Making the Trend Your Friend
How Trusted Investment Advisors Sustain 9 Lives
Shundrawn Thomas
Head of Funds and
Managed Accounts
Northern Trust
Asset Management
Opinions expressed
are subject to change,
are not guaranteed
and should not
be considered
investment advice.
You have undoubtedly heard the idiomatic expression that cats have nine lives. While this is not a literal
reality the folklore does stem from certain unique qualities possessed by our feline friends. Cats are generally
regarded as bold explorers that are distinguished by their agility and uncommon ability to take on challenges
with confidence and poise. Even when buffeted by unexpected circumstances, they seem to always land on
their feet. As an investment advisor, you are called upon to demonstrate an analogous level of proficiency.
We might say that the most trusted investment advisors also have the proverbial nine lives. Individual and
institutional clients seek your prescient market insights and sound investment guidance. You must deliver this
advice with uncommon acumen and poise even in the face of volatile market conditions. Moreover, the
dynamic shifts brought about by evolving investor preferences, changing financial regulations and dynamic
secular trends require a greater degree of professional dexterity than ever before. In consideration of the
essential role that investment advisors play in helping secure the financial goals of the investors they serve,
we present 9 themes that represent secular trends that we believe are reshaping the investment management
industry. By identifying and expounding on the relevance of each theme, we will highlight how the most
trusted investment advisors leverage the underlying trends to benefit their clients.
9 KEY THEMES
1
2
3
4
5
Demographic Disruption
The Retirement Savings Gap
Drive Toward Investment Efficiency
ETFs at the Center
Long Live Fixed Income
6
7
8
9
Problems Need Solutions
Regulatory Responsiveness
Man Plus Machine
Rebirth of Retail
THEME
1 Demographic Disruption
Four types of demographic shifts are disrupting the global investment management industry creating dynamic
opportunities and challenges for investment advisors. As baby boomers retire, generation X and millennial
cohorts become the predominant investment decision makers. GDP growth is decelerating in developed
economies mirroring trends in population growth. Conversely, accelerated GDP growth in emerging economies
in Asia Pacific, Africa and the Middle East has led to a faster growing middle class and a higher growth rate
of millionaire households. In both developed and emerging economies, the complexion of wealth is changing
as ethnically diverse groups make up the fastest growing components of the affluent population. Wealth is also
shifting along gender lines. Fifty-one percent of personal wealth is controlled by women in the U.S. Women’s
share of Global wealth has increased from 25% to 30% in just 5 years.1 These secular shifts, distinguished by
generation, geography, group and gender, require very different approaches to client acquisition, engagement
and solutions. The most trusted advisors are evolving their practices to better reflect the changing demographics
and delivering more tailored solutions to meet evolving client preferences.
The Retirement Savings Gap THEME 2
There has been a major shift in the nature of retirement savings over the past generation due in large part to the
fact that people are living longer. Life expectancy in the U.S. has increased from 71 years of age to 79 years
of age over the past 40 years.2 Over that same time horizon long-term, investment return expectations have
been significantly reduced. For the balance of the 20th century, U.S. stocks returned about 7 percent adjusted
for inflation. Looking forward, real returns on stock are projected in the 4-5% range.3 Finally, defined benefit
options are much less common as the percentage of workers in private defined benefit plans has been drastically
reduced. And while defined contribution alternatives are an increasingly common retirement option, the majority
of individuals simply aren’t saving enough to achieve their retirement goals. Trusted advisors are tackling this
challenge head on by proactively engaging their clients in the difficult dialogue regarding the need to save
and invest more. Additionally, they have deemphasized relative investment returns and focused their portfolio
construction on achieving clear investment and life goals.
THEME
3 Drive toward Investment Efficiency
A long-standing debate in the sphere of investment management has been waged regarding the merits of
active versus passive investing. While there has been a notable shift by investors toward greater utilization
of index managed strategies, this belies a broader underlying drive for improved investment efficiency. In the
investment management business, investors are rewarded for taking prudent risks. Investment advisors for their
part assist their clients by helping them assess three important questions as it pertains to their portfolio. Is the
client being appropriately compensated for the investment risks they assume? Is the client properly mitigating
uncompensated portfolio risks? Is the client’s portfolio constructed to reflect their risk preferences? Trusted
advisors understand the vital need for investors to build more efficient portfolios that better optimize risk adjusted
performance and better improve their after cost returns. Trusted advisors have shifted from a historical focus on
relative performance to a deliberate focus on investment outcomes. Advisors are also using empirical analysis
to better assess and measure the risk preferences as well as track performance in relation to the client’s real
world goals.
