Let’s Not Forget…

Equities have continued to march higher early in 2018, following the strong finish to what was a terrific year in 2017. As of this writing (January 17th), the S&P 500’s 3.9% advance in the first 10 trading days is the ninth best start to a year in history. The S&P 500 advanced an average of 20% in the other 8 years of returns better than 2018’s start. Still, in EVERY one of those eight years, there was an intra-year drawdown of at least 7%, with an average drawdown of 13%. 14% happens to be the NORMAL yearly intra-year decline over the past 38 years. 2017 witnessed the smallest decline (3%) in over 20 years (see below) and while we at Fundamentum continue to like equities, it would be highly unlikely for 2018 to experience another year without pullbacks, so the simple message today is….let’s not forget that drawdowns are normal, healthy and likely!

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations. Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.
Sources: JP Morgan Asset Management & Strategas Research

________________________________________________

Chad Roope, CFA – Portfolio Manager
Paul Danes, CFA – Investment Committee
Trevor Forbes – Investment Committee
Matt Dunn – Chief Compliance Officer
 
Our Internal Investment Management Division
• Deliver institutional quality, reliable portfolio solutions that fit many needs in the financial planning process
• Competitive Pricing: 29 basis points or less
• Dedicated team of Investment Professionals located in Cleveland, Ohio
• Collective experience of ~100 years, managing ~$40B of AUM
• CFA Charterholders
• Dedicated team of support staff including operations, trading and marketing
• Full access to the Portfolio Management Team for consultation and client presentations
• Over 20 portfolios in 5 distinct investment sleeves, focused on Tactical Asset Allocation portfolios, utilizing ETFs, Index Funds, individual securities and actively managed funds.

Investing involves risk including loss of principal. The investment returns and principal value of the portfolio will fluctuate so that the value of an investor’s account, when redeemed, may be worth more or less than their original value. No strategy assures success or protects against loss. The performance data quoted represents past performance; past performance does not guarantee future results.  Asset allocation does not ensure a profit or protect against a loss. Investment return and principal value will fluctuate and an investors equity when liquidated may be worth more or less than original cost. Current performance may be lower or higher than performance information quoted above.  Investment advice offered through Fundamentum LLC a registered investment advisor.

2017 Review and 2018 Outlook – WHAT WENT “WRONG?”

By any measure, 2017 was an exceptional year for investors. Virtually every major asset class advanced in 2017 and investors around the world were optimistic as a “global synchronized” economic rally has unfolded. U.S equities returned 21.8%1 in 2017 as measured by the S&P 500 Index while Emerging Market equities was the top asset class with the MSCI EM Index returning 37.3%1. After years of debate about which direction the “Goldilocks” economy would eventually break, the final months of 2017 brought resolution to this question (upward) in a manner that suits risk assets. We’ll discuss later that perhaps the biggest worry most investors have entering the new year is the lack of something to worry about. This cheery outcome far surpassed most investor’s expectations coming into 2017. To reflect on the year, we begin with an analysis of what investors missed a year ago…. what went wrong with the 2017 consensus forecast? Looking back, what were consensus expectations a year ago and why were they so off?

U.S. Economy – Following the Trump election and with talk of boosting infrastructure spending and cutting taxes, consensus expectations called for the U.S. economy to accelerate in 2017.  While this did occur in the back half of the year, the first half was viewed as a disappointment with two quarters of GDP growth that averaged ~2.0%2.  The lack of improvement in the economy for half the year was the primary reason most expectations were not met in 2017.

Value vs. Growth Stocks – Value stocks (and small caps) significantly outperformed the overall market following the Presidential election and entering 2017. Value stocks were expected to continue outperforming on the back of strong economic growth and rising interest rates. Growth stocks ended up significantly outpacing Value stocks (except for a late-year rotation into value stocks,) led by the Technology sector, resulting in a record performance gap favoring Growth over Value for trailing 10-year periods2.

