Diversifying Portfolios In Uncertain Times, Practical Investing In Sustainable Initiatives, And The Future Of Advisory Regulation
Dana D’Auria is Group President, Envestnet Solutions, and Co-Chief Investment Officer at Envestnet, and is responsible for wealth and asset management solutions across Envestnet’s ecosystem, including its research, overlay, direct indexing, sustainable investing, and retirement services as well as partnerships with exchanges and other wealth solutions providers. Dana is also a chair of Envestnet | PMC’s Investment Committee.
Russ Alan Prince: Do you agree with the notion that the 60/40 model is dead? Additionally, what types of assets are HNW and UHNW clients looking for in today’s markets?
Dana M. D’Auria: The 60/40 has formed the bedrock of retail investors’ asset allocation for decades. However, 2022 has brought about a lot of changes to the existing paradigm. The S&P 500 lost 20% in the first half of the year and the Bloomberg US Aggregate Bond Index dropped 10%. Meanwhile, more companies are waiting longer to go public as private equity is offering investment access to exciting innovations that are inaccessible through public market solutions.
As is usually the case, it boils down to the individual needs and preferences of the investor. Many investors are best off in an index tracking a basic benchmark mix of public equities and fixed income, a big reason being that they are measuring their performance against it and cannot tolerate tracking error risk. But for others, adding alternative asset classes, looking at style factors as a means of increasing long-term expected returns, and availing themselves of more personalized investment approaches are all considerations that need to be on the table for advisors to pursue.
Prince: Envestnet has assembled different exchanges offering a variety of asset management solutions such as annuities, credit, and alternatives. What is the vision behind those additions and how are advisors using them?
D’Auria: Over the last five years, Envestnet has transformed itself from a robust turnkey asset management program with hundreds of asset managers into an integrated wealth platform that offers financial planning, data analytics, and a variety of asset management solutions. This includes tax overlay, insurance, credit, retirement, trusts, supplemental Medicare insurance, alternatives, structured notes, and more. Collectively, these components form an infrastructure, empowering clients to live what Envestnet calls an Intelligent Financial Life, that is, one in which all financial transactions are contemplated in a holistic way that will benefit them most. For the advisor, this means bringing a comprehensive picture of the client’s finances to the engagement.
Prince: What is your view on sustainable investing in the current landscape, and do you see any adoption waiver or evolvement?
D’Auria: There has been a flurry of articles recently questioning the value of ESG investing. There are two big drivers behind this. Firstly, ESG solutions that are growthier and that have eliminated energy may have experienced some underperformance this year. Secondly, Russia’s invasion of Ukraine highlighted the perils of transitioning to carbon neutrality without fully considering the accompanying effects of such a change. Europe has largely been ahead of the United States in adopting climate regulation while simultaneously being more dependent on Russian natural gas and oil, so we land in a place where the E and S in ESG—environment and social respectively—may be in conflict about how and where to invest.
But while ESG may be bearing some slings and arrows right now, I do not expect interest in it to seriously diminish. This is partially because ESG provides valuable information to investors by generating a focus on good governance and quality environmental stewardship that, in theory, will result in prudent dealings between economic actors and communities. These elements of doing business could also impact the bottom line. For example, companies that fail to prepare for an energy transition may find themselves with stranded assets. Likewise, ignoring social considerations may harm a company’s ability to attract and retain customers.
It is too early to know how these variables will play out, and there isn’t enough pre-existing data to make a confident prediction. I think the studies detailing the defensive properties associated with highly rated ESG firms have a strong economic rationale behind them, as they appear to utilize the same underlying logic as governance has before. Additionally, the landscape is quickly evolving such that hyper-personalization is not only an option but also the norm. So even if you are not investing in ESG with an eye to better risk-adjusted performance, there may be opportunities to support causes you care about while accepting the tracking error it entails.
Prince: What are your thoughts on the regulatory issues in the investment industry now as well as how and where advisors are responding?
D’Auria: There are several new regulatory considerations facing the advisory industry right now, encompassing everything from rulemaking around climate reporting and ensuring that ESG investments live up to their claims to establishing a regulatory framework for addressing crypto investing.
One element that may be flying under the radar for some advisors is the SEC’s new marketing rule. Considering that it takes effect in November, it is a concern that compliance officers are understandably focused on. Many advisors have become accustomed to running hypothetical backtests for demonstrating how a proposed strategy might perform to clients; the new rule will severely impede their ability to do that. New books and records requirements may also limit the composite information formerly available to sell products. This is an area that advisors are going to want to consult their compliance teams on in order to understand how the rule is being interpreted and what it will mean for how they conduct business.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.