Wealth Management Personalization and Alignment – Solving the Tension

[The growing trend of clients demanding more personalization from their advisors and investments has the wealth management industry grappling with the operational tension that creates. As many wealth managers use a range of pre-built model portfolios by their home office investment teams to ensure proper allocation guidelines and compliance, there is a growing need to balance the specific deployment of these model portfolios with the need to satisfy the requirements of individual clients. This growing tension requires a solution that reimagines and reengineers how firms can create the portfolio alignment that personalization requires.

To understand the challenges and opportunities in this area, we reached out to Govinda Quish, Managing Director, Global Wealth Management at MSCI Wealth. MSCI has recently addressed this demand with the introduction of their MSCI Similarity Score capability which they further outlined in a recent research paper, Redefining Portfolio Alignment for Wealth Managers.

During our conversation, Govinda and I covered the balancing act that Chief Investment Officers (CIOs) and investment teams at wealth management firms, along with their wealth managers, are facing as personalization demands increase, the limitations of holdings-based comparisons, and how MSCI’s Wealth Manager platform (formerly known as Fabric) is aiming to address this challenge facing the industry.]

Hortz: For the last few years, we have seen reporting on the rise of client portfolio personalization. Can you elaborate on your views of this trend and what challenges it is causing?

Govinda: CIOs at wealth management firms are indeed facing increased demand for personalized client portfolios, driven by clients’ desire for tailored investment solutions. This has been going on for many years, but as we see better technology becoming available (some of it driven by AI adoption), wealth management firms are able to bring more portfolio personalization to more people. What was typically a service only in a firm’s private wealth business, or offering to high-net worth clients, we are now seeing personalization capabilities increase even to mass affluent clients.

As a response, this trend is pushing firms to invest more in portfolio monitoring and adherence capabilities. By enhancing these areas, firms can ensure that personalized portfolios remain aligned with both a clients’ goals and desires, but do not deviate too much from the established models and compliance standard set-up by the firm. If they can successfully navigate both sides of this demand, a firm can improve client satisfaction and trust, and limit downside risk and exposure the firm may not be comfortable taking.

Hortz: Is this why MSCI has established the MSCI Similarity Score?

Govinda: Exactly, I come from an institutional investment background. On the institutional side, we have advanced capabilities to analyze risk and exposure to different asset types. However, for many years there was a glaring gap in the tools available to wealth management teams. This is what caused me and  Rick Bookstaber to initially found our platform Fabric in 2019. We wanted to create a portfolio management platform that provided the same capabilities found on the institutional side, but now available to wealth investment teams to manage a network of advisors and all of their clients at scale.

The Fabric team officially joined MSCI in Dec 2023 and we have been able to build on that original foundation by adding MSCI’s data and expertise. We have created what we believe will be one of the leading standards in portfolio management and monitoring alignment, the MSCI Similarity Score. Our team has now natively embedded the score into our MSCI Wealth Manager platform to create a SaaS based solution to address the need and demand we are discussing for wealth management firms.

Hortz: What exactly is the MSCI Similarity Score?

Govinda: The MSCI Similarity Score is a proprietary metric designed to measure the alignment between a client’s portfolio and a model portfolio. It focuses on portfolio behavior rather than exact holdings, providing a standardized measure to compare different portfolios. The score focuses on portfolio risk and return rather than the exact holdings employing a factor-based approach using proprietary multi-asset class models from MSCI.

Hortz: What makes the MSCI Similarity Score different from traditional portfolio alignment methods?

Govinda: Traditional portfolio alignment methods often focus on exact asset replication, which can be limiting. The MSCI Similarity Score shifts the focus to how portfolios behave at the factor level, providing a more flexible and scalable way to assess alignment. This is particularly useful in managing diverse client portfolios, especially in cases where clients have positions across public and private funds.

Hortz: Can you elaborate on how the score is calculated?

Govinda: The score is calculated using a factor-based framework that evaluates the behavioral alignment between portfolios. It ranges from 0 to 100, with higher scores indicating stronger alignment. This approach emphasizes factors like market movements and economic conditions rather than precise asset replication. We believe that by taking what is a relatively complex and sophisticated analysis and creating a single score framework, we can create conversations between the investment teams, advisors, and their clients that are both easy to explain, and easy to understand.

Hortz: Can you provide a practical example of how the MSCI Similarity Score is used?

Govinda: Certainly. Imagine a client portfolio invested in a selection of emerging market ETFs that differs from the firm’s model allocation which is heavy with global equity funds. Instead of comparing holdings side by side, the MSCI Similarity Score assesses how the portfolio behaves in terms of factor risks. By breaking it down to the factor level, we may see that the composition of the client portfolio versus the model, while different at the holding level, may have similar factor-level exposure in areas like “Global equities” and therefore will behave directionally similar.

In this case, if the score is high enough, and remains within the guardrails established by the firm. It can be deemed to be similar and compliant and does not require significant rebalancing. This allows wealth managers to personalize their client positions, yet still potentially achieve strong alignment scores even with different asset compositions.

Hortz: How does the MSCI Similarity Score benefit wealth management firms?

Govinda: It helps wealth managers balance client customization with model portfolio efficiency. By focusing on behavioral alignment, it allows managers to deliver personalized solutions at scale without needing to replicate exact holdings.

In addition, we know from many of our clients using MSCI Wealth Manager, they benefit by providing a clear and intuitive metric that gives clients better insights into how their portfolios align with their goals and the views of the firm. This transparency helps in client portfolio rebalancing conversations and fosters greater confidence and trust in the wealth management process.

Last, the MSCI Similarity Score can help firms manage tax transition with their clients. When it is paired with MSCI’s advanced tax engine, investment teams can fine-tune portfolio rebalancing for specific tax outcomes. By integrating sophisticated tax strategies into asset allocation decisions, this enables wealth managers to focus on improving returns while minimizing tax liabilities inside portfolios.

Hortz: What advice do you have for firms looking to evaluate their portfolio monitoring and management capabilities?

Govinda: Client portfolio personalization is set to increase and not decrease over the coming years. If you are a wealth management, CIO, or a key member of a home office investment team, it is important for you to ensure you remain technologically competitive and have the necessary platforms and systems in place to allow your wealth managers to deliver what their clients are demanding while still establishing clear house views through your model portfolios. If you are not making this a priority in your firm, then you risk becoming a less attractive destination for clients and for advisors joining your firm over the years to come.

This article was originally published here and is republished on Wealthtender with permission.

About the Author

Bill Hortz

Founder Institute for Innovation Development

Bill Hortz is an independent business consultant and Founder/Dean of the Institute for Innovation Development- a financial services business innovation platform and network. With over 30 years of experience in the financial services industry including expertise in sales/marketing/branding of asset management firms, as well as, creatively restructuring and developing internal/external sales and strategic account departments for 5 major financial firms, including OppenheimerFunds, Neuberger&Berman and Templeton Funds Distributors. His wide ranging experiences have led Bill to a strong belief, passion and advocation for strategic thinking, innovation creation and strategic account management as the nexus of business skills needed to address a business environment challenged by an accelerating rate of change.