U.S. Dollar – Expectations of surging U.S. economic growth, concerns in the Eurozone over Brexit and populist elections, and tough talk of a new President around building walls and renegotiating trade agreements led investors to the comfort and safety of the U.S. Dollar. The USD rallied following the election and was expected to continue to rally in 2017. This was perhaps the consensus pick with the strongest conviction and as is so often the case, markets confounded expectations where investors were firmly set on one side of the argument as the trade-weighted USD declined 9% in 20173.

Tail risks that were contemplated a year ago, but didn’t occur, included 1). the potential for trade wars initiated by a new, unproven President who was openly hostile towards many existing trade agreements, 2). Brexit and the potential it had to disrupt the nascent economy recovery throughout Europe and 3). populist uprisings that led to elections in Spain, Germany and The Netherlands, which had potential to do the same. What did transpire was ideal for capital markets – acceleration in economic growth around the globe (with the expected impact it had on earnings) which occurred without inflationary pressures that would normally surface. In the U.S., the result was an equity market driven by ~50% earnings growth and ~50% valuation expansion (16.8x NTM EPS to start the year vs. 18.5x at the close and 10% EPS growth).2

Below are total returns for various asset classes for 2017:

 

Asset Class Index 2017 Total Return
(Source:  Morningstar Direct)
US Large-Cap Equities S&P 500 21.8%
US Small-Cap Equities Russell 2000 14.7%
Global Equities MSCI ACWI 24.0%
Developed Market International Equities MSCI EAFE 25.0%
Emerging Market Equities MSCI Emerging Markets 37.3%
US Investment Grade Fixed Income Bloomberg Barclays US Aggregate 3.5%
US High Yield Fixed Income BofA ML US High Yield 7.5%
Commodities Bloomberg Commodity 1.4%
US Large-Cap Growth Equities Russell 1000 Growth 30.2%
US Large-Cap Value Equities Russell 1000 Value 13.7%

 


 

2018 Outlook

Most investors we know (and virtually all the good ones) are constantly worrying.  While they may be optimistic by nature, they are trained to be skeptical and paid to worry.   If the economy is poor, they worry about earnings. If inflation is rising or if the Fed is raising interest rates, they worry. If these things (the economy, earnings, inflation) are too good, they still worry as after all, investors care about the future and the thought quickly becomes how conditions can’t get any better. As we enter 2018, the biggest worry many investors have (especially those that have been around a cycle or two) is the shocking degree to which there is (virtually) nothing to worry about!  Coming off a record year of low volatility, where global economies have settled in a synchronized recovery, driving healthy earnings growth and where inflationary pressures still seem slight, markets around the world are enjoying a consistent move higher. The S&P 500 experienced only a 2.8% drawdown over the course of the year (compared to a 14% average annual drawdown over the past 40 years)4, the smallest intra-year decline in over 20 years4. 2017 was extraordinary in that it was the ONLY year on record where the S&P 500 didn’t experience one negative month!1 The Organization for Economic Development (OECD) reports that the economies of all 45 countries they monitor are advancing, only the third such occurrence in the past 50 years. The International Monetary Fund (IMF) has recently raised its forecast for Emerging Market economies to 4.9% for 2018, up from the 4.5% 2017 estimate, and here too, inflation remains well-behaved.  On top of all of that, the US economy is likely to get further stimulus in the form of the much-discussed year-end tax bill.

At Fundamentum, our thoughts and portfolio positioning entering 2018 is predicated on one key fundamental construct…. the biggest potential risk for investors may be the threat of economic OVERHEATING. 

We are firmly in the camp of “be careful what you wish for,” in that attempts to drive an already healthy and fully employed economy higher with fiscal stimulus raises the risk of building inflationary pressures, the top pressure points and focus of our Investment Committee entering 2018. 2-3%, non-inflationary growth is arguably the ideal backdrop for equities and bonds. Too much of a good thing could end the cycle.  Given full employment and lack of apparent slack, GDP growth in the U.S. of something consistently with a “3 handle” puts at risk the steady, modest normalization of the Fed Funds rate the market expects, as inflationary pressures could pick up. We aren’t overly concerned about equity valuations given the $145 earnings estimate for S&P 500 Index companies for 20182 where an additional $10 in EPS might be added following the tax bill. If so, $155-160 earnings are in sight, which would put the market at EXACTLY the same multiple entering 2018 (16.8x)2 as we were entering 2017, despite the over 20% price change in the index this year. While earnings are less of a concern to us currently, what investors eventually pay for these earnings is a bigger concern, especially if inflationary pressures increase. A loss of a modest 1 multiple point due to inflation concerns is an approximate 6% hit to equities alone. Without the onset of inflation, we’d expect equities to hold the multiple it has entering the year which would make 2018 another outstanding year for equity investors given the expected earnings growth.

