicity, and Demonstrating Value
The role of costs in investment solutions was debated, with some participants arguing that cost should not be the sole driving factor, while others emphasised the importance of providing cost-effective solutions that demonstrate value to clients. The concept of simplicity for clients was also discussed, with some participants suggesting that clients appreciate simplicity in investment approaches.

Accumulation vs. Decumulation Phases
The meeting explored the implications of investment strategies for different client phases, such as accumulation versus decumulation (retirement). Considerations included the potential need for higher equity exposure during decumulation to account for longevity risk, the role of annuities or secure income sources, and the impact of sequence-of-returns risk.

Risk Tolerance and Client Needs
The discussion touched on the importance of aligning investment solutions with client needs and risk profiles. Participants acknowledged that risk tolerance could change over time, influenced by factors such as market volatility and life events. The need for ongoing review and recalibration of investment strategies based on changing client circumstances was emphasised.

Balanced Approach and Active Overlays
While some participants advocated for a purely passive or purely active approach, others suggested a balanced approach that combines passive instruments with active overlays or tilts based on empirical research. The concept of evidence-based investing was presented as a potential middle ground that leverages the benefits of both active and passive strategies.

Documentation and Evidence-Based Decision-Making
The importance of clear documentation and evidence-based decision-making was highlighted, particularly in the context of regulatory requirements and the need to demonstrate the rationale behind investment choices. Participants discussed the need to document the process, assumptions, and outcomes to align with regulatory expectations and client communication.

Key takeaways:

• Review and potentially incorporate evidence-based investing principles into investment propositions, considering factors such as empirical research, long-term market observations, and portfolio tilts towards historically outperforming factors
• Evaluate the balance between active and passive strategies within investment solutions, considering the potential benefits of combining passive instruments with active overlays or tilts based on empirical research
• Assess the alignment of investment solutions with client needs, risk profiles, and financial planning goals, ensuring that strategies are tailored to individual circumstances and can be clearly communicated and documented
• Establish processes for ongoing review and recalibration of investment strategies, taking into account changing client circumstances, market conditions, and regulatory requirements
• Develop educational materials and communication strategies to help clients understand the rationale behind investment approaches, including concepts such as risk tolerance, accumulation vs. decumulation phases, and the role of costs and value demonstration
• Explore the potential use of tools and resources, such as cashflow modelling and risk profiling questionnaires, to support evidence-based decision-making and align investment strategies with client goals and risk profiles
• Evaluate the fair value assessments and value propositions of investment solutions, ensuring that costs are justified by the benefits and outcomes delivered to clients
• Collaborate with investment managers, research teams, and regulatory bodies to stay informed about the latest developments, empirical research, and best practices in the field of evidence-based and passive investing