MASTERCLASS: Outcome-Driven Solutions

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  • 47 mins 17 secs
The pressure to deliver investors more value-added services is growing—a challenge in today’s increasingly complex regulatory and capital markets environment. In this Masterclass, experts from Columbia Threadneedle Investments discuss how incorporating model solutions may assist advisors: 
  • Josh Kutin, CFA, Head of Asset Allocation, North America
  • Anwiti Bahuguna, Ph.D., Head of Multi-Asset Strategy
  • Ben Simonds, Vice President, Client Portfolio Manager, Global Asset Allocation and Alternative Investments
  • Scott Brady, Vice President, Head of Product Development and Strategy

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MASTERCLASS




Contact your Columbia Threadneedle Investments representative at 800.426.3750

www.columbiathreadneedle.com/us

Remy Blaire: Welcome to Asset TV. A recent Cerulli survey indicated that when choosing an advisor, over 40% of investor households value someone who takes the time to understand their needs, goals and risk tolerance, and also proposes solutions that are customized. They rate these factors top on their list of importance. Investors are increasingly looking to advisors to offer wide range of services to address their unique situations. But with the added pressures of a complex regulatory landscape, and ever evolving capital markets environment, how do advisors balance it all?

Remy Blaire: Today, our panel of experts from Columbia Threadneedle Investments will dive deeper into the challenge’s advisors are facing. Discuss a few considerations that may help position advisors for success in the road ahead, and how Columbia Threadneedle has helped advisors deliver outcome driven solutions to address investor needs. Joining us today we have Josh Kutin the Head of Asset Allocation North America. He is Portfolio Manager on several asset allocation strategies and is responsible for research with a particular focus on global asset allocation and alternatives.

Remy Blaire: Anwiti Bahaguna head of multi asset strategy. She is responsible for asset allocation and research and portfolio management of asset allocation funds and separately managed accounts. Ben Simonds Vice President, a client portfolio manager, global asset allocation and alternative investments. He's a client portfolio manager and is a member of the Global Asset Allocation team and supports the firm's global multi asset strategies. Scott Brady Vice President, head of Product Development and strategy. He's responsible for the development and implementation of investment strategies at the firm, including creating and supporting the distribution of retail model solutions.

Remy Blaire: Thank you so much for joining me for today's masterclass. Well, we all know that the landscape for regulation is becoming increasingly complex and it's very involved. When it comes to the advisor the pressure is on for them. First and foremost, let's take a step back and take a look at the evolution of the financial industry. And then I want to start out with you, if you could tell me how the industry itself has evolved.

Ben Simonds: Sure. It's very interesting because I think it's always been complex. It's always been difficult to invest. But the one thing that's become really palpable and transparent as we talk to advisors is it's become so much more complex than it ever was. People are living longer. The prevalence of pensions are no longer what they once were. People are looking for that source of income and retirement where they didn't necessarily have to worry about that in years past. As I talked to advisors, and I get the feedback from their clients, they're increasingly worried about those types of goals, as opposed to just beating a benchmark with a product. Where in the past that used to be more of a give me the right fund, is it beating the benchmark that's working. Right now, is am I meeting my target? I'm I going to have the goal in place that will get me through a long retirement. I think that's a key step and increasingly complex world that we're entering and probably seeing intensifying.

Remy Blaire: Now, Anwiti I want to get your perspective as well, when it comes to the capital markets. It's also a very changing and complex environment. A lot of clients are paying attention to what's coming out of these central banks. From your perspective, tell me what you're paying attention to.

Anwiti Bahuguna: Sure. When I hear Ben and Scott talk about the challenges the advisors and the clients are facing, I'm a little surprised. Because when I look at the returns for capital markets over the last 10 years, they have had an incredible bond market. S&P has returned before dividends about 16% in the last decade. And if you include dividends, the returns have been even more impressive at around 18%. International stocks haven't done as well but they've still returned around 10% in returns. When I think of those sorts of returns, and I think about client's needs, one would say that rising tides would raise all boats, and the worry should actually be less. Instead, worries are escalating because clients are not looking back, they're looking ahead on what the next 10 years might bring. And when I think of the next 10 years, we just had Tiger Woods when the master’s this past weekend, going into the master’s his origin were less than 10% of winning. For the next 10 years, repeating those returns, the odds are even less. And that's sort of what I worry about.

Remy Blaire: And Anwiti unfortunately we don't have a crystal ball of whether it comes to sports or to the broader market. I do want to know whether or not you see any of this getting easier as we head into the future.

Anwiti Bahuguna: Unfortunately, no. We've had tenures of not just the bull market, we've had tenures of an economic expansion. Clients are rightly worried about when is the next recession. We don't see it very shortly or in the next year or so, but sometime in the next five years or the next decade, we're likely to see a recession. And our projections are the returns are going to be much lower than what they were in the past decade. We go through our capital market assumptions for the next five years, and VC returns somewhere in the range of mid-single digits. Those are times when clients need a lot more guidance on how to construct portfolios.

Remy Blaire: And indeed, I can understand that perspective very well. If you go from double digits to single digits, that's not such a great return. But I do want to move over to Ben, what is your perspective? Do you expect to see difficulty heading into the future?

Ben Simonds: Unfortunately I do. I think it's going to get much more difficult from here and sort of building off of what Anwiti said I think having that experience over the last 10 years, it's almost feeding into that worry. People realize we've had a really good run, and we don't necessarily have maybe the stock markets to rely on going forward like we have in the last 10 years. If you look at the types of concerns that I mentioned at the outset, people's lives are just living, they're living longer. They have more needs in their personal life, in their work life, that make that need for having some source of income that much more important. I think from this point forward, it's just becoming more and more worrisome, and that's feeding through to the advisors. Those clients are bringing those demands to their client, to their advisors, in a much more pointed way I think they have historically.

Remy Blaire: And Scott from a perspective of the regulatory environment, we know that it's always been complicated, but going into the future, do you expect it to be just as complicated or even more so?

