The new way of `Armchair Activism` & Diversification in wealth management – Daily Fintech

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Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019. 

Armchair activism is on the rise in the investment world and in wealth management. This kind of activism was adopted & embraced by consumers first who changed their consumption habits towards ESG, more social justice and fairness.

In the Fall of 2018, I highlighted a report that showed that Sustainability was a factor that didn’t weight a lot in our investment decisions. This was in stark contrast with our behaviors in consumer spending that took Sustainability factors into account much more. (read more in Is Sustainability your driver? Stop Borrowing from the Future.)

What is `Armchair Activism`?

It used to be a term used for those lazy and inactive, in terms of moving forward in any of the issues they felt strongly about.

Now it seems to have gained a different meaning, thanks to the lockdown and not only.

Two years after, there is no doubt that ESG investing (despite its challenges & its taint for overcoming green-washing) is on the rise. 2020 was the year of institutional adoption with giants like Blackrock taking major stances that have moved the asset management industry forward.

The Great Reset: BlackRock Is Fueling A $120 Trillion Transformation On Wall St. 

Investors have an increasing choice of investment options that curate ESG investments. There are Fintech that invest only in impact – e.g. Yova.ch. Most robo-advisors offer ESG model portfolios and consider ESG as a significant allocation. The annual Backend Benchmarking Robo report documented the outperformance of SRI offerings. Curating the Q3 2020 Robo Report 

In plain words, the 2020 digitalization wave in the investment world was predominantly characterized by an ESG push!

  • ESG became one of the main thematic investments with alpha-generating potential adopted at the institutional level

Direct Indexing also grew in 2020 and is now thought of as the next big threat to funds & ETFs. This is a tech enabled trend allowing for the construction of ESG customized and even DIY indices. Coupled with the easiness of Fractional shares investing from various Fintech providers (like ApEX Clearing) makes for an explosive mix.

  • ESG investing becomes even more powerful with Direct Indexing as a Service & Fractional share trading as a Service.

More sophisticated portfolio optimization is also on the rise. Industry providers are offering Saas with a focus on optimizing ESG returns instead of the classic geographic or sector focus optimizing.

  • ESG investing has also become the darling of the portfolio optimization software offerings

All the large asset management providers, Morgan Stanley, Bank of America etc, are aiming towards data integrations of wealth management, portfolio risk management, client management services. Their dream is to be able to provide end customers or financial advisors with a customized `The Next best action` that is superior to what Amazon has for their merchandise. ESG is very challenging in this respect. There are too many data and rating providers, there is no harmonization, and there is lots of green-washing.

  • Wealth managers are forced to engage with multiple ESG data and rating providers to make some sense from the disperse, myopic, or contradicting providers.

All of the above trends that are underway, facilitate ESG investing. So, investors can sit comfortably in their armchair and Swipe their choice of purpose-driven investment.

This Armchair activism will lead eventually to more purposeful public capital markets that feel the need to be accountable to end investors. This in itself turns upside down the model we have been used to in capital markets and wealth management.

The other new meaning that I want to highlight in this closing post on Daily Fintech, is the significant change of the Diversification ingredients.

A typical model portfolio will have Equities and Fixed income and some smaller amount of Alternatives.  The proportions vary depending on the risk profile. Alternatives traditionally have real estate and maybe some private equity or hedge funds.

2020 has shaken this up big time. This has been underway a while now due to several macroeconomic factors. 2020 however, moved it up the stack and from HNW to people following a common sense thinking there is a consensus forming that looks like this:

  • Fixed income offers now portfolio diversification any more
  • Real Estate, especially the commercial space, is at a major inflection point and therefore, a structural change should be expected in this asset class.
  • Thematic investing in ESG and Innovation is now core in a portfolio. It is on its journey to becoming a non-theme eventually, and therefore the only way.
  • Investing activism is the new black in `Armchair activism` and this is bringing cryptocurrencies to the masses.

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