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A Focus on Outcomes and How We Get There

Updated: Jun 17



Over my thirty-year career in the wealth management industry, I have seen neither the breadth nor the scale of innovation and change that is happening in our business today. Simultaneously, the industry is feeling the massive effects of the Baby Boomers’ march into their latter working and retirement years. The combination of so many impactful variables moving so substantially in such a narrow time horizon creates an environment for growth and change in wealth management platforms, technology for tools, scope of shareholders and regulation that may one day be considered unparalleled.


As exciting as all this change is for many of us in the wealth management profession, it requires context: How do each of these changes impact my clients? How does this new platform help my client better achieve his or her retirement goals? How does moving our firm to a different platform help us make a difference for more clients while not sacrificing our service standards? How will regulatory changes affect our ability to deliver what we promised our clients? Can this new AI-driven software help us better anticipate client concerns along the investing journey? The question I ask most often is: How will ‘X’ improve client outcomes?


Defined by my Google search an outcome is defined as ‘the way a thing turns out; a consequence.’ And, isn’t that what we are managing with clients – outcomes? Aren’t outcomes what we are managing with clients? Furthermore, since nobody a crystal ball, we are forced to deal with potential outcomes. Achieving successful client outcomes is materially different than generating a rate of return greater than a specified benchmark. While there are firms in our industry that offer their own proprietary asset management services, those services do not encompass the full spectrum of what wealth management has available to achieve client outcomes. Furthermore, as part of this great wave of innovation and change, the scope and nature of services available to wealth managers is growing steadily. This does not mean that I am advocating that the industry needs to abandon so many of the things that we have done so well over the years. Instead, the discipline required to improve client outcomes is one that frames our approach to the constant work wealth managers are doing every day with their clients. Suffice to say that clients hire and retain wealth managers in part for their ability to help clients realize the outcomes of their financial plans. Outcomes matter as much as returns.


There are two practice areas for wealth managers that are noted both for their importance in improving client outcomes as well as their underutilization across most types of firms. Those two areas are risk management and alternative investments. Why are these so important to impact client outcomes? First, it is an acknowledgment that wealth managers are delivering returns within a normal distribution of the most widely benchmarked equity and fixed income indexes. Second, that outcomes can be greatly affected by improving both downside floor and the upside ceiling of performance. Risk management and alternative investments are categories that address both the floor and ceiling respectively.


Risk management is traditionally about protecting portfolios against downside risk inherent to a particular security, portfolio strategy, macroeconomic event or market event. Although I will not be addressing them here, there are also personal (eg; individual health, mortality, etc.) and property (eg; home, car, etc.) risks to manage. As anyone who has spent any amount of time working with clients can tell you, there is often an expectation that wealth managers address all of these types of risks whether the firm states it does or not. While there is often a constant need to manage client expectations, there is a level of risk management that is endemic to the wealth management profession. We are expected to protect our clients, their money, their retirement and their families. The good news is that risk management is effectively baked in to what we do at almost every level of the industry. For example, it would be difficult to find an advisor or firm today that does not score their clients’ risk profile before discussing an investment strategy. Moreover, from Baby Boomers through Millennials our country is far more educated about market risks than at any time in our history. Although the presence of asset bubbles is a good topic for discussion to ascertain how seriously retail investors consider risk, my focus is how risk is managed on behalf of those investors. While there are many aspects of risk management that can be addressed, there are a few that I believe have the potential for the greatest impact on the largest number of clients. Assessments of these risks are fundamental to the services we provide to clients.


· Portfolio Risk – Effectively measuring, modeling and managing risks inherent to portfolios.

· Outcome Risk – What the portfolio is most often built to support. The risk associated with achieving client goals such as retirement.


The goal for wealth managers is to successfully manage these risks so that probability of successful client outcomes increases. This expands the types of risks and the risk management tools available.


Wealth managers have long understood the high risk-adjusted returns offered opportunities by alternative investments. Industry surveys state that on average between 35% and 40% of advisors utilize alternative investments. The definition of alternative investments varies. However, the following are typically included: private equity, private debt, real estate private equity, real estate investment trusts, hedge funds, natural resources and “other” (usually a catch all for things art, memorabilia, etc). Alternative investments also traditionally offer the opportunity to invest in asset classes that are generate high absolute returns (compared to the risk-free rate). Strategy examples that are familiar include early-stage and growth-stage venture capital, growth investing in established mid-sized enterprises, private commercial debt, distressed investing (both debt and equity), small-to-medium sized leveraged buyouts, real assets, infrastructure assets and other types of transactions that mainly involve private capital. (Note that I consider hedge funds to be its own subset of alternative investing as these funds require clients to make investments into a private fund vehicle that then trades in a portfolio of mainly public securities.)


Another reason why alternatives are so compelling is that they historically invest in areas where there is a “dislocation” of capital. For example, when an industry suffers a cyclical decline that goes beyond even the most conservative valuation metrics, private capital fund managers will often step in to provide funds at very attractive terms to the fund manager. If and when the industry begins a recovery (and the fund manager underwrote the company correctly), the gains to the fund can be substantial. Another example includes investing in fast-growing technology companies. Professional fund managers provide the expertise (and often access) to find the best companies while constructing a portfolio of companies to help diversify investment risk.


The many challenges for individual investors and their wealth management advisors investing in alternatives centered around several themes over the years. These include:


· The high cost and substantial time required to conduct due diligence on fund managers and fund vehicles,

· The challenges around fund interest valuations and fund reporting,

· Investor requirements set by regulators and fund minimums set by fund managers and

· The illiquidity of the closed end fund structure employed by so many alternative investment managers.


Many financial advisors who currently work at or previously worked at a large bank, wire house or independent broker/dealer had a support structure that addressed these and other issues. However, smaller platforms including independent RIAs, often lacked the infrastructure and support necessary to consider alternative investments as a core part of their service offering.


The good news is that the industry has more resources at its disposal than ever before to address the demand for both risk management and alternative investment platforms and capabilities. The even better news is that thanks to the pace of innovation in our industry, the cost of these resources is decreasing.

While risk management tools and techniques help protect the downside of clients achieving desired outcomes, investing could help client outcomes by improving portfolio performance over time.


It is the powerful demand for these solutions along with my many years of working with advisors, investors and management teams that led me to launch Wealth Management Outcomes, LLC. The focus of the firm is to deliver both expertise and execution support for some of the fastest growing needs of wealth managers - risk management and alternative investing. It is an exciting time for our industry and I am thrilled to be a part of it!


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