Scott Brady: I mean, I think being complicated is something that is going to be a constant here. When you listen to what Anwiti highlighted and what Ben highlighted, clearly the industry is evolving and the client living longer. And the client articulating their goals to advisors is really helped driving that change. And so, regulators have continued and will continue to keep pace, if you look at where we were 20 years ago, in the regulatory environment that's much different than where we are now. And that evolution in my opinion, is because the client has evolved. And I anticipate that as the client continues that evolution and continuing to gauge advisors over the next 10 to 20 years, we'll see a very similar evolution in the regulatory environment as well, complexity is here.

Ben Simonds: And if I could add on to that point, I think it’s a very important point. And I meant to mention earlier, not only our clients are more worried, but they're much more educated than they ever have been. They're coming into their advisors, not necessarily just looking at our return, they're coming in with concerns and somewhat of an educated view that they might not have had in the past. I think all of that is feeding into a much more demanding marketplace for the advisory business in general.

Remy Blaire: Then I do agree with that, I'm sure you hear from your neighbors, your relatives, they're much more educated. Exactly, and the access that people have to a lot of information, especially financial news that gets them thinking and wondering what to do with their own investments. As you mentioned, as clients evolve, advisors also need to evolve. Can you tell me what's happening?

Ben Simonds: I think, generally speaking, and I see this across various platforms and across the different types of constituencies be that lower retailer or high net worth. The level and spectrum of services is just increasingly being demanded. It's not just enough to build an investment portfolio or build a financial plan, it's to do those things that historically had been outsourced to a state planning, maybe some more insurance planning, those types of things. I think just in general, the depth in spectrum of services that are being demanded it is just increasing. That's putting a big burden on advisors.

Remy Blaire: And Scott moving on to you if I could get your perspective on how you think that advisors have evolved their practices to address these challenges.

Scott Brady: Absolutely. When you consider the things that Anwiti highlighted and that Ben highlighted, the complexity for an advisor has never been higher. And advisors need to be able to dedicate more and more of their resources to help address some of their concerns in the ongoing navigation of capital markets. They need to address client needs by dedicating a lot more resources to help solve those things, and those resources ultimately result in a reduction of scale for the financial advisor and ultimately gives him or her less time, and time as a resource that is very difficult to recreate.

Scott Brady: From a best practice standpoint, knowing that this is becoming more and more of an encumbrance for the advisors that we meet with regularly, a best practice that we've seen them implement is through the partnership with an asset manager. Partnering with an investment manager gives a financial advisor the opportunity to not only gain benefit from the portfolio construction and portfolio management expertise that an investment manager can bring to the table. But more broadly, not just the advisor but also the client collectively benefits from things like ongoing support that a firm, an investment manager can provide.

Scott Brady: Whether that support is through expertise or through other value-added resources. Investment manager that has a strong risk management and oversight of their investment management process benefits both the advisor and the client. And lastly, from a really a mutually shared benefit of not only partnering with an investment manager but more importantly using models to get there, is through the benefit of scalable and consistent trade execution. Where the advisor and the client are benefiting from the scale that we bring to the table and the consistency in which were able to drive trades into the market. That collectively is both client and advisor benefit and ultimately gives the advisor more time to dedicate back to his or her clients.

Remy Blaire: Well, I know there's a lot of expertise here at this table when it comes to strategy as well as asset allocation. Ben, I do want to bring it back to you, if you could tell me more about the capabilities as well as the partnerships that you have with advisors.

Ben Simonds: Sure. It's really been an evolving process in terms of the partnership that we are engaged with our advisors and clients. I'll start with capabilities, as far as capability perspective, we're a global asset management firm, manages strategies across the entire gamut of traditional assets and alternative assets in a variety of styles. We bring to bear a large perspective of approaches. What's really developed, and I think is interesting and it's probably a trend going forward is, in the last five years, we've seen an acceleration of partnering with our clients to actually construct specific goals-based solutions, drawing on that full palette of things that I just mentioned.

Ben Simonds: Whereas in the past, we may have been more inclined, like the industry to offer an individual capability in one of those areas, now, we're actually talking to our clients engaging with them in a number of ways and the feedback channels, there are multiple. But we're looking basically to find out what is it that clients want? And then we look at our resources, our ingredients, and we put them together for them. That has been a really interesting development that has really accelerated, I'd say in the last five years, and we're doing a lot more of that right now.

Remy Blaire: And now that we've highlighted this evolution we're seeing in the financial advisory as well as industry, I want to move on to client needs, and Ben going back to you, highlighting partnerships with advisors. Could you tell me a little bit about how your firm has evolved?

Ben Simonds: Sure, initially and I think the biggest footprint that we made in this way was we built a large series of models, going back to about 2014, where we took a unique approach. We went to our advisors, our large book of advisors around the globe, and basically surveyed them. Literally surveyed them and said, what is it that you're looking for? And they came in and written responses, and we took that information, and that fed into building a series of models.

Ben Simonds: Using that experience and that template, we've further developed our capabilities using those types of methods, but we also have a very active Salesforce and client portfolio management of which I'm one force that's in the field that's talking to advisors daily. We have this multiple feedback loop, where we're always in the conversation and hearing what is it that people want. It could be developments to the models that we have already on offer, or it could be something entirely new. But the point being it's a very much of a collaborative conversation that's ongoing.

Remy Blaire: And continuing this conversation with Scott, I want to move on to you. You deal with products; do you have anything to add when it comes to client needs?

Scott Brady: Absolutely. Ben, to summarize what he was highlighting, I mean the most important thing that we do, really comes down to listening. We have a lot of different opportunities for us to collect feedback, to be able to take that feedback and turn it into something that is actionable for us is really the central thing that we try and do. Putting the client in the middle of the room is really the cornerstone of everything that we try and do whether it is through articulating our existing product line or through developing new products. And so, as Ben rightly highlighted, hearing from advisors, what it is that their clients are asking for, and identifying places where we can partner where we can help is critical.