Leonhardt, Megan, “Women’s Wealth Growing Faster Than Men’s,” Money Magazine, June 7, 2016.
National Institute on Aging, “Growing Older in America,” January 22, 2015.
3
Shiller, Robert, “Irrational Exuberance,” January 25, 2015.
1
2
THEME
4 ETFs at the Center
U.S. listed ETFs have attracted unprecedented flows to start the year. This comes on the heels of a record
+$284 billion the prior year.4 Individual and institutional investors alike have shown increased affinity for
index-based investment strategies with the ETF serving as the vehicle of choice. While relative cost is an
important consideration among investors, this only reflects part of the story. We believe investor preferences for
transparency, accessibility and investment efficiency are fueling the adoption of ETFs. And while the tradability
of ETFs is often cited, institutional and individual investors are increasingly using ETFs to meet long-term investment
objectives. Professional investors are specifically looking to “Smart Beta” ETFs to address portfolio challenges
such as persistent low yields. As advisors seek to deliver comprehensive solutions or take discretion for investment
portfolios, they are using ETFs as core building blocks. Our observations of trusted advisors are that they are
utilizing ETFs to improve a portfolio diversification through providing access to a wider array of asset classes and
investment strategies delivering more targeted investment outcomes to their clients.
Smart Beta Definition: According to Ruth Sullivan, of the Financial Times Smart Beta is an umbrella term for rules based investment
strategies that do not use the conventional market capitalization weightings.
Long Live Fixed Income THEME 5
Over the past two years fixed income has accounted for a growing share of portfolio allocation. Bonds accounted
for the majority of mutual fund flows in 2016 and the +85 billion of net flows into taxable bond ETFs which was
the largest annual showing in that category.5 While the category has benefited from macroeconomic shifts,
there are other long-term factors at play. Retiring baby boomers have a greater need for income. Millennials are
more risk averse than their predecessors resulting in higher relative allocations to fixed income. Institutions are
immunizing pension liabilities and matching their assets to long-term liabilities. So while the Fed is expected to
raise short-term interest rates, new demands for fixed income are emerging for the long-term. Whether investors
seek reliable income streams, to preserve capital or mitigate risk, fixed income plays a vital role in any long-term
portfolio. We have seen many trusted advisors tackling the dynamic market conditions and concerns about the
level short-term interest rates by evolving their utilization of fixed income strategies. Specifically, they are placing
more emphasis on quantitative approaches and efficient strategies.
THEME
6 Problems Need Solutions
Individuals are living longer and have more direct responsibility for their long-term financial well-being. This
applies to their choice of financial providers as well as their investment selections. Constructing a well-diversified
portfolio composed of suitable investment products is complicated by an ever expanding array of options. Ten
years ago there were nearly 20,000 registered funds offered to U.S. investors. Today that number has increased
50% to nearly 30,000 funds.6 Investors are also inundated with financial reports and news. Market information
is readily accessible and free in most instances. Investors need more curators as opposed to commentators
as they seek to sort the proverbial wheat from the chaff. Today’s most trusted advisors are not only adept at
curation but they are effective problem solvers. Specifically, they help their clients translate their needs and
wants into clear goals and investment objectives. They assemble portfolio solutions that are targeted to achieve
measurable objectives based on the client’s unique circumstances. They also develop a network of vendors or
providers that are adept at providing solutions that prove most beneficial to their investing clients.
Morningstar, December 31, 2016.
Morningstar, December 31, 2016.
6
Investment Company Institute, “2016 Investment Company Fact Book,” January 2017.
