New Age Wealth Management
- SEDA Experts
- Aug 5
- 4 min read
While the term “wealth management” can be applied to a variety of financial instrument investment processes (wealth being a generic term not necessarily confined to any market segments), it is generally applied to the accumulation of asset value by individuals, organizations, foundations, or endowments. Their common connection is that they are not holding the assets for active profit generation, but passive accrual. This categorization does not account for portfolio assets like rental real estate that straddle the notions of active and passive holdings. But corporations and going concerns use their assets quite differently than individuals, and the way they position their portfolios requires an approach distinct from those who are positioning for long-term accumulation in and of itself. A company that keeps cash on hand for working capital liquidity or strategic actions is very different from a person who keeps a certain portfolio allocation in cash, either for risk balancing or opportunistically to market time other investments.
Across all portfolios, the primary strategic wealth management decision often centers on selecting a risk/reward strategy and instruments that align. The two most common forms of financial instruments (other than cash or highly liquid instruments held for that purpose) are bonds and stocks. The basic recognizable balancing act is how the allocations to those two categories fit the risk appetites of the portfolio holders. Blends can range from 40/60 to 80/20, or some other mix. Understanding the fundamental attributes of bonds versus stocks is the foundation of portfolio investing. Dissatisfied with this simplicity, variations of these two basic instruments have been engineered ostensibly to alter the risk/return ratio, though more likely to sell the latest financial product and often to incorporate added elements like leverage into the mix. It’s not unlike an artist with a color palette. There are primary colors (red, blue, yellow) and then multiple variations from there. It’s not quite so simple in investing because these financial instruments are multi-faceted and therefore subject to more external elements.
During the span of my 48-year career, extensive academic work on financial instruments created what is known as a financial engineering trend, where newer and more complex instruments were created to embody the elements of risk and return in various relationships to one another. While some of these notions are as old as the Phoenicians, it is fair to say that the definitions brought to bear by the financial engineering research created a proliferation of these new forms of investing. In many ways, this trend defined my time in the arena of finance. Finance is, by its nature, a conservative arena, and the field does not change its fundamental measures easily or quickly. These new instruments have gradually grown in use to the point where they are grouped into what are now called alternative investments. The truth is that even within the grouping of alternatives, there are many, many forms offered that consist of the “primary colors” of financial building blocks embedded into them. In other words, adding a new category to the array called “alternatives” has not really added clarity to the decision-making of portfolio construction, even though it has enabled the ability to narrowly define investments in terms of their relative prudence.
Other financial fads emerged in the investor array under the guise of newness. Years ago, foreign currency (FX) became more generally accessible as a pseudo asset class, only gradually to be spread out like leverage (borrowing against holdings to increase market exposure) or optionality (contingent claim instruments) as a feature of the primary instruments. With the recent flurry of interest in cryptocurrency (blockchain-based digital encryption algorithms that allow for untethered payment mechanisms), it too is being treated as an asset class. Its construction implies that it is unlike leverage, currency, or optionality, but its lack of connection to underlying profit-making going concerns makes it a very confusing species that may be a new asset class or may not.
A recent Bank of America Wealth Management survey showed that the average portfolio allocation of under 45-year-olds is radically different from the over 45-year-old set. The older set allocation approximates the traditional 60/40 equity/bond mix with a dollop of cash and a dabbling in Alternatives and Crypto. But the younger portfolio holders embraced a new strategy, with around 28% in equity and a significant allocation to Alternatives and Crypto. This dramatic change in generational preferences and outlooks represents a significant departure from traditional asset management approaches. It will be enlightening to track findings in behavioral finance. If these changes are driven by return expectations and correlations, then the entire business community needs to start thinking about how to fund itself differently, and investors need to change their allocation approach.
Some definitional refinements need to be made before assessing how this informs the general appetite for equities, because alternatives, including the newest forms, could easily be another way to express that outlook. In other words, maybe alternatives need to be reclassified based on their underlying risk elements rather than the title on the cover of the offering memorandum. This preference shift suggests that investor advisors need to update their investor voir dire process and probably their entire allocation systems. The new generation needs to be understood properly in terms of their investment appetites to properly and prudently serve their needs. Money long held by Baby Boomers is on the cusp of shifting into the hands of their children, and advisors have precious little time to adjust and reallocate accordingly.
EXPERT INVOLVED
Richard Marin
Richard Marin as a former finance senior executive with over 40 years of industry experience, and as a former clinical professor at Cornell University is a world class testifying expert in asset management, alternative investments, private equity investments, securities lending, retirement and pensions, and real estate / project financing.
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