Scott Brady: And in turn we will distill those things back that we hear from the advisors. Clients maybe expressing a need for growth, we've been able to identify our products that exists today. And we're able to organize them in a way where we can have a follow-on conversation about the inventory of things that can support growth aspects within an advisors' portfolio. Other things that we hear on a regular basis can be tied to the desire to manage volatility, or to manage your income or generate income in a portfolio. We equally have an inventory of products and solutions that can meet those needs as well.

Scott Brady: And most importantly, as Ben highlighted, it's not limited to just what I'll call the historic containers being mutual funds and ETFs. The ability to deliver things in a way that client needs them to be delivered or would like them to be delivered is no longer limited to a wrapper. And so, goals can be expressed through a mutual fund or an ETF and they also can be helped and solve for through an SME and equally they can be solved through a model. With that lens for the existing products that we make available, we also apply that to any new development efforts that we may have. As we look to move into the future, any new products that we may decide to bring to the market, as I mentioned a minute ago, start with the client in the center of the room.

Scott Brady: We take that feedback that we hear from advisors, and that's where we start, and that really is instrumental for us because it allows us to take the best of our capabilities and bring them to bear in a way that it is targeted towards something that we're hearing that there's a need for. So that on the other side, when we're bringing something into the marketplace, we're able to articulate not only who we're building it for, but what it's intended to solve for. We think that, that collection whether through an individual security or through a model that we're managing, that allows us to talk about the partnership that we can establish and maintain with an advisor.

Remy Blaire: Well Scott, it sounds as though you're saying communication skills on top of expertise are very key in your position. I do want to bring you Josh into this conversation as well and talk about some common client needs, you're hearing from advisors. What are some that you can share?

Josh Kutin: Sure. Well, I guess the number one goal that we're hearing from clients is the idea of managing volatility. That's been a very important topic that we've heard from a lot of people it can mean a lot of different things. It could mean having a similar return as a traditional asset allocation or asset portfolio, but maybe getting there with a lower volatility. It could mean having a similar volatility through a traditional Allocation Fund or strategy but getting there with higher risk adjusted returns by having other asset classes. It could also mean more broadly, the idea of just thinking about the volatility of the fun when you're making your allocations, measuring, what your drawdown is going to be and trying to manage that and mitigate any potential drawdowns that you might have. All these different ideas kind of gets summed up in that big topic of managing volatility.

Remy Blaire: And when it comes to volatility, we all know when we're watching financial news or we're reading the financial media headlines that, that word does get thrown around quite a bit. Anwiti when it comes to some of these client needs, some may be obvious others maybe not. Tell me a little bit about your perspective, and what about generating income.

Anwiti Bahuguna: Right. Number one client needs as Josh mentioned, was managing volatility. Along with that, comes the need to generate income for retirement. What we are hearing is yes, we need income, yes, we need better returns, but we don't want our portfolios to suffer enormous losses. The key going forward is to construct portfolios, which can generate those returns and those incomes tailored to the client's needs, but at the same time, make sure that there is consistency of those returns. In other words, we don't see enormous drawdowns, and we see lower volatility.

Remy Blaire: I think that's very important because if you're looking at the long-term perspective, then for the advisor they need to balance a lot of things. I do want to move on to portfolios in particular outcome driven portfolio since that is the topic of this masterclass. If we can start out by talking about some of the considerations that you take into account, Josh, could you share some of those highlights.

Josh Kutin: Absolutely. Well, Ben mentioned earlier that we took a survey of investors in 2014. And this was a very critical survey that we used to develop our model portfolios that we launched in 2015, for example. We have many different model portfolios at this point across different advisor goals, but that one area where as I said, we've seen the most interest has been in managing volatility. In our active risk program, there's four key areas that we focus on there when we're building out those portfolios. The first is the idea of risk allocation. What I mean by that is, instead of investing capital, we're going to be investing risk.

Josh Kutin: Instead of saying, I want to have 60% of my assets in equity, and 40% in fixed income, maybe I want to have 60% of my risk in equity and 40% of my risk in fixed income. It's a common idea, but it's important to talk about that a 60/40 fund isn't necessarily as balanced as investors thing. Because a 60/40 fund has over 90% of the risk of it coming from the equity. Any kind of a strategy that we can use to balance out the volatility of the underlying assets and what their contributions are to the portfolio, we found that, that's a key idea in maximizing risk adjusted returns and generally controlling the volatility of the outcomes.

Josh Kutin: Second idea that we focus on when developing a model portfolio, which is common to any is, having a good blend of both active and passive vehicles. This is something which we can't ignore any more in 2019. We don't necessarily have to decide it's all or nothing, we don't have to say that we're going to be 100% active or 100% passive, we found that investors want to mix of those asset classes. Investors want to have access to quality active management; investors also want to have passive vehicles in their portfolio which do a good job of controlling fees. So, having a good blend of those two different ideas is important, it's something that we try to incorporate in all of our portfolios.

Josh Kutin: Another key idea, the third of the three ideas in our active risk program is the idea of diversification. So, this is something which I think ties into the other ideas even risk allocation alone is a good way of diversifying your risk between equity and fixed income. But in general, we look for as many different asset classes to include as possible. We try to favor a global application as opposed to simply a domestic, we try to throw in credit markets, we try to throw an inflation link themes ideas such as commodities, rates, inflation linked bonds, we even tried to throw an alternative asset classes to an extent in the portfolio. We believe that diversification ties very nicely to this idea of balancing the risk, balancing the outcomes for investors.