4
5
THEME
7 Regulatory Responsiveness
The past decade has been marked by a significant acceleration in the pace and breadth of regulatory
changes within the financial services industry. These changes have impacted all major aspects of the investment
management business. Whether we consider the SEC’s recently enacted Money Market Fund Reform Rules,
the pending implementation of the DOL Fiduciary Rule, or the SEC’s proposed Liquidity Rule, the role of the
investment advisor is being irrevocably altered. Although the political landscape in the U.S. has changed, the
address of issues regarding consumer protection, conflicts of interest, and cybersecurity has clear momentum.
The rising costs of compliance, coupled with greater requirements for transparency and suitability, has
necessitated a greater degree of regulatory responsiveness. The increased risk and complexity of managing
fiduciary mandates and smaller accounts is fueling product, technological and business model innovation.
Trusted investment advisors are not simply making compulsory changes but are making anticipatory moves to
best serve current and future clients. Moreover, they are using the present environment to reaffirm their value
proposition and commitment to serving the best interests of their investing clients.
Man plus Machine THEME 8
Our human intelligence makes us quite an adaptable species. We cleverly employ our intelligence through the
creation and use of machines. Simply put, machines translate our efforts into more efficient outputs. Machines
have enabled economic transformations including the industrial revolution, computer revolution and the internet
revolution. In each instance, questions arise regarding the fate of affected industries and the role of machines
relative to man. As we witness the increased adoption of technology within investment management industry,
pundits ponder if machines will supplant financial advisors. We believe that technology is indeed altering the
asset management industry and the role of the advisor. It allows advisors to more efficiently perform tasks such
as client prospecting, investment reporting and portfolio trading. It also provides the means for advisors to scale
their practices in ways that were previously unavailable. Trusted advisors are leveraging technology to achieve
an integration of human and artificial intelligence. The immediate upshot is that they have more time to provide
valuable advice. Moreover, they see they combination of man and machine as the means to providing a
superior advisory offering.
THEME
9 Rebirth of Retail
Investment advisors serve at the pleasure of asset owners. Estimates of global financial assets approach $300
Trillion, 7 with the vast majority owned by individuals. About 43% of these assets are owned by high net worth
households,8 commonly defined as having liquid financial assets exceeding $1 million. Of this total 15% is
owned by ultra-high net worth households having at least $30 million in liquid financial assets.9 Whether
working directly with individuals or their service providers, investment advisors generally focus on serving these
segments. This is due to the scale economies required in investment management. Approximately 55% of
financial assets are owned by individuals with less than $1 million in liquid assets.10 Of more interest is the fact
that a large majority of this asset base goes unadvised.11 Technological innovations and product innovations are
converging to enable efficient advisory solutions that can be delivered at lower price points. Trusted advisors
are evolving their service and product offerings to serve a broader section of asset owners. Trusted investment
advisors are transforming their practice through emphasis on a broader base of individual investors.
International Monetary Fund, “Global Financial Stability Report,” October 2016.
Credit Suisse Research Institute, “Global Wealth Databook,” 2016
9
Ibid
10
Equifax, “Observations and Impacts of U.S. Consumer Wealth Trends,” December 2016.
11
Wyman, Oliver, “The Role of Financial Advisors in the US Retirement Market,” July 2015.
7
8
Different by Design
FlexShares Exchange Traded Funds offer different ETF strategies that seek to help investors achieve real-world goals by
providing the products and solutions that allow them to construct, allocate and manage outcome-oriented portfolios.
EQUITY
TILT
FlexShares Morningstar®
U.S. Market Factor
Tilt Index Fund
TLTD
FlexShares Morningstar®
Developed Markets ex-U.S.
Market Factor Tilt Index Fund
TLDH
FlexShares Currency Hedged
Morningstar® DM ex-U.S.
Factor Tilt Index Fund
TLTE
FlexShares Morningstar®
Emerging Markets Factor
Tilt Index Fund
TLEH
FlexShares Currency Hedged
Morningstar® EM Factor Tilt
Index Fund
ESG
ESGG
QLC
QDF
QDEF
FlexShares STOXX® US ESG
Impact Index Fund
FlexShares STOXX® Global
ESG Impact Index Fund
FlexShares U.S. Quality Large
Cap Index Fund
FlexShares Quality Dividend
Index Fund
QDYN
IQDF
FlexShares Quality Dividend
Dynamic Index Fund
FlexShares International
Quality Dividend Index Fund
IQDE
FlexShares International
Quality Dividend Defensive
Index Fund
IQDY
FlexShares International
Quality Dividend Dynamic
Index Fund
FlexShares Quality Dividend
Defensive Index Fund
FIXED INCOME
TDTT
FlexShares iBoxx® 3-Year
Target Duration TIPS Index
Fund
TDTF
FlexShares iBoxx® 5-Year
Target Duration TIPS Index
Fund
RAVI
SKOR
LKOR
FlexShares Credit-Scored U.S.