In this environment, we are positioned in our Tactical portfolios in the major asset classes entering 2018 as follows:  

  • We continue to favor equities over fixed income.  Bond markets appear to be discounting Real GDP growth in the 2.5% range. We believe the underlying economic momentum and additional fiscal stimulus raise the probability of growth above this level.  As such, we are overweight equities in our tactical models, through foreign equities (both Developed Markets and Emerging Markets) where economic and earnings growth are experiencing similar accelerations as in the U.S. but where valuations are likely more attractive.  While admittedly not heroic assumptions, we expect 2018 U.S. equity returns to more muted than 2017, and we would expect volatility to trend higher with more normal drawdowns through the year.
  • Tactical portfolios continue to be underweight duration (~4 vs. 6 with Barclays Agg Index), and neutral weighted in terms of credit exposure.  The overweight position to domestic high-yield credit was reduced early in 2017, but we still have a modest overweight in high-yield. There is little “value” in high-yield sectors but with the positive economic outlook, we expect to earn the more generous coupon yields in this asset.
  • Our use of “active managers” is evenly split in our Tactical portfolios. We employ active management mostly in asset classes with larger expected inefficiencies – international, emerging markets, credit, and fixed income. ETFs and Index Funds are employed to achieve the desired tactical exposures in other asset classes, and to lower underlying expense ratios.
  • We are equally weighted regarding style, Value vs. Growth in the Tactical portfolios. The Global Individual Equity portfolio is overweight Banks and Energy sectors, giving it a modest Value tilt, though the largest positions continue to be Google, Apple and Microsoft.
  • Our interest in “inflation hedges” has grown given our economic outlook.  Exposure to TIPs and Commodities has been increased and will likely increase further should our concerns over inflation come to fruition. Commodities have been the worst asset class for five of the past six years, including 2017, and are increasing in appeal given the outlook.

Finally, as we enter a new year with strong economies and with financial markets performing well, it is worth reminding ourselves that things don’t always work out as they “should.” The heuristics of long-term investing such as “equities deliver 7% real returns” and “bonds are the safe assets” may not occur over shorter time frames. As such, we are on guard for changing asset class correlations and return streams, and think advisors should be stress-testing financial plans for a range of outcomes for their clients. The advances we’ve had over the last few years does not warrant complacency, a mindset we fear is on the rise given the smooth ride that was 2017.

Fundamentum Investment Committee
December 29, 2017


Chad Roope, CFA – Portfolio Manager
Paul Danes, CFA – Investment Committee
Trevor Forbes – Investment Committee
Matt Dunn – Chief Compliance Officer
 
Our Internal Investment Management Division
• Deliver institutional quality, reliable portfolio solutions that fit many needs in the financial planning process
• Competitive Pricing: 29 basis points or less
• Dedicated team of Investment Professionals located in Cleveland, Ohio
• Collective experience of ~100 years, managing ~$40B of AUM
• CFA Charterholders
• Dedicated team of support staff including operations, trading and marketing
• Full access to the Portfolio Management Team for consultation and client presentations
• Over 20 portfolios in 5 distinct investment sleeves, focused on Tactical Asset Allocation portfolios, utilizing ETFs, Index Funds, individual securities and actively managed funds.

Investing involves risk including loss of principal. The investment returns and principal value of the portfolio will fluctuate so that the value of an investor’s account, when redeemed, may be worth more or less than their original value. No strategy assures success or protects against loss. The performance data quoted represents past performance; past performance does not guarantee future results.  Asset allocation does not ensure a profit or protect against a loss. Investment return and principal value will fluctuate and an investors equity when liquidated may be worth more or less than original cost. Current performance may be lower or higher than performance information quoted above.  Investment advice offered through Fundamentum LLC a registered investment advisor.

