This trend is not new. In fact, it’s happening in different ways across various industries. Financial services is one of the last industries experiencing disruption. Several early fintech companies have reached a level of scale that allows them to pose a meaningful threat to incumbents. Traditional players are building or buying technology in an effort to ensure that they remain relevant and don’t become the “Blockbuster” case study in a world dominated by streaming entertainment. Most retail investors are benefiting from these changes. But it’s not just a technology story – it’s about fundamental changes that are converging.

How did we get here?

In November, I wrote “The Only Topic More Polarizing Than Politics,” about active versus passive investing. In the end, I suggested that the right answer is what’s right for the client. That statement is borne out of a belief in the fundamental value of asset allocation, as well as some interesting facts. As of March 2020, passive funds make up 48% of the combined U.S. mutual fund and ETF assets under management (AUM) in equity funds and 30% of bond funds.1 The rise in passive investing and its clear acceptance by the market are undeniable.

Though not the only reason, one key driver of increased adoption of passive investing is technology-enabled solutions. Distribution models and channels are changing with the rise of technology-enabled firms — whether it’s new market entrants or incumbents undergoing digital transformation. Models-based distribution with its supporting technology infrastructure in intermediated channels and the adoption of model-based solutions in direct-to-consumer offerings have both contributed to the growth in passive investing. That trend is here to stay.

pink piggy bank with glassesFinally, the “Amazon effect” has been a big driver of change as well. OK, maybe that’s a slight stretch, but not entirely. Consumers’ expectations in their non-financial lives where technology-enabled business models have created “delightful” user experiences are becoming the benchmark against which all their interactions are measured.

My wife and I joke about how annoyed we get when a highly-anticipated, same-day Amazon delivery arrives on the tail end of the estimated delivery window. I’m still anxiously waiting for the release of the next season of Cobra Kai on Netflix, or Hanna on Prime Video so I can spend a sleep-deprived weekend burning through episodes then dealing with the guilt of my inability to delay gratification. We’ve all been spoiled by the ability to get what we want when we want it.

Beyond that, as a society, there is a greater awareness of the impact we have, or aspire to have, on the world around us. There is also a strong sense of empowerment that comes from inclusion in communities defined by common interests, where socially-networked individuals can congregate and coordinate. In recent months we’ve seen that play out in a variety of impactful ways.   

Making investing personal

There has been significant growth in the adoption of sustainability-focused investment solutions, from funds to managed accounts. A key contributor to this shift is the growing desire among retail and institutional investors to align their investments with their values, using their assets to help drive change. There is also significant growth in the emphasis on tax management as a component part of investment solutions. Taxes are highly personal — different segments of investors have different tax obligations and, more importantly, have individual, unique sets of goals that may be positively impacted through tax-efficient investing over time. 

Clients may want to personalize their investment portfolios in other ways as well. The recent saga with GameStop2 is an example of non-financial motivation driving investment behavior. While this is not indicative of long-term, planning-oriented investment behavior, it does capture a very real example of personal preferences dominating specific financial considerations. For those of us in the industry, facing change on all fronts — technological change, regulatory change and these changes in investor preferences — how should we respond?

At SEI, we’ve chosen to embrace these trends.

While the line between investments and technology has become rather blurred, our goal is to make the two indistinguishable.

While the line between investments and technology has become rather blurred, our goal is to make the two indistinguishable. Why, you may ask? Investing is personal. To provide solutions that align with the trends we see, we believe it is essential that investment expertise, or “IP,” and its implementation (i.e. investment operations) merge with technological connective tissue bundled in a delightful user experience to deliver on what investors demand and what advisors need. 

In a world where investors want personalized investments and advisors need to differentiate and demonstrate value, this technology-centric approach is required in order to deliver the full value of personalized financial advice implemented with personalized investments. As we continue to evolve and further blur the line between technology and investments, we will have the ability to deliver highly personalized, highly differentiated investment solutions. From various forms of tax management to factor-tilts, ESG (environmental, social and governance) overlays and other personalization elements, these investment solutions can be the configurable “app” that advisors have at their disposal to help their clients to achieve their financial goals. 

Now if you’ll excuse me, I just got the highlighters and Wi-Fi extender I ordered on Amazon this morning. Can you imagine the olden days when we had to wait two whole days for a delivery?

1"The Shift from Active to Passive Investing: Potential Risks to Financial Stability?" Federal Reserve Bank of Boston.
2This example is for illustrative purposes only and is not affiliated with SEI.

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