BlackRock: Markets Will Challenge FAs Over the Next 10 Years … But Here’s How You Thrive
Over the next 10 years advisors will be challenged with more difficult market conditions and only the strongest FAs will emerge victorious, Patrick Nolan, portfolio strategist for BlackRock, said at a Fidelity Investments conference this week. Advisors and investors have recently experienced a tailwind where they benefited from strong markets, he says. But Nolan predicts the next 10 years are not going to offer FAs the same type of returns as in the past. Indexes will only return 5.4% over the period, not including fees and taxes. U.S. equities and 10-year treasury notes are also predicted to return 7% and 3%, respectively, so generating returns for clients may be difficult, he says. But difficult doesn’t mean impossible and, according to BlackRock, FAs hoping to succeed in impending market conditions need to follow four guidelines for portfolio management:
1. Reduce investment return drag
FAs must decrease what they pay in management fees and become more tax efficient, Nolan says. If advisors are only going to achieve a 5.4% return rate, Nolan says they need to be able to maximize the amount of returns they keep -- and that means lowering fees and taxes paid.
2. Access drivers of returns more efficiently
Investment return drag isn’t just about fees and taxes; it can also involve how efficiently investments are accessed, Nolan says. And for this reason, he claims many advisors are discussing factor investing. Factor investing is choosing index investments based on specific attributes, ranging from value to volatility linked to high returns. If advisors are to more consistently generate excess returns for low costs, they must implement those techniques, he says.
3. Make clients more comfortable with previously unfavored asset classes
Capital market assumptions also show non-U.S. markets outperforming the U.S. over the next few years, and advisors must familiarize clients with “owning investments they are currently less comfortable owning,” like non-U.S. equities, to generate returns, Nolan says. FAs should invest more into international assets and they will need to help clients be more open to more asset classes, because many investors have a U.S.-bias, he says.
4. Choose active investment managers with precision
Active managers may be “crowding each other out” of client portfolios and diluting their portfolio benefits, Nolan says BlackRock data reveals. FAs should select active managers with a unique skill other managers can’t deliver, he says. But FAs will still need to use active managers many places in client portfolios. Be deliberate in what active manager is used and make sure managers don’t cancel each other out in a portfolio, he says.