Sources:  1. Morningstar Direct, 2. Factset, 3. Federal Reserve Bank of St. Louis, 4. JP Morgan Asset Management

Is There a “New Normal”?

Some years ago, Mohamed El-Erian, then chief strategist at Pimco Asset Management, dubbed this now commonly used phrase to describe economic growth that is less than that of historical norms. This is not without controversy, as any claims that sound like “it’s different this time” is nearly blasphemous to most investment professionals, trained to expect and position portfolios for “reversion to the mean.”

If such a “new normal” exists, what does it mean and why does it matter? Do we, at Fundamentum, subscribe to this theory and if so, what are the implications?

First, we would suggest the “new normal” incorporates most basic economic conditions. Most important to us include:

  • GDP growth rates
  • Levels of inflation, and the
  • “Equilibrium” Fed Funds rates.

Today, despite full employment and healthy economic growth both here and abroad, and with the USD declining over the course of the year, measures of inflation remain stubbornly below the Fed’s desired 2% level and have, for some time.

Is this an example of the new normal?

Similarly, although the most recent quarter showed Real GDP growth of 3%, the U.S. economy has been stuck in the 2% range for some time, despite massive amounts of liquidity injected into the banking system by the Federal Reserve ($3.5T since 2008), near-zero percent interest rates for over eight years, and every economy measured by the IMF is registering positive economic growth for the first time in nearly 30 years.

Is this an example of the new normal?

Another example of what might be this new normal is the Yield Curve. While the yield curve (2/10 year is most of interest) is still upward sloping at ~77bps, and not indicative of near-term recessionary conditions, it surely doesn’t register on the “long end” levels that are historically associated with solid economic growth, full employment and rising commodity costs in certain areas (copper, steel, aluminum, iron ore).

Surely, this must be an example of the new normal at work.

At Fundamentum, we continue to believe in the laws of economics. Supply and demand WILL dictate price levels in the future, as they have in the past. Said simply, there WILL continue to be cycles, even in a new normal environment.

As the Federal Reserve Bank of San Francisco pointed out in a recent white paper, there is now strong evidence to support the notion of new normal economic environment.

Consider an excerpt from the San Francisco Federal Reserve, written the fall of 2016….

Estimates suggest the new normal for U.S. GDP growth has dropped to between 1½ and 1¾%, noticeably slower than the typical postwar pace. The slowdown stems mainly from demographics and educational attainment. As baby boomers retire, employment growth shrinks. And educational attainment of the workforce has plateaued, reducing its contribution to productivity growth through labor quality. The GDP growth forecast assumes that, apart from these effects, the modest productivity growth is relatively “normal”—in line with its pace for most of the period since 1973….

It is a fact that in the U.S., labor markets are not growing at the pace of the post-war era. In addition, productivity remains stuck at historically low rates of growth, something we believe, can, and will, revert to the mean, especially with the implementation of business-friendly fiscal policy. Still, with one of the two main building blocks (labor market growth) expected to remain depressed for some time, it is difficult to NOT accept the premise of a new normal economic condition.

The Investment Committee at Fundamentum has attempted to identify other factors in addition to demographics that argue for a new normal. While not tested, or proven, these are in the narrative of most economic and business writers we read and are well-accepted by most:

1. China – While China remains an important engine of growth for the world economy, it’s impressive high-single digit rate of economic growth is roughly half that of the 1990-2012 period. Now the second largest economy, this diminished rate of change lowers the potential for world GDP growth.

2. The Internet – the internet imposes a price discovery mechanism that wasn’t available in most post-war periods. This has important implications for pricing for many items that would tend to depress the historic inflation rates.

3. Globalization – certainly globalization, or the ability to offshore production to lower-cost regions – was not the factor in much of the post-war periods. This too, has important implications for pricing power and the levels of wage inflation today, versus the past.

Our conclusion is that there are strong reasons to expect a new normal for economic growth and inflation rates in the foreseeable future. Still, we want to be clear that this does NOT make laws of economics less applicable.

