The Evolution of Wealth Management

Josh Persky, Founder and CEO of Briefcase

“Individualism is the only lever big enough to move the world”. – Fernando Pessoa

Do good ideas ever become obsolete?

The investment management industry has evolved greatly since the advent of the ticker tape in the 1860’s. Whilst the utility of the ticker tape was quickly recognised and adopted widely across Wall Street, over time, electronic boards and computer displays took over the work of the manual machine.

By the time Pink Floyd were singing about “Money”, Led Zeppelin (and most other market participants) didn’t have a “Whole lotta love” for the device, and it was largely relegated to the pile of obsolescence. In spite of this evolution, the concept of the stock ticker lives on, in the scrolling electronic tickers seen on brokerage walls and on news and financial TV channels around the world.

Index investing

The history of index investing goes back to the mid-1970’s with the launch of the Vanguard 500 investment trust. At the time, the mutual fund was largely derided for its central premise – that buying and holding the broad stock market would provide a better investment return than would a stock picker - “A sure path to mediocrity”.

Financial markets since the launch of Vanguard’s experiment have witnessed a seismic shift in investment flows from active funds towards passive funds. By some measures, the size of assets managed by passive funds now eclipse those managed by active fund managers (Gittelsohn, 2019; Whyte, 2021) - a trend which shows no signs of abating. Much of the shift to index-based investing can be attributed to chronic underperformance & relatively high fees of active funds, as illustrated in S&P’s annual SPIVA report.

With more than 8,000 Exchange Traded Funds, with close to $10 trillion US dollars in assets, this suggests that index-based investing will continue to grow. Despite the derision Jack Bogle, Vanguard’s founder faced, his place in history was cemented.

The enormous shift towards index fund investing also brings with it some uncomfortable truths.

Corporate governance is increasingly shaped by a small number of economic agents (think of the major ETF issuers) with no real skin in the economic game. There is an argument to be made that these firms have even less interest in engaging with management to influence behaviours such as environmental, social & governance issues. More importantly, investors in these mutual fund and ETF structures are actively relinquishing their own voices on these important issues to fund managers that control the ETF’s themselves.

Is it time to move on from index mutual funds and ETFs?

Not entirely. Index-based investing has stood the test of time. The importance of asset allocation in the portfolio construction process is well established (Brinson, Hood & Beebower, 1986), yet the instruments with which one expresses those views has evolved.

Wealth management in the 1970’s saw explosive growth of the mutual fund wrapper. This unitised structure (at the time) allowed for easier market access at a lower cost, reducing single stock idiosyncratic risk. This advancement is not all that different to the evolution of the ticker tape & how stock and bond information is consumed & utilised today.

Wealth Management 3.0 

Briefcase’s technology empowers advisors and their clients to replicate an index via. a quantitative, rules-based approach to portfolio construction. This technology, coupled with negligible trading fees, now allows for far greater flexibility in accessing index-based investment strategies, whilst simultaneously removing the shackles & constraints of an ETF or mutual fund wrapper.

Investors directly purchase the underlying assets of an index to mirror it, without utilizing a unitised vehicle. These personalised portfolios give financial advisors and their clients far greater control & flexibility beyond any ETF or mutual fund wrapper.

By owning individual securities, advisors & their clients now have the ability & flexibility to deploy their own values-based investment preferences (ESG), retain their voting rights, incorporate existing holdings, as well as potentially delivering superior after-tax outcomes.

Our collective experience in managing in excess of $50Bn AUD has given us the insight to recognise that the success of any advice relationship requires a strong set of institutional grade portfolio construction algorithms. More importantly, this technology must fundamentally be built on an ongoing collaboration between the financial advisors and their client, leveraging their expertise in helping investors reconcile their preferences & biases into a compelling, individualized investment program.

Now that is something worth celebrating – a ticker-tape parade perhaps?

Like to learn more? Visit www.briefcase.au or email enquiries@briefcase.au for further information.

 
Briefcase Pty Ltd (AFSL Number 546257) does not warrant the accuracy, completeness, or correctness of any information herein.