Financial Planning is King, but Investment Selection is still Essential
5 October 2021

Often, the value a financial advisor provides centers on financial planning. Investors consult with advisors to help set goals, get a sounding board for financial decisions, and ultimately, help them keep everything on track. 

And in the interest of increasing their value proposition, the next generation of advisors have gone all-in on a planning-based, goal-centered, all-in-one approach. 

According to a 2020 Broadridge survey, advisors under 40 are four times more likely than advisors over 55 to embrace a holistic planning approach. 

No doubt there’s tremendous value in financial planning and helping investors strategize around how to best achieve their goals. But a planning-first approach often glosses over wealth-building as a core service advisors provide.

Advisors are more than life coaches. 

When an investor entrusts their advisor with their investment portfolio, the investment selection process is essential to fulfilling an advisor’s planning promises such as aligning risk tolerance and staying on track for goals.

Today, we want to reflect on why investment selection is still critical to understand even when financial planning dominates the headlines. 

The Importance of Investment Selection

For a finance-focused occupation like advisors, the level of financial knowledge runs the spectrum from deep to surprisingly shallow. 

It’s not that surprising though, with evolving technology allowing advisors to outsource the majority of the knowledge work in their jobs. With the right tech stack, some 21st-century advisors hardly need to know anything beyond how to talk their way through client meetings. 

Of course — outsourcing investment management is an entirely understandable choice as it can simultaneously lessen the workload and responsibility. 

But in order to provide a truly holistic, fiduciary approach to your clients, investment selection should still be seen as a valuable service—even when it’s outsourced. 

By connecting with your clients and really understanding their values and investment philosophy, you can identify the best investment strategy that helps them meet their goals.

We are actually seeing a renewed interest in investment selection as consumers become more aware of how their investments match up (or don’t match up) with their personal values.

The rise of ESG investing, in fact, may give financial advisors a way to frame their investment management skills as a prioritized service instead of a commoditized one.

ESG Investing

Today’s investors care deeply about the social impact of their investments and are jumping at the opportunity to tie their personal beliefs into their financial plan, which is where ESG investing comes in. 

ESG funds captured a record $51.1 billion of net new money from investors in 2020, which was more than double the prior year, according to Morningstar. ESG funds also accounted for roughly one-quarter of the money that flowed into all U.S. stock and bond mutual funds last year. 

It’s no wonder—after a year marked by a global pandemic, increased environmental concerns and social unrest—that investors are looking to vote with their dollar. 

Investors also have more choice than ever. The number of sustainable funds available to U.S. investors grew to almost 400 last year—up 30% from 2019 and a near fourfold increase over the previous decade, according to the same Morningstar report. 

As an advisor, having a complete understanding of what your client values and why,  gives you the insight needed to effectively screen their portfolio for ESG concerns. 

There are a few ways you can align your clients’ values with ESG investing. Historically, sustainable investing focused on avoidance methodologies. This includes:

  1. Negative screening – Avoids specific companies with poor ESG performance, or companies that disregard ESG standards. 
  2. Exclusionary screening – Avoids entire sectors or industries when they conflict with the investor’s values. For example, investors may choose to avoid companies or industries with interests in alcohol, tobacco, firearms or fossil fuels. 

As the ESG investing trend has picked up speed, investors are not only looking to avoid investments that conflict with their values, they’re looking to actively engage with and support companies and industries that are making a difference. These methodologies include:

  1. Thematic ESG Investing – Actively pursues market exposure to specific long-term sustainable and ESG themes. For example, investors may target specific sectors or “topics” like gender diversity or clean energy that best align with their values and interests.
  2. Impact investing – Actively targets investments in sectors or companies intending to achieve a specific, measurable impact. For example, these projects could include affordable housing or access to clean water.

Investors are increasingly interested in ESG. According to a Fidelity study:

  • 79% of investors say they “love the idea of investing in a company that cares about the same issues that they do.”
  • 74% of investors believe ESG investments represent “a strategy they can feel good about and one that makes long-term financial sense.”
  • 1 in 5 investors are willing to pay more for an advisor who offers more socially responsible or ESG investing. 
    • This number climbs to over one-third when looking at Generation X, Millennial, and Generation Z investors. 

As an advisor, when you understand what your clients want, you can be a powerful force in helping them get there. By aligning your client’s investment selection with their financial plan, advisors can deepen relationships and deliver more value.

Building an effective investment strategy starts with comprehensive portfolio analytics, allowing you to manage investment risk and performance

Kwanti empowers your advisor-client journey with investment-centric data and visuals.

To see what Kwanti can do for you, try our platform risk free for 30 days. Click here to start a free trial now.

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