There will still be cycles but compare to the past, perhaps the amplitude won’t likely be what they have historically been. This has direct implications for the level of the equilibrium Fed Funds rate (lower), inflation (lower) and GDP growth (lower).

Perhaps the dampening of inflation (and interest rate) cycles will have positive implications for valuation levels for equities, as today’s somewhat elevated valuation levels may not be the impediment to future returns that most observers (including ourselves) think they will be, if the magnitude of the inflation cycle is lowered. Perhaps this offsets the less-than-normal rates of return from fixed income vehicles, supporting our tactical position of favoriting equities over fixed income.

Evidence of a new normal also factors into our belief that 10-year expected returns for both stocks and bonds are lower today compared to most 10-year look-back periods historically. This is important for financial planning exercises.

Here’s another excerpt from the San Francisco Federal Reserve on their conclusions regarding the evidence of a “new normal” ….

This lower pace of growth has numerous implications. For workers, it means slow growth in average wages and living standards. For businesses, it implies relatively modest growth in sales. For policymakers, it suggests a low “speed limit” for the economy and relatively modest growth in tax revenues. It also suggests a lower equilibrium or neutral rate of interest. Is the new normal a bad thing? We don’t necessarily believe that it is, but it must be understood to prevent policy mistakes or for political parties to be aiming for objectives based on past conditions that aren’t likely to be met in the future. We certainly can’t change the factors that have led to a new normal, but recognition of them can assist us in positioning our client portfolios for realistic returns and in meeting expectations, which is surely a hallmark of successful wealth management.

Paul Danes, CFA
Fundamentum Investment Committee November 1, 2017


Chad Roope, CFA – PORTFOLIO MANAGER
Paul Danes, CFA – INVESTMENT COMMITTEE
Daniel Jacoby – CHIEF INVESTMENT OFFICER
Trevor Forbes – CEO AND HEAD OF INVESTMENTS, RENAISSANCE INVESTMENT GROUP
Matt Dunn – Chief Compliance Officer
 
Our Internal Investment Management Division
• Deliver institutional quality, reliable portfolio solutions that fit many needs in the financial planning process
• Competitive Pricing: 29 basis points or less
• Dedicated team of Investment Professionals located in Cleveland, Ohio
• Collective experience of ~100 years, managing ~$40B of AUM
• CFA Charterholders
• Dedicated team of support staff including operations, trading and marketing
• Full access to the Portfolio Management Team for consultation and client presentations
• Over 20 portfolios in 5 distinct investment sleeves, focused on Tactical Asset Allocation portfolios, utilizing ETFs, Index Funds, individual securities and actively managed funds.

The Fear of Missing Out…

Stratos Wealth Partners

If you have teenagers, you are undoubtedly aware of this social media-driven phenomenon, (dare I say curse) that most teenagers have regarding “Fear of Missing Out.” It’s certainly a big reason most are glued to smart-phones nearly 24/7 as they stay connected to the pictures and stories posted by their friends (and it’s Snapchat, NOT Facebook for those keeping score at home).

I believe we’ve entered a phase in the market cycle where this psychological factor is growing in importance to many investors. Q3 earnings results for many of the large-cap Tech bellwethers and the incredible reactions their stocks enjoyed must have weighed on the psychology of the investor who might be “out of the market.”

Imagine the pressure an investor feels (or advisor, fund manager) who has missed this terrific year of equity market returns (and bonds and gold and real estate returns) as they were afraid of high valuations, afraid of Trump, of hurricanes, of North Korea, of rising interest rates and all the other reasons many commentators have offered for why this is a dangerous time to own risk assets. We know that while equity-oriented ETFs continue to enjoy strong inflows ($780B since 2009), there’s has been a net OUTFLOW of equity-market mutual funds ($973B over that same period) making this one of most hated bull markets in history. Corporate buybacks is the missing link for the mismatch of supply/demand.

We have now passed the most dangerous months for equities historically and markets tend to rally into the year-end, especially in years when the 10-month rise has been as strong as 2017’s performance. We must consider the implications of what many describe as the “melt-up” stage of the equity market cycle, where investors throw caution to the wind and “chase” returns into the New Year.