Josh Kutin: Finally, the fourth idea, which underlies many of our portfolios, including this series, is the idea of being adaptive, having a different state of the market that we can identify in a simple way. If we could say that, well, there's times where we want to be very balanced and have a certain balance between equity and fixed income, great. Maybe there's other times where we can identify that we want to be more bullish, or even in rare cases, highly bullish and we want to tilt the portfolio even more towards equity risk. On the flip side, maybe there are times where we want to be more defensive, and that's a capital preservation state that we've identified. And we've looked for ways to incorporate that idea of being defensive, opportunistically defensive in many of our different model portfolios. Those are just some of the common ideas that we use to launch the active risk program, but that's just one of our different model portfolio programs. Another portfolio program that we have is our series of income portfolios.

Remy Blaire: Well, Josh, I think you gave us a really great overview. Anwiti I know that you have your own perspective when it comes to portfolio construction, some that Josh highlighted as well. Could you give us your take?

Anwiti Bahuguna: Sure. And I keep coming back to the income theme. When we talked about the evolution of the industry, we noted that returns have been great for all asset classes, that's true for bond investors also. What clients are telling us is that, they're looking for consistent income. And going forward, we don't expect a lot of returns from bonds either. My number one thought when constructing an income oriented portfolio is, to expand the toolkit, to diversify, to look beyond just bonds to look at stocks, to look at rates, to look at convertible bonds to look at a host of other asset classes that can add to a client's income portfolio. And at the same time, be very aware of draw downed risks and volatility in the portfolio.

Remy Blaire: We would also want to get a better idea of how you determine conditions as well as the market state. Could you give us a little bit of insight into that?

Anwiti Bahuguna: So that's very similar to what Josh mentioned, we have identified different states of the market. I feel like I'll be repeating myself, but it's similar to what Josh said there are times when we think market environment is such that we can take a lot more risk in the portfolio and have a little more risk coming from the most volatile asset class which is equities. And there are times when we feel, that the market conditions do not justify taking that amount of risk, and in fact, we want more cash in the portfolios.

Remy Blaire: Before I move away from this topic in terms of portfolio construction, I do want to know whether or not you might have some additional thoughts when constructing a portfolio.

Josh Kutin: Well, I think one of the common themes that I see across all the underlying funds strategies models is, the importance of having a process. That's just something which is true, whether it's a qualitative fund, or whether it's a quantitative strategy, the idea of having a process is really important. In some cases, such as the state regime choice that I talked about, that's maybe a rules-based scenario. But in other cases, even a qualitative portfolio, the sort of equity fund, which we've had for many years in a portfolio, that sort of an idea, there's a process underlying that. That manager has a strategy and at the firm, that's a really important idea, that idea of process. It's something that we want to stick to what we say we do, if we're going to do something, if we say that we're going to do something then we want to stick to that approach and that's true across all of our underlying strategies.

Remy Blaire: And going around the table, what advice would each of you give to an advisor so that they could better deliver on their client needs. We all know that we live in an ever-increasing complex environment for both the client as well as the advisors. Ben starting out with you.

Ben Simonds: Well, I think Scott made a great point, Scott often makes great points. I think that the point I heard him make earlier in this session was, it really has become a resource allocation game, if you will. If you're an advisor managing a diverse book of clients with different needs, you really need to find time in your day, to help satisfy all the things that you need to do. Being able to leverage and outsource where you can to professionals, I think it is a really key trend. And something that advisors are really making good use of going forward, it just enables them to leverage the expertise of others so that they can then have more time back in their day to do some more of that individual hand-holding as the case may be. I think that's probably the single best piece of advice I can give somebody, use the resources that are out there and leverage what you can.

Remy Blaire: And Scott, what about you?

Scott Brady: I'll echo some of the things I said earlier, I guess I'll summarize it by saying, find a partner. I mentioned earlier that advisors, partnering with investment managers in order to bring scale back into their business. And not only helps the advisor but it helps the client. When I look at kind of key attributes of a partner that I would look for or suggest that a financial advisor look for it really comes down to four primary things. It comes down to a mix of resources, approach, people and oversight. What do I mean by that? Resources I think are pretty clear, we've talked about the resource constraints that advisors are seeing today.

Scott Brady: I think an advisor needs to evaluate which manager or managers can best help him or her meet the client needs that they're being asked to deliver on and at the same point in time, maintain a scalable practice. Very, very important. And I think as part of the resources, when you're looking at a manager, one of the other things in that category would be the idea of having a manager that's sized for success. Making sure that the manager size is one that lines with your desire for nimbleness and their ability to execute and perhaps pivot as you need them to.

Scott Brady: Secondly, I mentioned approach. I'll echo a word that Ben highlighted a minute ago, and that's the word collaborative. We believe in a collaborative approach; we have found that it absolutely benefits advisors and clients through a collaborative engagement. It helps you better articulate and define what the end goal is. As advisors we are looking for firms to partner with, identifying firms that have an approach that aligns with the way in which they'd like to do business is going to be critical. Next, is people. To me, the most meaningful part, having the expertise that really can help provide the thought leadership that advisors are looking for is critical.

Scott Brady: I mean, you think about some of the things that Josh and Anwiti just talked about. There are a lot of things to take into consideration for an advisor to manage a portfolio. Now, take the complexities of multiple clients and multiple needs, multiple portfolios could come about leveraging the leadership and the thought leadership and the expertise of an organization to really help distill a lot of that noise and to be able to help pinpoint a goal and execute on it. I think is a meaningful and impactful thing for advisors to evaluate.

Scott Brady: And then last but not least, is the idea of oversight. Well Josh and Anwiti have a defined process, the great thing that we take a lot of pride it is the fact that there is independent risk oversight that actually looks at what Josh and Anwiti and our firm is doing as it relates to managing money. Josh said, we look for opportunities to be able to state that we're going to do something and then take pride in the fact that we do it. It's the idea of knowing your role and delivering on it, and that's very much the philosophy we take with our investments. And so the idea of risk management and oversight is critical to us, and the fact that we hold ourselves accountable to deliver on the results and the attributes that we say that we're going to deliver, I think it's something else that an advisor needs to take in the strong consideration when evaluating a partner.

Remy Blaire: And Josh, do you want to add to Scott and Ben's comments there?

