Top considerations for financial intermediaries in 2021 - welcome to brighter - Mercer
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welcome to brighter
success
positioning clients for
Top considerations for
financial intermediaries
in 2021
Investor insights
Positioning clients for success — Top considerations for financial intermediaries in 2021 2 The year 2020 has proved to be one for the history books. It has also laid the groundwork for the possibility of more unprecedented events in 2021. With the market backdrop, a new administration and an ongoing public health crisis, advisors and their clients may find it more difficult to build durable portfolios that can withstand market uncertainty and meet clients’ investment goals. To best prepare advisors (and their clients) for the year ahead, we have identified five areas for consideration that we believe are critical for long-term success. © 2020 Mercer LLC. All rights reserved.
Positioning clients for success — Top considerations for financial intermediaries in 2021 3
1
Forward-looking returns:
Revisiting the balanced portfolio
Although the traditional global balanced The traditional global balanced portfolio (60% MSCI
ACWI/40% Bloomberg Barclays Global Aggregate)
portfolio of 60% equities and 40% fixed returned 6.2% per annum for the 10-year period ending
income outpaced more diversified portfolios September 30, 2020.1 In comparison, the S&P 500 gained
following the global financial crisis (GFC), 13.7% over the same period.2 We expect the balanced
portfolio to return 3.6% over the next 10 years.3
sustained low interest rates and high equity
valuations have greatly reduced return To enhance client returns, we believe intermediaries
expectations. Additionally, diversifying away will need to seek opportunities outside the traditional
balanced portfolio framework — this includes determining
from the S&P 500 to small-cap and non-US
where to allocate investments and educating clients about
equities as well as alternative assets has the potential risks and opportunities.
generally detracted from overall absolute
results over the past 12 years. Actions to take:
• Revisit clients’ liquidity needs to identify appetite for
alternative investment strategies, and discuss the
relevant risks, such as liquidity and fees.
• Explore alternatives strategies that have historically been
accessible only to institutional investors and may provide
higher risk-adjusted portfolio returns over a market cycle.
• Ensure the proper level of investment and operational
due diligence is incorporated within the manager
selection process — by either an internal team or an
outside professional firm.
1
Gross, reinvested returns. Past performance is no guarantee of future results. Actual results may differ materially.
2
Bloomberg.
3
xpected returns are hypothetical average returns of economic asset classes derived using Mercer’s Capital Markets Assumptions. There is no assurance that these
E
returns can be achieved. Actual returns are likely to vary. Please see the Important Notices for further information on return expectations.
© 2020 Mercer LLC. All rights reserved.
Positioning clients for success — Top considerations for financial intermediaries in 2021 4
2
The fixed income dilemma
With historically low interest rates and Questions to consider:
elevated global risk, advisors fear that fixed • What role should fixed income play in your client portfolios?
income may no longer be able to provide • How should you consider the risk-reduction bucket of
diversification (especially in down markets) the overall portfolio?
or the necessary level of income in client • Is increased yield worth the risk of potential loss if credit
portfolios. The past few years have been markets deteriorate?
• Are the diversification benefits of fixed income,
challenging, as many investors have sacrificed
particularly US Treasuries, still intact under the current
quality and ignored certain risks in seeking low-rate environment?
higher-yielding investments for client • Are other sources of income and yield — such as
portfolios. Looking forward, we encourage distressed credit, taxable municipals, preferred equities,
real estate (including non-traded REITs), high yield and
advisors to be mindful regarding fixed income
emerging markets debt — worth considering?
in client portfolios.
© 2020 Mercer LLC. All rights reserved.
Positioning clients for success — Top considerations for financial intermediaries in 2021 5
3
Governance is key for
market crisis readiness
By their nature, market crises are a surprise Actions to take:
and are generally unprecedented. However, • Revisit core investment beliefs internally and ensure they
for the prepared and patient investor, they can are reflected in the client’s portfolio positioning.
also create opportunity. Fiduciaries overseeing • Understand risk exposures and stress test portfolios.
client portfolios should be thoughtful and • Reeducate clients about long-term goals and objectives
ready to act. Having the proper planning and the importance of being prepared to take action in
future volatile market environments, such as rebalancing in
and governance structure in place is crucial market drawdowns.
to address client priorities ahead of time, • Maintain an opportunistic bucket — have dry powder
enabling them to capture opportunities as ready to implement if and when opportunities arise.
they arise rather than succumbing to panic- • Consider possible tax changes and how they may affect
future after-tax investment returns.
driven decision-making.
