There has been much said for and against pending Department of Labor (DOL) standards directed at enforcing fiduciary oversight and fee transparency for savers in 401(k)-Type retirement plans. While the implementation and enforcement of standards as planned may have wide and complex implications, one core concept at the heart of the matter does seem intuitive. Today’s individual investor desires, requires, deserves, and would greatly benefit from a higher level of portfolio transparency than they currently have access to. This holds true for the self-directed investor in a brokerage account as much as it does a retirement account.
What does “portfolio transparency “mean? Portfolio transparency as I define it goes well beyond better disclosure of fees, it educates the investor with the complete picture of who they are, what they own, why they own it, and how to improve it. “Transparent” and “understandable” go hand in hand. Transparency does not cross the line into advice, but if implemented properly it illuminates historical issues and paves the way forward to a healthier portfolio. Or, higher returns balanced with healthier risk.
At the core of transparency is measuring investment performance. DOL standards touch on the importance of this as well, highlighting the need for historical benchmarked returns. As stated, that only answers the “how did I do?” part of the equation. Expert level analysis, including portfolio attribution, risk-adjusted returns, after-tax returns, and custom benchmarking, has the potential to bridge the gap between “how did I do” to “how can I do better?” A deep, sophisticated performance engine sets the stage by generating accurate and timely data on investor personality, goals, style, and behavior, with in-depth analysis on results. The analysis itself is complex, but it must be presented to the investor in a modern, digital and intuitive experience. Modern performance tools like Scivantage’s Wealthsqope Portfolio, for example, are able to mine historical account data to create natural language portfolio insights, triggering new investment ideas and trading activity that help take the investor to the next level.
Transparency is also a two-way street that benefits the investment firm as much as it does the investor. With transparent performance insight into client portfolios, firms can greatly improve service, enhance trust, and direct their clients to an enhanced product fit. They can, for example, monitor for accounts that are performing poorly and assist them prior to investor burn-out.
The right level of data gleaned from performance, risk, and tax tracking (cost basis) can also be leveraged to enhance transparency for younger, next generation investors who will recognize and find comfort in a social investing experience. The addition of “peer analytics” to social investing provides much-needed education, perspective, direction and trust to young investors who know they need to start investing early but need better information on how and where to start.
Where traditional performance and portfolio tools were designed for the financial professional to justify their services, now is the time for a new age of tools to be designed to actually improve the performance of individual investors. The convergence of new regulations with an increased importance of the investor’s digital experience creates the perfect environment for tools to provide this transparency.