The changing role of the investment advisor
Tuesday, July 16, 2019
July 2019
A more in depth exploration of key sustainability topics
The changing role of the investment advisor

Investment advisory isn’t a field for the inflexible. Throughout history, advisors have weathered ever-changing client demands, market theses, innovations and macroeconomic conditions. The need to constantly justify their business is in part what makes the job dynamic and its success so rewarding.

But just as each challenge looms larger than the one that came before it, today’s advisors face existential threats to their playbook. Questions may arise, such as: How can I differentiate my business when my peers are selling the same ETFs, mutual funds and index funds? How can I stay afloat as fees compress across all of asset management? As I prepare for client wealth transfer, how do I engage the next generation of stakeholders?

To answer these questions, let’s better understand how we got here. The story of how advisors rode out the cultural and economic trends of the past can provide insight into how today’s advisors can best face their future.

The history

As stock markets developed throughout the early 1900s, financial thinkers such as Benjamin Graham, who popularized value investing, or John Burr Williams, who championed a focus on dividends, centered investor attention on individual stocks. The role of the advisor at the time was to assist clients in choosing the best companies and buying them at the best price. These were the days that gave rise to stock brokers on phones, eagerly pitching companies and filling orders.

The thing that would upend this model started as a little-read thesis from a graduate student, Henry Markowitz. Published in the Journal of Finance in 1952, his work “Portfolio Selection”—later known as Modern Portfolio Theory—concluded that portfolios should be constructed as a balance between risk and reward. Investing wisely wasn’t about just buying a bundle of good stocks. It became about buying good stocks and other securities at the appropriate risk tolerance for the client. For advisors, that meant they couldn’t just sell products. They had to know their client and sell advice.

A series of political and economic events pushed the profession forward through the 1970s and 1980s. Inflation eroded buying power, energy price shocks shook up markets and Watergate and the Vietnam War created widespread instability. Financial advisors were putting clients into tax shelters and annuity-like products amid high inflation and interest rates.

It was in these decades that individual retirement accounts and 401(k)s took off, later buoyed by the bull markets throughout the 1980s and 1990s. Amid changes to retirement savings and increased market awareness came an innovation that would change the role of the investment advisor yet again: the index fund.

In 1976, John Bogle of Vanguard launched the first index fund for individual investors. The idea was novel: instead of trying to beat the market by picking winners and paying money managers fees to do so, investors could be better off by buying a less expensive vehicle that tracks market performance itself. Initially disregarded and even considered “un-American,” the index fund became one of the most consequential inventions for financial advisors. Market access was no longer a barrier for investors and passive investing undermined the expertise of stock pickers. Despite success in creating other types of alpha, such as tax and trading efficiencies, advisors needed to find new ways of making money.

If advisors had any remaining edge, perhaps it was information access. But that began to erode, too, as yet another groundbreaking technology, the internet, exploded and financial knowledge proliferated. That’s somewhat akin to where we are today: if advisors can’t differentiate on product, fee or access, how can they win?

This time it may not be an economic or technological shift, but rather a cultural one that provides the answer.

A cultural shift

Consider the growing tendency to hold companies accountable to measures beyond profit. As society has become more global and more connected, consumers and investors alike have begun calling out businesses on moral grounds. The joys of wearing Nike faded as reports of child and sweatshop labor emerged. Uber lost its luster amid allegations of sexual harassment and discrimination, and when the CEO was shown disrespecting drivers.  #DeleteFacebook, a campaign against the social media company, caught like wildfire as users became aware of poor data-privacy practices. Cultural criticisms have begun to have real financial consequences, and investors care about a business’ environmental, social and governance practices.

It’s increasingly clear that this isn’t a fringe movement.  One dollar out of every $4 professionally managed assets in the U.S.—or roughly $12 trillion—was invested in line with sustainable, responsible and impact strategies at the end of 2017, according to a report from the Forum for Sustainable and Responsible Investment. Such strategies grew more than 38% from 2016 to 2018, the report shows.

We believe that such figures point to another sea change for the investment advisory industry. If their roles were once to manage money, then to manage money and offer planning advice, we’d argue that the successful advisors of tomorrow are the ones who can manage money, plan and engage with clients around their values.

First, it addresses the advisors’ need for differentiation. Unlike index funds, mutual funds and ETFs, sustainability doesn’t come in a one-size-fits-all package. It necessitates conversation, emotional intelligence and the ability to translate values into financial proxies. This is where certain advisors distinguish themselves from others.

Second, evidence suggests that people are willing to pay for things that align with their values. Forty-eight percent of U.S. consumers say they would definitely or probably change their consumption habits to reduce their impact on the environment, according to a 2018 study from Nielsen. In an earlier study, Nielsen found that 66% of people are willing to pay more for offerings loyal to their values—a finding that was consistent across income levels. Helping clients find these investments is where advisors can earn the cost of their advice.

Third, connecting with clients around their principles is a way to engage the next generation of wealth holders. While investors of all ages show a commitment to sustainable investing, millennials are leading the charge. They’re two times as likely as the overall investor population to invest in companies targeting social or environmental goals, according to a report from Morgan Stanley. Advisors able to identify with such aims will become all the more important as baby boomers pass on wealth to this impact-minded generation.

When investors wanted stocks, financial advisors became expert storytellers and company specialists. When investors wanted more diversified portfolios according to risk preferences, advisors rose to the challenge. When index funds threatened advisors’ business model, the industry sought new ways of seeking alpha with tax and trading efficiencies. Today, advisors face a client base eager to incorporate values into their financial portfolios. Will they rise to that challenge too?

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Sources and footnotes

The foregoing was provided for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Ethic Inc. recommends that all investors seek out the services of competent professionals regarding the applicability of any specific securities, investments, or investment strategies relative to each investor’s individual situation.


Johny Mair was raised in Australia, and driven by love of technology, collaborating, and bringing ideas to life. He has been building technology products across three different continents and led product teams at Deutsche Bank, JPMorgan, BlackRock, Fidelity, Guy Carpenter, Goldman Sachs and a number of high-growth startups before co-founding Ethic. He studied Mechanical Engineering at Queensland University of Technology.

Kamel Bouraoui does technology.

Melissa Mittelman creates content at Ethic and is an alumna of Bloomberg News, where she covered private equity & deals. Melissa previously worked at Deutsche Bank, providing institutional, cross-asset sales coverage for ultra-high-net-worth investors.