Josh Kutin: Well, if I'm going to think about an important idea to focus on to paraphrase a famous real estate maxim, I'd say that the three most important things to consider for asset allocation portfolios are diversification, diversification and diversification. It really is just such a core idea to everything that we're trying to accomplish. I spoke earlier about some of the different aspects of building an asset allocation portfolio and active risk allocation portfolio. Diversification is a common theme among all of them. Try not to be too concentrated in the equities in your portfolio, have other asset classes in there.

Josh Kutin: Have equities, have fixed income, have credit markets that are underlying your fixed income, try to have some alternative asset classes. Don't just go for a domestic approach but go for a global approach wherever possible. I really believe that having diversification is something you can't have enough of in a portfolio. I remember being asked on a panel a while back when is a good time and a bad time for diversification? I think it's a funny question because I think it's always a right time to have diversification and portfolio. Sometimes it works better than other times.

Josh Kutin: For example, on the first part of 2018, a concentrated portfolio tended to do better than a diversified portfolio. But then once we have the fourth quarter of last year, we saw a lot of those different positions reversed and a lot of the diversified portfolio started coming back. In the end for the year, diversification was rewarded in that portfolio and that's what we believe is the right position to have going forward.

Remy Blaire: And Anwiti what about you? What are your thoughts?

Anwiti Bahuguna: If I can add to Josh's comment on diversification, I would say that diversify but also be adaptive. In other words, professionally and tactically manage the portfolio, taking opportunities for risk when they present themselves, and also to scale back on risk as needed.

Remy Blaire: And since you mentioned a thought leadership as we are heading into the close of this masterclass, could you share any examples of great thought leadership that you're seeing right now.

Scott Brady: Sure, do you want me to start?

Ben Simonds: Please do.

Scott Brady: I guess there are a handful of things that I would immediately bring to bear. Thought leadership to me really comes to me in two primary forms. It comes in either the website and or written form and it comes from the personal delivery. And in both cases, those are things that we take a lot of pride in. We've heard from financial advisors outside of what their clients need, we've heard what some of the things are that they need to manage an effective practice. And so internally, we've identified the right resources and pulled them together to establish a series of what we believe are very strong value added programs, which advisors can utilize within their practice to learn how to better manage their time, better manage portfolios, for those that are interested in doing that, and handle a variety of very unique client situations as it relates to a wealthy client base, or a client that may maintain a concentrated stock position.

Scott Brady: Those are some examples of things where we've been able to dedicate our resources toward helping advisors learn how to solve unique client problems, but separately from that, I mean, I only need to look to my right to publish thought leaders who regularly make things available through our website and in the form of white papers that help articulate their current views on many of the topics that they've talked about here. And I think those two things the in-person value added program along with the thought leadership that's written from folks like Josh and Anwiti make a very powerful tool for an advisor to incorporate into his or her practice.

Josh Kutin: I want to actually reiterate a point that Scott made earlier about caring less about the vehicle. I think that, that's a really important idea. And it's a very forward-looking idea that we can't emphasize as important enough right now. The idea that 25 years ago, we were building an asset allocation strategy, we would be focusing on doing all of that within a mutual fund. And that will be one single fund, which we'll be asking an advisor to consider purchasing. Now, with the conversation, to models, it's the same conversation, it's the same ideas, it's the same science that we might use to build that strategy, except now we're going to be unbundling that and we're going to be offering a series of underlying funds and strategies which we can then bundle up together as a model. It's an idea that's been having a lot of traction over the last few years for the different reasons that both Scott and Ben mentioned. And that's something which we really think is an important idea of leadership going forward.

Ben Simonds: If I could just follow on to Scott, because I think, Scott made four points earlier that are important when evaluating a potential partner and having four essential pieces of criteria. I would add a fifth, which is having that collaborative discussion that we've talked a lot about here today is crucial, and it's been a great step forward for the industry. I also think when you're looking for a partner, it's important to find a partner who was helpful in helping you determine what you may not necessarily be worried about today. But having an industry or a leader that has a view on the industry that can help them to navigate where things are headed. And I think having the scale sort of ties in with that, but it's important. Collaboration is a key, but also having somebody can help you navigate where things haven't happened yet.

Remy Blaire: I think you've all highlighted some very key points there. But as we head into the future, I think it's very important to have an idea of what could come up in terms of outlook. We've talked about the evolution of the financial industry for the advisor as well as the client. But what do you think is on the horizon, and what are some trends that you're watching right now?

Scott Brady: There are a lot of things that that seems to be gaining momentum. It'll be interesting to watch to see which ones are false indications and which ones are true and are going to stand the test of time. It is clear to once again echo what we've talked about here, that we are in an environment now where clients are focused on things that are goals oriented, things that are financial plan oriented, and I believe that that trend is here to stay. As a result, the manner in which clients elect to do business with financial advisors is also evolving and moving from a transactional commission based brokerage environment into an environment which is much more advisory in nature and fee based is what the industry refers to it as sometimes, continues to build momentum and it has for several years.

Scott Brady: My suspicion is that, that will continue. And that very much aligns with the opportunity for model portfolios like Josh and I and Ben have mentioned. It allows firms like ours to partner like we've talked about, and to sit on the same side of the table with an advisor when they work with a client. And I see that that partnership trend that I know you've heard mentioned here a couple times; I see that continuing in the future as well. Because I do see complexity continuing to raise for advisors, as the environment continues to evolve.

Josh Kutin: I think we can also speak maybe about our financial outlook, it could be a useful thing for some of the listeners to talk about. We run a five-year strategic forecast process, it's something that we look at twice a year, just to maybe take a little bit of a step back and think beyond what's necessarily happening. The headline of the day, but what we think are going to happen for financial markets going forward. And what we're seeing right now is positive returns for various asset classes. However, we do believe that they're going to be more modest returns in the sort of numbers we've seen over the last 10 years, which ties into all these different ideas of things aren't necessarily going to get any easier going forward. But we do think could be a little bit more difficult. Anwiti since you did all the work on the underlying scenarios, I don't know if you want to speak to what some of the key scenarios you're considering right now.