© 2020 Mercer LLC. All rights reserved.Positioning clients for success — Top considerations for financial intermediaries in 2021 6
4
Managing inflation:
The devil is in the detail
As central banks across the globe continue to Questions to consider:
demonstrate a commitment to expansionary • Does the combination of fiscal and monetary policy
monetary policy, investors are increasingly in 2020 change how we view the future?
worried about the threat of inflation. This is • Are there new asset classes (e.g., cryptocurrency) that
not a new phenomenon. Inflation concerns should be evaluated as part of the toolkit?
last surfaced after the GFC but did not • Are there existing portfolio allocations (e.g., equities,
emerging markets debt and high yield) that will help
materialize. The question now is whether combat inflation over the long term?
the typical inflation protection playbook will • Is there a hypothesis for more tactical asset classes
be relevant or whether a different approach (e.g., gold or currency overlays) to be included in
investors’ strategic allocations?
is required given the amount of fiscal and
• Should investors aim to hedge or outpace inflation?
monetary stimulus in the market and the
impact of COVID-19 on certain segments.
© 2020 Mercer LLC. All rights reserved.Positioning clients for success — Top considerations for financial intermediaries in 2021 7
5
Responsible investment:
Understand the evolution
Responsible investment (RI) is an umbrella Actions to take:
term for economic, social and corporate • Focus on education and training so advisors can
governance (ESG) investing, impact investing, effectively establish an RI approach with their clients.
screened investing and active ownership. It • Understand and overcome implementation
has become clear that RI cannot be ignored, challenges (e.g., technology, reporting, lack of
high-quality investment products).
and we believe it will be the path to better
• Consider firm-level beliefs to differentiate your
investment results in the long run. An advisory practice and help guide clients since ignoring social
firm’s ability to offer flexible approaches and factors could be a risk to your business — many
show measurable impact will be appealing believe it’s now “cool to care.”
to clients and prospects, particularly for the
next generation.
© 2020 Mercer LLC. All rights reserved.Positioning clients for success — Top considerations for financial intermediaries in 2021 8 About us Mercer’s Financial Intermediary practice is dedicated to advancing the investment management capabilities of financial advisory firms. Mercer leverages its global infrastructure, fortified by providing advice to large institutional clients for nearly five decades, to offer innovative strategies to firms serving individual investors. Our expertise in delegated solutions, manager research, alternative investments and portfolio construction gives us the flexibility to customize our approach. For more information, contact: David Hyman, CFA Partner +1 203 229 6414 david.hyman@mercer.com Nicole Kramer, CFA, CAIA Principal +1 609 520 2675 nicole.kramer@mercer.com Casey Wamsley Principal +1 480 254 7908 casey.wamsley@mercer.com © 2020 Mercer LLC. All rights reserved.
Important notices
References to Mercer shall be construed to include Mercer LLC and/or inflation. From these two key assumptions, we develop an estimate for
its associated companies. corporate earnings growth and the natural level of interest rates. From
these values, we can then determine the expected long-term return
© 2020 Mercer LLC. All rights reserved. of the core asset classes, equity and government bonds. We combine
current valuations with our expectations for long-term normal
This contains confidential and proprietary information of Mercer
valuations and incorporate a reversion to normal valuations over
and is intended for the exclusive use of the parties to whom it
a period of up to five years. Volatility and correlation assumptions
was provided by Mercer. Its content may not be modified, sold or
are based more directly on historical experience except in cases in
otherwise provided, in whole or in part, to any other person or entity
which the market environment has clearly changed. Manager impact
without Mercer's prior written permission.
on performance is not incorporated into expectations. The views
Mercer does not provide tax or legal advice. You should contact your expressed are provided for discussion purposes and do not provide
tax advisor, accountant and/or attorney before making any decisions any assurance or guarantee of future returns.
with tax or legal implications.
This does not contain investment advice relating to your particular
This does not constitute an offer to purchase or sell any securities. circumstances. No investment decision should be made based on
this information without first obtaining appropriate professional
The findings, ratings and/or opinions expressed herein are the advice and considering your circumstances. Mercer provides
intellectual property of Mercer and are subject to change without recommendations based on a particular client’s circumstances,
notice. They are not intended to convey any guarantees as to the investment objectives and needs. As such, investment results will vary
future performance of the investment products, asset classes or and actual results may differ materially.
capital markets discussed.
Information contained herein may have been obtained from a range
For Mercer’s conflict of interest disclosures, contact your Mercer of third-party sources. Although the information is believed to be
representative or see http://www.mercer.com/conflictsofinterest. reliable, Mercer has not sought to verify it independently. As such,
Mercer makes no representations or warranties as to the accuracy
Past performance is no guarantee of future results. The value of of the information presented and takes no responsibility or liability
investments can go down as well as up, and you may not get (including for indirect, consequential or incidental damages) for any
back the amount you have invested. Investments denominated error, omission or inaccuracy in the data supplied by any third party.
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Portfolio expectations are forward-looking and reflective of determine to hire or retain an adviser. Mercer Investments’ Form
Mercer’s Capital Market Assumptions, as defined by asset class and ADV Parts 2A and 2B can be obtained by written request directed
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for setting asset class expected returns begins with developing an Boston, MA 02110.
estimate of the long term normal level of economic growth and
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