For decades, advanced customized investment strategies have been the norm for large institutional investors such as defined benefit (DB) plans, endowments and foundations. However, recent demand for investment solutions that increase the likelihood of successful outcomes for defined contribution plan participants has focused industry and public policy attention on this objective. Outcome based solutions are becoming increasingly sophisticated in their design and construction, and the next objective is to more precisely fine tune them to the profile of each particular investor.
Customization of investment strategies, even for non-institutional investors is not a new phenomenon. Trust companies have administered investments for wealthy individuals for hundreds of years. As the ranks of the mass-affluent have grown so have the number of investment advisors providing custom advice. But now there is increasing and urgent demand for sophisticated ‘outcome based’ investment solutions for all investors. This demand arises – at least in part – as a result of the structural shift from defined benefit to defined contribution plans. The shift has transferred responsibility for portfolio management from institutional professionals to individual investors, the vast majority of whom have no relevant training, thus increasing the need for solutions that include embedded asset selection and allocation. The industry response to this structural shift is an ongoing journey, the current phase of which is Customization.