Anwiti Bahuguna: Sure. Looking ahead, there's so much uncertainty about when the next recession is going to be. That's the number one question related to markets that we get. When we think of how returns are going to be over the next five years, we lay out our outlook for, do we see growth continuing to be in the low 2% range? Or do we expect a recession, or do we expect the changes in regulatory environment and changes in tax code to somehow generate faster growth than 2%? Those are some things we look at, and then look at how those levels of growth translate into earning opportunities for different companies. And that informs our outlook for future returns, along with looking at history and saying that it's quite unlikely to see 16, 18% rate of returns every year for equities. Our expectations looking at that analysis is that growth is indeed going to be in low middle digits.

Josh Kutin: I know you mentioned Tiger Woods earlier, have you had any idea on who will be winning the master’s over the next five years or are we still working on that model?

Anwiti Bahuguna: I do not really follow those folks honestly. But it was surprising to see a fellow bet incredible amount of money when the odds of win were only 7% and then actually make millions on that win. If that happens, we will see another 18% decade for S&P 500. But I wouldn't be putting my money on it.

Scott Brady: You raised an interesting point outside of the Tiger Woods point that you made. It's really the opportunity to reset expectations. I think the industry and in particular the client base, much more educated as Ben highlighted earlier than perhaps, they had been in years past. They've also seen an incredible run up, and so you can look through the current market conditions with an objective eye and say, "Yes, I know that nothing is guaranteed, and we can anticipate that this is going to continue tomorrow." But at the same point in time, there's an anticipation a lot of times that this can and will continue.

Scott Brady: And so the thought leadership that I had touched on previously, and particularly the things that you and Josh, Anwiti to be able to continue to provide the thought leadership and the views and to really set the stage for where the market currently is. And where things maybe, perhaps a more mature trade and where there may be things that are an opportunity. Those kinds of tools can help advisors sit with their clients to make sure that the expectations are in line with the goal, so that the opportunity for an emotional transaction rather than one that's based on fact is muted. I think that's another very, very impactful thing that comes along with the thought leadership that you will provide.

Remy Blaire: And it sounds as though you have a lot of advice for advisors out there. I think when we take a look at the current bull market, it really depends on what generation you're from. If you've seen the financial crisis or other downturns in the market, it's easy to be cautious. But if you're muted market, perhaps not as much so. I know that there are advisors listening to this masterclass or watching this. If there's anything that you've all learned in each of your roles that could be helpful going forward, what would that be?

Ben Simonds: I would absolutely agree with what you said. Generationally, I think it defines your perspective, but I also think even people who live through their financial crisis, as I had been in many advisors’ offices, and they've expressed frustration that even those people who got hit pretty badly. This past 10-year run is the recency bias, and all those types of terms I get referred to, is very much in place. People, even though they may have experienced 07 or 08, they still had a really good run here for 10 years, and they've kind of anchored off of that. And so, their expectations are probably a little bit out of line with what is probably realistic in what our portfolio managers would see going forward. So really managing people's expectations and bringing them back into the reality of today's markets and what the opportunities present going forward as opposed to just expecting more of the same. That's the real challenge.

Remy Blaire: Well, with challenges come opportunities, so Scott, do you have anything to share as well?

Scott Brady: I do, I agree with Ben and I know I talked about the idea of partnering previously and I absolutely do believe in that. There's definitely a lot of opportunity to really change the conversation that you have with your client if you've got the right partner and the right resources to align to that. The views that Ben highlighted each client segment and by each segment, Gen X, Gen Y. Each of them is going to have their own views that are a bit unique, whether it is investing related or even goals related. Leveraging investment managers who may have done work in that space or may have views on how different portfolios can be managed for folks along that lifecycle can make for a much more meaningful and a much more engaging conversation with those clients and can help you deepen the relationship.

Josh Kutin: Scott's a lot older than I am. I'm speaking for a younger generation, and he is. I think that that idea of having drawdown management is really important. It's something which is both different and common across the different generations of investors. You might have younger investors who don't remember 2008, and they are not necessarily understanding that they should be focused on drawdown in their portfolio and that's part of our job. You have other investors for whom 2008 was one of several drawdowns that they might have experienced in their career. They might have been there to participate in the tech crisis in 1987 et cetera. Having portfolios right now, I think that you can't get away with a portfolio unless you have some kind of a strategy to deal with drawdowns.

Anwiti Bahuguna: And if I could add to that, what I would say is that it's very important to therefore tactically manage your portfolio. We could have another year of 10% returns, but that could be followed by one with 20% declines. And having professionals be aware of what's happening with fundamentals, with economics with opportunities and acting on it tactically is very important.

Remy Blaire: Well, thank you very much for joining me for this masterclass and of course, thank each and every one of you for your insights today.

Anwiti Bahuguna: Thank you.

Ben Simonds: Thank you.

Josh Kutin: Thank you very much.

Scott Brady: Thank you.

Remy Blaire: Thank you for watching our experts from Columbia, Threadneedle Investments were Josh Kutin Head of Asset Allocation North America. Anwiti Bahuguna Head of Multi Asset Strategy. Ben Simonds VP of Client Portfolio Management and Global Asset Allocation and Alternative Investments. And Scott Brady, VP, Head of Product Development and Strategy. From our studios in New York, I'm Remy Blaire.

Remy Blaire: Thank you so much for joining me today. Well, the regulatory landscape continues to change, and we all know that clients' needs as well as goals change as well. But when it comes to the advisor, it is a very challenging environment as well and the pressure is on. Ben, I want to start out by talking about the financial industry and its evolution. Can you take a step back and tell us about that?

