NAVIGATING GLOBAL CHANGES TO REACH FINANCIAL GOALS

Change is constant in our industry, but there’s something unique about how the world is changing today. “We believe that this time, it really is different,” said Rob Goldstein, BlackRock’s Chief Operating Officer and Head of BlackRock Solutions, at our third annual Aladdin Wealth™ Executive Forum.

The event focused on topics central to how wealth managers can thrive in the new reality we face to help clients reach long-term financial goals. These were the takeaways on the fundamental shifts we’re seeing in the industry, and how they’ve been influenced by the markets and geopolitics.

The need for a new portfolio playbook

Panelists and moderators noted some of the core challenges for investors today. We are in a market environment of increased volatility. Inflation in the U.S. has risen to its highest level since 1981. Russia’s invasion of Ukraine in February 2022 accelerated a trend towards de-globalization that was already underway after the pandemic, among other factors. This also precipitated global energy shocks and further disrupted global supply chains with many downstream impacts.

Stocks and bonds, which typically have inverse relationships on performance, have fallen in tandem. How can wealth managers construct portfolios for the future with such a challenging backdrop?

“We need a new portfolio playbook,” said Rob. What that looks like is still malleable. Portfolios will have to adapt to the new environment and take a more holistic approach than the traditional 60/40 asset allocation that wealth managers are used to. In this environment, wealth managers are demanding more robust tools to better understand portfolio risks, Rob noted.

Unifying the language of analytics with Aladdin Wealth™

The value of a unifying language has been blooming for years. We’ve understood its importance since the early days of BlackRock’s founding.

“In our 34 years of existence, BlackRock wouldn’t be who we are today if we didn’t unify ourselves under one technology platform, Aladdin®,” BlackRock Chairman and CEO Larry Fink said during his keynote. The Aladdin Wealth™ platform provides a common language of risk for portfolio managers and other stakeholders to increase transparency and unify portfolio construction.

“I will tell you as the leader of BlackRock, I use Aladdin® to understand what risks we’re taking on behalf of all our clients,” he said. As much as the world’s changing, what hasn’t changed is that markets will continue to go through cycles, and wealth managers will continue to help clients navigate them. We share a common goal of helping end clients meet their financial goals, now and for the long term.

“With every crisis, there’s opportunity,” said Larry, remaining a long-term optimist despite global challenges. “We’re not void of opportunities.”

A confluence of opportunities

What are some of those opportunities, and how can wealth managers leverage technology to capture them?

To start, challenging environments are opportunities for wealth managers to build stronger relationships with their clients. But assessing turbulent markets and what to do about them is difficult. “Clients are frankly worried,” said Seth Warner, who leads the Americas Delivery and Execution team for Aladdin Wealth™ Enterprise. “They’re turning to advisors more and more for help.”

There are three trends emerging among those who use our platform.

First, there is decoupling of traditional measures of historical volatility and forward-looking factor volatility. Past performance was never indicative of future results, and more than ever, advisors are looking for more robust evaluation methods after spotting flaws in traditional methods. “Past performance is not enough to build portfolios in today’s environment,” said Carolyn Barnette, who leads BlackRock’s Portfolio Solutions Metro team. Being able to incorporate holdings-based, ex-ante risk is important to understanding what’s happening now versus relying on analytics based on past performance, she added. Second, advisors want to understand the direct and indirect exposures across their book, particularly in packaged products. Advisors need a method that can dive deeper into the details and model holdings for greater transparency into risk exposures. Third, advisors are gravitating to market-driven scenarios to help answer clients’ most pressing questions about what’s happening in the markets. Advisors can visually illustrate several potential outcomes for clients.

“Scenarios and their impact can be understood by anyone,” Seth said. End clients don’t need financial expertise to appreciate the implications of stress tests based on historical or hypothetical scenarios. Improving the dialogue between a wealth manager and a client keeps them both more tightly aligned on long-term financial goals.

Another area of opportunity technology offers is the ability to address ever-changing regulatory requirements. “I think it’s normal for all of us to think of regulation as a burden,” Co-Head of Aladdin Wealth Tech Woo Fung Kwong said. “But we really see regulation as a big opportunity as it raises barriers to entry.”

Regulation is also increasingly affecting environmental, social and governance (ESG) investing. “We’re seeing increased regulatory focus on truth in labeling,” said Christopher Weber, Head of Climate and Sustainability Research on BlackRock’s Sustainable Investing team. This puts a greater weight on data quality and transparency for asset and wealth managers.

Sustainability analytics can provide additional insights into clients’ portfolios. (These are now synthesized within the Aladdin Wealth™ platform from a variety of data providers.) Nelli Oster, Head of SRI ESG, Aperio at BlackRock also articulated the growing role of technology in personalizing portfolios for ESG and values alignment.

Taking the initiative

With all these intersecting needs and challenges increasing complexity, wealth managers may feel like they have a lot on their shoulders. This is particularly true when you consider the market’s current inflection point.

As an industry, we’ve been on a 12-year bull market escalator that has now come to a pause, Venu Krishnamurthy, Aladdin Wealth Tech Co-Head expressed. But hope isn’t lost. “You can keep moving up if you take a little initiative,” he said. This is a crucial time to lean into technology. “Any successful transformation really requires a platform,” said Venu, about what stepping forward looks like. “Your technology needs to support the full advisor journey.” That full journey for wealth managers in a changing world requires reconsidering the way portfolios are built today.

Guiding clients’ portfolios through unprecedented times

These are “very unprecedented times,” said Gargi Chaudhuri, BlackRock’s Head of iShares Investment Strategy, Americas. With many asset classes experiencing volatility, there’s no straightforward answer to where wealth managers should be putting their clients’ money. The path of U.S. interest rates is another uncertainty. “The Fed is not in the position to slow down when inflation is running at three times their target,” she said.

With heightened uncertainty all around, debates about markets and outcomes persist. So, a more helpful question to start with, as posed by Gargi, is: “What does this mean for asset allocation?” It has been a while since we’ve seen simultaneous drawdown in both equity and fixed income assets, causing advisors to rethink the traditional 60/40 portfolio. As a result, wealth managers are increasing allocations to alternatives. Wealth managers need to be able to look across an entire portfolio when helping clients through this changing environment. “Whole portfolio navigation is essential,” Larry said. Leaders from wealth management firms echoed their sentiments on panels speaking about these core changes facing the industry. Wealth managers are taking a more holistic approach to serving ultra-high-net-worth and mass affluent clients.

Wealth managers are shifting away from traditional tools to assess portfolios as they lean into more modern techniques such as forward-looking methodology and scenario analysis. Technology can increase transparency into portfolios while enabling wealth managers to scale personalization amid growth in separately managed accounts, direct indexing and alternatives. Technology can also help transform the conversations that wealth managers have with their clients, in a challenging market backdrop when those relationships are more important than ever.