Corporate Bond Index Fund
FlexShares Credit-Scored
U.S. Long Corporate Bond
Index Fund
BNDC
MBSD
FlexShares Core Select
Bond Fund
FlexShares Disciplined
Duration MBS Index Fund
FlexShares Ready
Access Variable Fund
REAL ASSETS
GUNR
NFRA
FlexShares Morningstar®
Global Upstream Natural
Resources Index Fund
GQRE
FlexShares Global Quality
Real Estate Index Fund
ASET
FlexShares Real Assets
Allocation Index Fund
FlexShares STOXX® Global
Broad Infrastructure
Index Fund
REAL-WORLD GOALS
Capital Appreciation
Income Generation
Risk Management
Liquidity Management
Shundrawn A. Thomas oversees the development, management and distribution of Northern Funds,
Northern Institutional Funds, FlexShares Exchange Traded Funds and the managed accounts practice
providing investment advisory solutions to advisors, financial intermediaries and institutions. He serves
as member of the asset management executive committee and operating committee of the Northern
Trust Corporation.
Important Information
Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information
is in the prospectus and summary prospectus, copies of which may be obtained by visiting www.flexshares.com. Read the
prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.
An investment in FlexShares is subject to numerous risks, including possible loss of principal. Fund returns may not match the
return of the respective indexes. The Funds are subject to the following principal risks: asset class; commodity; concentration;
counterparty; currency; derivatives; dividend; emerging markets; equity securities; fluctuation of yield; foreign securities;
geographic; income; industry concentration; inflation-protected securities; infrastructure-related companies; interest rate /
maturity risk; issuer; large cap; management; market; market trading; mid cap stock; MLP; momentum; natural resources; new
funds; non-diversification; passive investment; privatization; small cap stock; tracking error; value investing; and volatility risk. A
full description of risks is in the prospectus.
The STOXX® Global Infrastructure Index, STOXX® USA ESG Impact Index and STOXX® Global ESG Impact Index are the intellectual property
(including registered trademarks) of STOXX® Limited, Zurich, Switzerland and/or its licensors (“Licensors”), which is used under license. The
securities based on the Index are in no way sponsored, endorsed, sold or promoted by STOXX® and its Licensors and neither of the Licensors
shall have any liability with respect thereto.
The iBoxx® 3-Year Target Duration TIPS Index and iBoxx® 5-Year Target Duration TIPS Index are the intellectual property (including registered
trademarks) of Markit iBoxx® and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way
sponsored, endorsed, sold or promoted by Markit iBoxx® and its Licensors and neither of the Licensors shall have any liability with respect
thereto.
The Morningstar® Global Upstream Natural Resources Index, Morningstar® U.S. Market Factor Tilt Index, Morningstar® Developed Markets
ex-US Factor Tilt Index, Morningstar® Emerging Markets Factor Tilt Index, Morningstar® Developed Markets ex-US Factor Tilt Hedged Index
and Morningstar® Emerging Markets Factor Tilt Hedged Index are the intellectual property (including registered trademarks) of Morningstar®
and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or
promoted by Morningstar® and its Licensors and neither of the Licensors shall have any liability with respect thereto.
FINANCIAL PROFESSIONALS CONTACT:
By Phone Consult
Consultants are available
Monday - Friday: 9 AM to 5 PM ET
1-855-FlexETF (1-855-353-9383)
By Mail/Overnight Delivery
FlexShares ETFs
c/o Foreside Fund Services, LLC
3 Canal Plaza Suite 100
Portland, ME 04101
Follow Us on LinkedIn
FlexShares
INDIVIDUAL INVESTORS CONTACT:
Contact Your Financial Professional
flexshares.com | Making the Trend Your Friend
FS00112 (04/17)