Ben Simonds: Sure. I think it's really interesting, and I have a unique perspective on that because the nature of my role, I'm a client Portfolio Manager with the team, which means that I represent a variety of products in the field with advisors. I spend pretty much the majority of my time in advisors’ offices, hearing their concerns, and in hearing what it is that they're basically worried about, and the trend is pretty clear. They're worried about a lot because their clients are worried about more and more than they used to be. Just one simple example, clients are living longer, we all know this, but that's presenting a lot of problems for people's income. Where before they can rely on pensions, that's no longer the case.

Ben Simonds: Those two primary trends alone are just introducing so much more worry into the equation. And so, advisors are really struggling to try to find solutions to deal with that for their clients. Then a new layer on top of that, it's been a very, very difficult environment to keep investors’ expectations in line. We're coming off a very good run in the equity markets. Investors are anchored off of that experience to some degree. You take all of this into the mix, it's really meant, clients are coming in with a high degree of worry that they have always had, but they're probably coming in a little bit more educated and that may not even be the exact right word.

Ben Simonds: They're coming in a lot more informed. They have a lot more information being thrust at them. They're coming into client advisor's offices, with a whole series of concerns, that they just heard on CNBC or they just heard on Twitter or whatever the case may be. Advisors need to take all of that information, pare it all out and turn it into some sort of a cohesive plan that can then put clients back on at the right track. But the overriding theme is there, the complexity is increasing, the demands are increasing, and advisors are becoming much more demanding in general. I think that alone is intensifying their worry.

Remy Blaire: Anwiti, let's talk about the capital markets environment that's also evolving as well. And because of that, I want to get your perspective. Tell me what's unique?

Anwiti Bahuguna: Sure. When I hear Ben talk about advisor concerns, what the advisors are hearing from their clients, they surprise me. Because if I look at capital markets over the last 10 years, we've had an incredible bull market. We've had S&P return before dividends, somewhere close to 16% since the financial crisis. And if we were to add dividends to S&P stocks, then returns are actually closer to 18%. That's the experience of US stock market investors predominantly invested in large cap stocks. If we look across other asset classes, even those who have diversified into global stocks have done well.

Anwiti Bahuguna: Global stock returns have been around 10% or so. And then those invested in bonds have really done quite well, if you consider the lower volatility that comes with bonds. High yield returns have actually been better than global stocks, those set of clients and advisors they have experienced terrific returns if they have been invested in the market. And my feeling is, rising tide should have raised all these boats. Unfortunately, though, that's not the experience of all clients. Many advisors tell us that some of their clients have a very conservative outlook.

Anwiti Bahuguna: And actually we're quite scared by the global financial crisis and didn't take part in the market returns that happened post crisis because they remained out of the markets, or they remained in conservative options for investing, such as treasuries only. Returns for treasuries have not been as good, lower than 3%. And in fact, they are now anxious about meeting their income needs, their retirement needs, and all other requirements that they have for their portfolios, which Ben has been highlighting. Really, there is anxiety on both levels from those who have invested and expect similar returns going forward, and those who have not invested and are trying to make up for their lack of investments.

Remy Blaire: Well, Anwiti, now, that I've gotten the perspective of everyone regarding the evolution. Do you see the environment getting any easier as we move forward?

Anwiti Bahuguna: It's funny that you asked that Remy. This is a question that's fresh in my mind having just come across the odds of Tiger Woods winning the Masters Tournament. Last weekend, he defied all odds and won the tournament after a gap of many years. Going into this weekend, his odds of winning were less than 10% in fact they were closer to 7%. When I look at the returns of the last decade, and then look ahead, chances of repeating those returns in the stock market are actually like Tiger's odds were when he went into the tournament this weekend. In fact, we have modeled the analysis of past hundred years of returns of stocks and bonds, and we think the probability of a similar decade ahead is less than 10%.

Anwiti Bahuguna: The anxieties are not going away, return ahead are likely to be much lower than what we have experienced, and client needs are not going away. If I could add something to that discussion, stock market return and bond market returns are eventually related to how the economy does. And after the global financial crisis of 2008 and nine, economy has done, okay, not in terms of the strength of its recovery, but in terms of the duration of its recovery. We've had a 10-year expansion of the US economy. In fact, if we see positive returns in second quarter of 2019, then we would have matched the longest expansion in US history and the second half of the year would actually make this the longest recovery on record.

Anwiti Bahuguna: A very natural question to ask at this point is, can this continue? Can we have another five years of recovery? And this is where, again, that anxiety comes in that, not only are we likely to not have stocks return 18% or so, we're also likely to see a recession in the next few years. That's the number one worry I get from clients, and those are the things that we are very focused on.

Ben Simonds: I couldn't agree more, if I could just interject on that point. I think it is interesting. My role is a little bit different, as I mentioned than some of the other panelists here with advisors so frequently. I actually feel as much like an advisor as I do, an asset management team member, because I'm hearing their concerns. I'm sort of hearing and living with their concerns. It used to be you had a product and you had a benchmark, if you beat that benchmark, you were winning. And I think there's still an element of that and probably always will be, but the conversation has really geared towards and I just came out of an advisor's office in Florida last week with the story, and it's a frequent story.

Ben Simonds: But I'm retired, says the client, I'm retired. I have a son who's living back home with me now. I have no pension, I have this pool of money that you are picking investments for, and they're all beating their benchmarks. But what I'm really concerned about is, is this enough to give me income for the next 30 years? I have this problem, and I need this solution. It's not so much just pitch me another product. I think that trend is one that we're just seeing, really, really exacerbating the demands on advisors. They need to sort of reach out from their historical comfort zone, but really find those solutions-based models or portfolio types of opportunities, as opposed to just finding the best investment fund.

Remy Blaire: And Ben, could you also tell me how things were different for an advisor, say a decade or a decade and a half ago?

