We recently sat down with Scott D. Welch, CIMA, Chief Investment Officer at Dynasty Financial Partners to discuss the growing popularity of third-party
research platforms and other trends driving wealth management today. We also touched on his market outlook and thoughts on positioning client
Q: Outsourcing investment decisions to third-party research platforms has become increasingly popular within the RIA community. Based on your experience
in the industry, how would you describe the benefits of working with a third-party research platform?
Scott D. Welch:
Working with an outsourced research platform has a number of benefits, but they all come down to scalability, leverage and efficiency. The cost of
resources necessary to replicate the size and scope of a third-party research platform, such as Dynasty's, would be prohibitive for most RIAs. But our
advisors benefit from the scale we achieve by serving a growing network of firms. Bottom line: By outsourcing the research function, RIAs can focus on the
areas of wealth management where they can add the greatest value and still deliver high-quality investment solutions.
Q: What are some of the trends you are seeing as you interact with other advisors, and what does Dynasty's success say about the state of modern day
We see five distinct forces that are disrupting the wealth management industry and driving current trends. These are things we think advisors would be wise
to pay attention to – and to not only understand the energy behind these trends but also think seriously about how best to adapt.
1. Independence: Increasingly, advisors are making the move to independence; they see and want the benefits of actually owning their own
enterprise. In addition, technological advances have made it easier to operate as an independent. Of course, a move toward independence affects the nature
of an RIAs relationship with clients. There’s a fundamental difference between selling into a wirehouse platform and advising clients as an independent.
With the wirehouse, the scale and leverage is often huge, which may offer certain advantages. But as an independent, an RIA is making the investment
decision purely on merits of the strategy and its suitability for client portfolios; education and case support can be important differentiators. We’re
finding that as more teams make the move to independence and succeed, more teams are considering it. Success breeds success.
2. Demographics: We are in the midst of a multi-trillion dollar wealth transfer from The Greatest Generation and Baby Boomers to Millennials,
Gen X and Gen Y. Typically, these newer investors have considerably different relationships to money than their parents and grandparents, and their
investment objectives and preferred methods to achieve those objectives also are different. Meanwhile, the average age of wealth managers today is
somewhere in the mid-50s, and fewer younger advisors are coming into the industry. So we face the potential dilemma of having more people who need advice
at the same time there will be fewer advisors to deliver it.
3. Regulations: Advisors have faced an increasingly complex regulatory environment – new DOL (Department of Labor) rules, the CFPB
(Consumer Financial Protection Bureau), Dodd-Frank, just to name a few. As firms seek to centralize the management of the regulatory regime, we expect to
see a rise in industry consolidation.
4. Technology: Wealth management is in the midst of a technological revolution, which is contributing to the "commoditization" of many
aspects of the traditional wealth management model – as well as fee compression. (One example: digital advice platforms.) In an increasingly commoditized
world, advisors must adapt to and embrace these changes, as they have the potential to
streamline operations, improve practice scale and efficiency and, most importantly, fine tune their unique value propositions.
5. Investments: There has been a distinct "democratization" of investment solutions taking place. You see this in the explosion of ETFs,
the advent of factor-based strategies and the growth in liquid alternative investment strategies. These add to the significant fee pressure on traditional
asset managers, but for the wealth manager, they should encourage development and deployment of increasingly more sophisticated portfolios for end-clients.
Q: Do you see this “democratization” taking place at a more rapid rate in the traditional brokerage arena or RIA? And if so, what is the best way for
firms to educate clients on these more sophisticated portfolios?
Both wirehouse advisors and RIAs have rapidly adapted to this democratization of investment solutions. In our opinion, the wirehouse folks have become
extensive users of model ETF portfolios; it fits well with a wrap fee-based "advisor-as-portfolio manager" approach. On the other hand, RIAs perhaps have
been a little more open to the liquid alts phenomenon due to their open architecture platform. Asset managers should ensure that advisors
have a very clear understanding of and appropriate expectations for how these strategies should perform under different market environments.
So elaborate a bit on investment positioning amid all these changes. PIMCO believes correlations between stocks and bonds are becoming less stable,
currencies will contribute more to portfolio volatility and liquidity conditions will be markedly different over the foreseeable future. In this kind
of environment, how are you positioning client portfolios for success?
Dynasty's outlook for the global economy projects continued sluggish growth, combined with increased market volatility as we see a divergence of global
central bank policies. We’re seeing pockets of opportunity but, generally speaking, we expect single-digit returns in most markets, and are encouraging our
advisors to manage their end-clients' return expectations appropriately.
We have a strategic investment philosophy that emphasizes global diversification, an intelligent mix of active and passive strategies and investment
discipline over a full market cycle. We encourage prudent use of alternative and real asset strategies to improve the overall diversification of the
portfolio and introduce potential drivers of return that have lower correlation to stock and bond markets. For those clients who can handle the relative
illiquidity, we believe there may be interesting return potential in the private markets, including equity, credit and real estate.