‘Make sure clients know what they own and why’

As registered investment advisors face an increasingly complex landscape marked by rapid technological advancements, changing client demographics, market uncertainty, and emerging investment opportunities, the path to sustainable growth and competitive differentiation has become more challenging than ever.

In a recent webinar, several Goldman Sachs executives, along with Cameron Dawson, CIO of NewEdge Wealth, an RIA, gave advisors insight into the types of investment opportunities RIAs can use to help build their book of business and ultimately their clients’ wealth.

When it comes to building out alternative strategies within portfolios, Dawson said investors have to be highly selective, which “necessitates us as a firm to have a robust due diligence team in order to filter through all of the imbalance of funds that are wanting to get on our platform and be highly selective about the ones that we bring on.”

NewEdge Wealth, for example, met with over 150 private credit funds and chose just four. That kind of selectivity is imperative, Dawson added, mostly in times where capital rushes into certain pockets of the market, like private credit.

“The way you’re invested has to be far more focused and far more selective. The most important part in all of this is making sure that clients know what they own and why they own it,” she said.

This discussion also dived into ETFs and the substantial growth that those funds have seen. ETFs have gone from approximately $200 billion in the early 2000s to nearly $10 trillion currently, including hybrid models, noted Gregory Calnon, co-head of public investing at Goldman Sachs Asset Management.

“ETFs are an incredibly helpful and powerful tool in building out client portfolios to be able to get quick and tax efficient access to different asset classes, as well as to satiate need for lower minimum types of account. It’s a really efficient way to get access,” Dawson said.

There’s also the misperception of ETFs being “off the shelf”. Dawson shared that some of NewEdge Wealth’s clients’, specifically ultra high net worth clients, think that because they want a custom fund, they don’t need an ETF.

“There’s an education process in talking about how we can add value within the ETF space and being able to even use ETFs in some of these largest accounts, in order to get that quick kind of exposure, as well as the tax efficient exposure,” she said. “

According to Goldman Sachs, one of the largest growing segments of models is the hybrid business, which is an ETF that combines elements of debt and equity securities. “85 percent of hybrid models saw inflows in 2023, compared to 75 percent of index that are active. It’s really one of the emerging trends that we’re seeing there,” said Alexandra Wilson-Elizondo, managing director and co-CIO multi-asset solutions at Goldman Sachs.

One of the things that’s important about delivering through a hybrid model, Wilson-Elizondo pointed out, is advisors can use index inactive strategies, not only for tax efficiency, but “to really enable us to deliver alpha in multiple layers of the portfolio.”

Advisors and clients should be cognizant of what risks they’re trying to address within a portfolio, said Sylvia Yeh, head of fixed income wealth solutions at Goldman Sachs, and what new risks those solutions might bring.

“Clients are de-risking or repositioning by shifting their asset allocation towards more stable or less risky investments, such as fixed income securities,” Yeh said. “Clients are increasing their bond allocation, particularly to high quality bonds and more importantly, the message here is they’re letting those bonds be bonds.”

Yeh also highlighted frequent conversations with clients about extending duration in bond portfolios. “Cash and very short maturity bonds really aren’t a strategic allocation to fixed income,” she said. “Building out your fixed income allocation is a prudent way of de-risking.”

As for what kind of market advisors can expect for the remainder of the year, it’s not a soft or hard landing, but rather a “strange landing”, Dawson said, quoting Robert Heinlein’s novel Stranger in a Strange Land.

“The different sets of data tell very different stories about the underlying economy, whether it’s the labor market where you’re seeing some fraying around the edges, but not necessarily weakness within the headline. Labor Statistics, whether it’s the reacceleration in some manufacturing activity that we’re seeing, while other parts of the economy seem to be stalling out.

“All of these things tell conflicting signals and are likely a source of continued volatility for markets, as we move through the year,” Dawson said.

Related Topics: ETFs, private credit, RIAs