Before predicting what the new year holds for the financial advice industry, we must first look back on a 2021 filled with Covid-19-related instability: surging inflation rates, persistant unemployment and the most volatile period for stocks in nearly a decade.
But even as these phenomena follow us into the new year, so too will an investment sector that has experienced continued innovation as new, and newly accessible, tech platforms and products transform the financial services landscape and contribute to positive change in how we invest—as well as who is investing.
Here are my thoughts on how these trends will play out in 2022.
The anti-product trend will continue. Due to emerging and innovative technologies in recent years, financial technology is now being applied at the individual account level versus within a traditional product structure. New tech offers features that allow for investor personalization and new avenues for monetization in advisory firms.
This shift is evidenced by the growing personal indexing trend, which allows for enhanced personalization by packaging equities and fixed- income securities in accounts based on investors’ individual goals and/or preferences. Technology is delivering the same investment strategies to individual accounts without the legal product structure. As a result, account minimums will move lower, personalization options will increase, and tax outcomes will improve as the technology advances and becomes more scalable.
Alternative investment products will move downstream. Alternative investments have traditionally been considered tools for high-net-worth investors. But thanks to the rise of interval funds, which bridge the gap between illiquid hedge funds and liquid mutual funds, this is no longer the case. Mass affluent individuals can now engage with alternative investment products in more strategic, deliberate ways.
Interval funds allow investors to break into new markets for return, as opposed to traditional public markets that are arguably running hot right now in valuation. With more than 100 interval funds on the market today, including 11 new filings in 2020 and six in 2021, I predict alternative investment strategies like these will become increasingly prevalent in the new year, giving investors exposure to private markets and thus providing access to a return stream that was previously only available in the high-net-worth space.
Product crossbreeding will grow. Crossbreeding products has been a trick of the trade for quite some time and it’s showing no signs of slowing down, what with annuities being incorporated into retirement plans and ETFs evolving into actively managed products the same as mutual funds. We are seeing it even in the previously discussed interval fund space where private equity or private debt are being placed into Investment Company Act of 1940 fund structures.
However, the most popular type of product crossbreeding in 2021 has been structured products, or packaged options strategies that are linked to a security or basket of securities. These packaged strategies have become incredibly popular for their ability to offer forms of downside protection, providing security when investing in today’s largely uncertain market. While structured products are now being incorporated in mutual funds and annuities specifically, they are increasingly found in ETFs as well.
Of course, it’s worth noting that while product crossbreeding at large represents an exciting new frontier in financial investment, it’s not without risk. Accordingly, it will be important for anyone considering products like these to understand the pain points associated with solutions that have not yet fully matured or been widely tested. As with any new investment package, it can be difficult to accurately assess how any one combination will perform in the short and long term.
Despite leaving behind a year marred by financial instability, market volatility and uncertainty around every corner, we know that when faced with seemingly insurmountable obstacles, financial advisors have historically risen to the occasion, pioneering creative new investment products that improve reliability, enhance portfolio returns and attract new entrants to the market. As we look to the future, excitement, not uncertainty, abounds as we imagine the possibilities before us and our clients.