Ben Simonds: I think it's building on that being able to, you pick the hot fund, you just benchmark by its margin, hopefully a very big margin. That was a really, really good day for you. Your clients were happy, you did well. And hopefully they gave you more money and you got more clients. I think, as I mentioned, there's still an element of that and that probably will never go away in the asset management business. But I think people are seemingly taking this step back and looking at this more comprehensively, and saying, "How does this all work?" Fine, this is interesting. This fund did X, this fund did Y. I'm very happy about that, but all together, am I going to have enough money here for the next 20 years? Or what if this great bull market that Anwiti made reference to is not going to last another one, two more years. All those things are sort of feeding into the complexity issue, and it's just causing a lot of distress, if not panic in some cases. I think advisors are really, really looking for that next tier of solutions.

Remy Blaire: And Josh, moving on to you. Could you tell me a little bit more about diversification as a strategy? And does it always work?

Josh Kutin: Well, it's a great question. And I would say that it's always a great idea to have diversification, but depending on what the environment is, I could see where an advisor would feel that it's not working. I think 2018 was one of those years where for the first nine months of 2018, having one or two key tech stocks looked better than having a diversified US stock portfolio. Having a US stock portfolio loan, looked better than having a diversified global portfolio. Having a pure 100% stock portfolio did a lot better than having any kind of a balanced portfolio.

Josh Kutin: For example, 60/40 the famous idea of a balanced portfolio, and certainly even having a 60/40 portfolio with more equity looked better than having one of the sorts of risk allocation portfolio that we talked about. Now then in the fourth quarter what happened is, a lot of those stories flipped, all of those stories that I mentioned flipped and it ends up being a rewarding time for having diversification. But I know that the advisors often have to focus on those shorter periods, and one of the common things we find is that everything seems to be benchmarked to the S&P 500 whether you've got an equity portfolio or a 50/50 equity portfolio or a 10% equity portfolio, everyone wants to know somehow how you're doing against the S&P 500.

Josh Kutin: It's a difficult conversation advisor, clients always expect you to get that right and to have the best asset class. I'd like to make some analogies here; I'll maybe make an analogy to driving a car. I know everyone's talking about driverless cars, but I still drive a car, maybe some of my colleagues here still drive their cars. If you think about it, let's say a friend and I decided we're going to drive across the country, and we want to get there, and I'm going to drive at or marginally above the speed limit the entire time, but my friend doesn't like to do that.

Josh Kutin: My friend like and it's not Ben despite that. But my friend likes to drive way above the speed limit. So maybe he's going to drive 120 miles an hour, there might be a short period of time where he gets there and he's beating me, maybe for a little stretch there. But most likely over the course of that entire trip across the country at some point, he's going to get pulled over by the police, and he is going to have to stop that car for a while or God forbid something worse is going to happen if you drive irresponsibly. We might get there at the same time, but I'm going to get there in a much safer way in a much more predictable way. And that's kind of what we're trying to do with a lot of our portfolios to maybe get to that same place, and maybe we're not going to be winning over every period over every leg of the trip. But over that entire trip, we believe that that's a much more responsible way to get from point A to point B.

Josh Kutin: This ties back to the idea of drawdowns obviously, because this whole idea is what's the big deal about having a drawdown it is a big deal to have a drawdown. You can't always control when you're going to enter an investment. Maybe you've been in that fund or that strategy for 10 years and it's a drawdown now and that's okay, or maybe the drawdown is going to happen the day after that you make that investment, in which case, it's going to have a major deterioration of your value. Similar to that, we believe in having those smoother outcomes. You never know when you're going to getting pulled over, if you're driving too fast. You never know when that drawdowns going to happen. Be safe, be measured, and try to have that balanced approach the entire trip.

Remy Blaire: Well, Josh, that analogy you made for driving across the country from point A to point B and having two different speeds, it might remind some people of the quant section of the GMAT or some other standardized exam, at least it did for me. But when an advisor is addressing diversification with their clients, how should they be talking about this?

Josh Kutin: Without a car analogy [crosstalk 00:59:45] For example, I mean, 65 miles an hour, that's a great speed to go on a highway, right? But is that the right speed to go if you're driving across a small town, perhaps not. I mean, there are interesting analogies there in terms of what the different towns are, and what the different risk profiles might be for a responsible investor. And I think that, that whole idea of risk profiles is important. Ideas like target date portfolios, which would become so popular. The idea of a target date portfolio, there are a lot of lessons in that for investors as it is today, even if it's not specifically for a 401k, IRA retirement account.

Josh Kutin: The idea that having more equity might be appropriate for a younger investor, having more volatility might be appropriate for younger investor, having less volatility, less equity risk, might be more appropriate for a more mature investor. I think that those sorts of ideas are important, and to that point having different risk profiles across the way is the responsible way to manage your portfolios. You can't put every one of your clients in 100% stock portfolio even if that might be one of the assets where you might have the highest possible upside, because it's also one of the areas where you might have that downside.

Remy Blaire: And Josh, while we were talking about market returns, it's important to have downside protection. Why does that matter?

Josh Kutin: I think having downside protection matters because you never know when that downside is going to occur. This could be happening the first day that you make your investment, it could be happening the hundredth day that you make your investment. And if it happens really early on in the process, then you might have such a drawdown in your value that it's going to take you a really long time to get back up to what that eventual value was. Take a really high-risk equity investment, maybe it'll go up for 10 years, and that's going to be fine. Maybe it's just going to go down the day after you buy it, in which case, it's going to take you a really long time to recover from that investment.

Ben Simonds: In a real-life example, building on Josh's point is, the math of a drawdown is clear. It's really hard to make that money back, but what advisors are constantly telling me is if we can at least minimize or mute these drawdowns, so that my clients are also inclined to exit their investments. If we can do that, that just prevents them from leaving at the worst time, and then not coming back in until they've missed a lot of that upside. It's really important to obviously miss the depth of the severity of a drawdown and advisors are keenly aware of that. But they're also fighting the battle daily, which is a severe drop on in a day or a week or a month. If that makes your clients skittish enough to leave their own investments, and they don't come back in for three, four or five months, to miss all that upside is equally damaging. I think, really that drawdown, volatility protection it can't be overstated. It's really important.