A Birthday You’ll Want to Celebrate

Twenty years isn’t that long, but in some ways it’s a lifetime ago.

In 2005, you might have spent Friday nights renting a DVD from Blockbuster, hanging out on MySpace or downloading new music onto your iPod. The idea of accessing the world’s media in your pocket, going somewhere in a self-driving car or having a deep philosophical conversation with AI was still science fiction.

But as we know through hindsight, the world was changing fast, and not only in ways that seem so obvious.

THE INTRODUCTION OF INSTITUTIONALLY MANAGED PORTFOLIOS

Edelman Financial was founded on the principle that everyone – not just the most sophisticated or wealthy investors – deserves access to strategies and products that can help them reach financial freedom. Twenty years ago, we took a major step under that principle by launching our institutionally managed portfolios.

Instead of just picking individual stocks, bonds and mutual funds, this emerging way to invest was initially accessible only to the very wealthy or institutional clients. For the first time, it allowed us to thoughtfully balance and integrate an array of different asset classes, with flexibility to reflect individual client circumstances and investment objectives.

WHAT IT MEANT FOR OUR CLIENTS

Clarity and reliability. As many investors discovered during the dot-com bust and mutual fund scandals of the early 2000s, a lot of mutual funds weren’t managed as advertised. Although there are no guarantees that any investment will meet its stated goal, the behavior of the portfolios caught up in the scandals was far more unusual than what’s typical for mutual funds, and too many people were left exposed to unanticipated risks. Investors (and planners) needed to trust that portfolios were managed in line with their stated objectives. Careful research and transparent disclosures mattered.

Powerful diversification. We’ve always believed in the power of diversification: holding a range of investments across the universe of options. That’s because it’s impossible to know what kinds of investments will do well at any one time. Diversification gives you the opportunity to benefit from owning the strongest performers while dampening losses from the weaker ones.

However, not all diversified portfolios are made equal. They usually include stocks and bonds but may or may not incorporate things like international, real estate or alternative investments. We began to incorporate up to 16 asset classes in professionally engineered portfolios that are recommended based on each client’s unique circumstances. The greater segmentation enhances diversification and helps reduce risk.

Flexibility and convenience. The way we built the portfolios also allowed us to take advantage of the technological advancements of the time, making us able to more quickly respond to a changing investment environment and client needs. For example, money could be moved from one mutual fund to another overnight – reducing the risk of being out of the market temporarily. It also allowed us to perform tax-loss harvesting for the first time, without money sitting out of the market. And when clients needed money from their accounts, it could be directly deposited within days rather than sent out in multiple paper checks that risked getting lost or delayed.

Strategic rebalancing. With the launch, Edelman was able to look at each client’s portfolio for rebalancing opportunities on a daily basis to ensure portfolios maintain the allocation designed for each client’s unique circumstances and goals. Our rebalancing process is powered and executed by sophisticated algorithms that can be adjusted to account for current market conditions.

As markets move, rebalancing helps maintain the same level of risk, ensuring your portfolio doesn’t drift too far from your intended strategy. This was especially critical during fast-moving markets such as the 2008 financial crisis, when swift action was essential.

One of the key people behind the development of our managed portfolios was Andrew Massaro, a financial planner who was then serving as head of the investment committee.

“Looking back, it seems crazy to think there was a time when some of this wasn’t a standard way to manage investments,” he says. “No direct deposit? Money sitting out of the market for days or weeks as it moved between mutual funds? But that’s just the way it was. This change was a major win for clients.”

BUILT TO EVOLVE

Our managed portfolios were never intended to be static. They’ve evolved to reflect the changing investment landscape and needs of our clients. In fact, we update our forward-looking assessment of asset class expected returns, risks and correlations frequently and adapt our portfolio allocations when we see shifts in the long-term outlook across the investment landscape in bonds and stocks, in the U.S. and globally.

One notable milestone in the evolution of our portfolios was the 2015 introduction of investments focused on disruptive and transformative technologies, like some of the ones we highlighted above – computing, artificial intelligence and other breakthroughs that are reshaping the world. It was an emerging gap in investor portfolios that we were among the first to include.

Another major step in the evolution of our managed portfolios came after the merger of Edelman Financial Services with Financial Engines, which brought additional rigor to our methodology. The Financial Engines legacy goes back to one of the giants of modern portfolio theory – and co-founder of Financial Engines – William Sharpe, and his Nobel-Prize-winning work in financial economics.

Dr. Sharpe and the Financial Engines team built their algorithms on his groundbreaking research, using it to project possible future outcomes based on today’s economic trends – and snagging more than a dozen patents along the way. Like Edelman, Financial Engines’ goal was to apply the best practices of institutional investing to small investors.

MORE THAN JUST INVESTMENTS

Since our beginning, we’ve carried forward our commitment to serving clients and our mission of providing access to sophisticated investments for everyday people.

The evolution of our institutionally managed portfolios will also endure, as we continuously assess the marketplace, economic environment and new types of investments looking for diversification benefits that can add value for our clients. And we expect to continue being among the earliest adopters among financial advice providers, democratizing access and pioneering new ways to invest when it’s needed.

“In a world of investment innovation, we’re always working to ensure that we incorporate products that can help our clients,” says Chief Investment Officer Neil Gilfedder. “But our foundation remains factor-based diversification and mapping investments to a client’s individual situation, goals and preference.”

At Edelman Financial Engines, investing is just one part of a bigger picture. Your path to financial security begins with financial planning and a deep understanding of your goals, your needs and your life. Then we figure out what you need from your investments to help support that plan. Institutionally managed portfolios have been a core part of our investment approach for the past 20 years – and they’ll continue to support our effort to help our clients achieve their goals for decades to come.

So the next time you’re celebrating, light a candle for Edelman’s institutionally managed portfolios!