Morningstar Magazine - June/July 2018 - 7

Letter From the Editor

Packaged Goods

Jerry Kerns

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@jerrykerns

In our April/May issue, we examined why
financial advisors might want to focus
their time and energy on the human tasks of
financial planning. In an increasingly automated,
commoditized, low-fee world, there is little
value advisors can add by managing investment
assets. Algorithms and robo-advisors can
construct portfolios and select investments more
efficiently and cheaply. Outsourcing these
tasks, therefore, frees advisors to build deeper
client relationships with techniques such as
behavioral coaching. Research from Morningstar,
and others, shows that by helping clients
tackle their behavioral biases and become better
investors, advisors can add significant value
to portfolio returns.
In this issue, we turn our sights to the other side
of the equation: the recipients of these outsourced
assets. All-in-one investing solutions such
as managed portfolios, target-date funds, and
multi-asset-class funds are very appealing
to investors because they are designed to meet
goals. Advisors like them because they don't have
to worry about constructing portfolios one
stock or fund at a time for every client. Third
parties, including Morningstar, are happy
to take this work off advisors' plates. In "Of Models
and Management" (Page 51), Dan Kemp,
Morningstar's chief investment officer for Europe,
the Middle East, and Africa, explores how the
changing nature of the advisor's role is fueling the
rise of managed portfolios. He writes from
London, but the lesson is the same globally: As the
coaching model of advice gains steam,
more advisors will define their value to clients
in holistic financial planning terms, not as
investing specialists.

Larsen write in "Target-Date Investors Choose
Cheap and Passive" (Page 53), investors
are overwhelmingly selecting those target-date
series that offer passive funds at the lowest
costs. Providers are rushing to meet the demand,
but like elsewhere in the marketplace, they're
all chasing Vanguard.
Conventional wisdom says that investors can
understand the risk/return profile of a target-date
series by looking at its glide path's equity
allocation. Although that's true to some extent
on an absolute basis, new research from
Morningstar's David Blanchett and Paul D. Kaplan
shows that equity allocation doesn't provide
much differentiation among funds. In "Beyond the
Glide Path: The Drivers of Target-Date Fund
Returns (Page 58), the researchers say investors
should instead evaluate factors such as investment
style and selection to better assess a targetdate fund. Finally, in "Sizing Up Multi-Asset Funds
(Page 62), Kaplan and Thomas Idzorek have
solved the problem of benchmarking diversified
asset-allocation funds. They call it the Target
Risk Ecosystem, and it provides a way for investors
to monitor and compare these funds.
Vehicles such as managed portfolios, targetdate funds, and multi-asset-class funds
offer neatly packaged investment solutions.
Investors like the simplicity, low costs,
and the set-it-and-forget-it aspect of these
investments. For advisors embracing their
roles as behavioral coaches rather than asset
managers, they're a win-win.

Showing their increasingly important role in
helping investors meet retirement goals, targetdate mutual funds recently passed a milestone:
Assets topped $1 trillion for the first time
in 2017. And as analysts Jeff Holt and Heather

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Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2018