This behavior would not surprise us and it can be a very lucrative time to be fully invested. You don’t want to miss this stage as many professional managers did later in the dot.com cycle when many couldn’t stomach those high valuations.


Recall that markets rallied for THREE YEARS following Greenspan’s famous “irrational exuberance” statement made in December of 19961. Many famous investors and funds so badly lagged the returns of the S&P 500 in 1998 and 1999 that some lost their business, closed their funds and many hedge funds returned cash back to their investors.

Of course, these same managers were vindicated when the bubble burst following the peak in the spring of 2000 but many were also out of business!

Personally, I was co-managing a large-cap, domestic mutual fund and institutional accounts for an asset management firm and while we too lagged the S&P in those melt-up years, I was lucky to be partnered with a more technically-inclined colleague who kept us “in the market” for longer than I would have if acting alone. We lagged, but we “participated” and few (if any) clients fired us for being within 2-3% of market returns.


The point here is that while “melt-ups” feel great and you don’t want to miss them,
you must also be prudent and take some chips off the table on the way up. 

“It is nearly impossible to time the top.”


At Fundamentum, while we have taken some chips off the table by dialing back small-cap domestic equities and high-yield bonds early on in 2017, we have largely held the course and in our Tactical portfolios, we have been rewarded by strong absolute returns and out-performance versus our benchmarks for the most part.

Our Investment Committee meets every week, pouring over the economic data, valuation data, technical data, and truth be told, we are looking for reasons to pare back risks more, but have resisted for the most part beyond the measures already mentioned. Surprising to some of us (me), this aging economic cycle appears to be gaining steam globally, and doing so without generating much inflation pressures (so far). Valuations are high but nowhere near the levels of 2000.

It was recently pointed out by Professor Robert Schiller that his “CAPE” ratio2 is now at the same level as it was at the time of Greenspan’s irrational exuberance statement in 1996. Tech stocks, for instance, currently sell at high levels relative to their 200 day moving averages (+15%), but this compares to nearly 50% above their moving averages before the bubble burst in 20003. Equities markets that are overly concentrated and expensive, as they were in the spring of 2000 are clear warning signs. Today, while the largest FIFTY names in the S&P 500 Index sell for 18x forward earnings estimates, they sold for 31x forward earnings in March of 2000. Regarding concentration, the TEN largest holdings in the S&P 500 Index make up 20% of the Index, up only a few points from the 18% lows, compared to the highly concentrated 27% in 2000.

Don’t misunderstand, we know it’s dangerous to attempt to ride relatively expensive markets higher, especially with interest rates and inflation rates likely moving higher.

We get MOST EXCITED about the prospects for equity returns when valuations are low (NOT), when inflation is high and falling (NOT), when interest rates are high and falling (NOT) and when margins, earnings and sentiment are depressed (NOT). Clearly, that is not the environment we are in today.

It’s hard to say whether today, November 1, 2017 most resembles 1996, 1997, 1998, 1999, or 2000, but we feel reasonably good about the economic prospects for the next 6-12 months (with or without tax cuts) and signs of a recession are slim. We are monitoring the yield curve but even here, at today’s level of 75bps (10-year vs. the 2-year), the last four times we are at similar stages, it took 12 months, 8 months, 31 months and 12 months before inverting which is a dangerous time to own equities. It appears we have time.

In conclusion, like many, we are “nervous bulls” for the short term and remain convinced that LONG-TERM equity and fixed income returns are likely to be subpar as the starting point matters most for long-term returns (not so much in explaining SHORT-TERM returns).

Today, at 18x and 2.40% on 10- year Treasuries, we believe these levels represent headwinds for long-term returns, but not so extreme to prevent further appreciation in the short-term.


If a melt-up occurs, enjoy it but be aware that they generally end badly
and be prepared to adjust.
Your Fundamentum Investment Committee endeavors to do the same.


Paul Danes, CFA
Fundamentum Investment Committee November 1, 2017


Chad Roope, CFA – PORTFOLIO MANAGER
Paul Danes, CFA – INVESTMENT COMMITTEE
Daniel Jacoby – CHIEF INVESTMENT OFFICER
Trevor Forbes – CEO AND HEAD OF INVESTMENTS, RENAISSANCE INVESTMENT GROUP

Our Internal Investment Management Division
• Deliver institutional quality, reliable portfolio solutions that fit many needs in the financial planning process
• Competitive Pricing: 29 basis points or less
• Dedicated team of Investment Professionals located in Cleveland, Ohio
• Collective experience of ~100 years, managing ~$40B of AUM
• CFA Charterholders
• Dedicated team of support staff including operations, trading and marketing
• Full access to the Portfolio Management Team for consultation and client presentations
• Over 20 portfolios in 5 distinct investment sleeves, focused on Tactical Asset Allocation portfolios, utilizing ETFs, Index Funds, individual securities and actively managed funds.
1 standardandpoors.com
2 econ.yale.edu
3 Strategies Research Partners MorningstarDirect.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.
Investment advice offered through Fundamentum, LLC., a registered investment advisor.

Fintech Deployment Woes? Call In the ‘New Gatekeeper’ Team

The choice of technology solution — whether for CRM, planning or practice management — is often fraught with peril

Who are the key stakeholders in determining the technology a firm utilizes, and what impact do the tools an advisor uses have on end client engagement?

These questions were at the heart of the panel discussion “Technology, Financial Services and the New Gatekeepers” held Monday at the T3 conference in Las Vegas, with a panel including Jeffrey Concepcion, founder and CEO of super OSJ Stratos Wealth Partners, and Steven Wallman, founder and CEO of Foliofn, best known for services including Folio Investing and the SRI Conference.

As advisory firms grapple with disruptive technologies such as robo-advice platforms, not knowing whether to embrace or differentiate from a growing array of self-service tools flooding the marketplace, Concepcion suggested that successful firms will become “bionic advisors,” leveraging innovative technologies where needed, especially for the increasingly millennial audience that won’t be bothered with the time it takes to interact with a live advisor.

The choice of technology solution — whether for CRM, planning, or practice management — is often fraught with peril. Panel moderator Matt Lynch, managing partner of the consulting firm Strategy & Resources, said that as a rule, six months after a tech rollout at an advisor firm, the new technology has a negative Net Promoter Score (NPS), meaning most users dislike the new tools.

An FPA survey found that less than a third of advisors were fully prepared to manage the risks of a…

Firm like Stratos are adopting the “new gatekeeper” role, developing a staff of experts whose role is assisting in matching technology providers to advisory firms, with the goal of enabling better decision-making when it comes to applied technology throughout the practice. This enhances technology adoption in several dimensions, including facilitating build-or-buy decisions and providing guidance in modifying commercial off-the-shelf software to meet an advisor’s needs without building a solution from scratch.

One sticking point raised during the panel was the lack of a common data language for fintech software and services, which can raise barriers to integration between different offerings. Since most advisory firms rely on a variety of applications and services in their practice, the lack of an industry-specific application program interface (API) puts a greater burden on internal IT, often requiring multiple calls to a vendor’s support staff to achieve the desired integration.

This problem is being addressed by new gatekeeper teams as well. For example, the Stratos team also acts as intermediary between advisory firms and vendors, fielding first-level support calls to further reduce friction between vendor and firm.

As clients increasingly rely on their mobile devices to electronically interact with financial advisors, the mobile user experience increases in importance, and is rapidly becoming a differentiator when advisor services are otherwise roughly equal. To that end, advisory firms of all sizes will need to develop strategies for adopting and integrating new technology as it reaches the market, and may find that relying on a “new gatekeeper” partner can quicken the adoption of the next big thing in fintech, whether AI or support for the latest iPhone.

____

Originally published on ThinkAdvisor. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

2015 Weatherhead 100 logo

Stratos Recognized in Weatherhead 100

Stratos Wealth Partners was selected as a 2015 Weatherhead 100 Winner in the category of “Weatherhead 100.” This award recognizes that Stratos is one of the 100 fastest-growing companies in Northeast Ohio.

To be considered for the Weatherhead 100, companies must have net sales of at least $100,000 in year one of five years required for the application and over $1 million in year five. Willing companies must have employed a minimum of 16 people full time in the last year.