The first decade of the 21st Century dramatically changed the landscape for financial advisors. Starting in 2000 and 2001 with the implosion of the dot.com bubble and then the turmoil of the worldwide financial crisis in 2008, advisors were forced to readjust their thinking and their approach to planning.

Today advisors are facing increased competition at the same time that the margins from a business model based on assets under management are shrinking. Moreover, there are an exponentially greater number of increasingly complex financial products that must be understood and explained to clients. To evolve and succeed, advisors have to make the transition from practitioners to business owners. As a result we've seen larger firms arising as advisors attempt to add scalability.

Rapid Evolutionary Change

A decade ago, asset growth was almost taken for granted and advisors (and their clients) measured success by portfolio growth on a quarterly basis. The low returns and intense volatility found across all markets in recent years has changed that dramatically. Now the goal of a financial advisor above all else is the preservation of wealth-ensuring that the client does not lose money. Growing client wealth is still vitally important, but in many cases it's become secondary to wealth retention. Among the new metrics for advisor success are loss avoidance, tax minimization, risk mitigation and client peace of mind.

In a simpler time, a typical investment strategy was to keep some assets in cash, put some into fixed income and then add diversification with a mixture of stocks. That common sense approach, promulgated by academics and broadly practiced by advisors, seemed to work for decades. But, the global financial storm of 2008-onward left far too many underwater or otherwise on a course radically different than they once had envisioned.

Evolved Tools and the Rise of ETFs

Fortunately the tool kit for advising in this new environment has also expanded in recent years. We've seen the creation of a wide range of software packages that allow advisors to increase their efficiency and sophistication. There has also been an increase in the use of "alternative" investments, such as hedge funds, managed futures and commodities.

And furthering a trend of increased interest in passive investing and broader asset class diversification, exchange-traded funds (ETFs) have risen in prominence and expanded in coverage, along the way boxing out investments in specific securities (e.g. picking Apple over a far-more diversified investment in the U.S. technology industry) and actively managed mutual funds.

While these solutions can benefit clients when used properly, they don't fully address the measurement and acceptance of market risk, which has come to preoccupy the minds of many advisors and their clients, in no small part due to the failures of various asset allocation strategies during the market turmoil of the last five years. Enter tactical strategies, many of which have been designed specifically to assess and address market risk, generally seeking to benefit from the opportunity that increased volatility creates.

Experienced tactical managers will adjust portfolio exposures across asset classes based on their quantitative reviews of various data sets, which may range from fundamental valuations to broader macroeconomic conditions. Proven tactical managers don't try to predict the market-rather, they react intelligently to it. This often can be a more effective way to access alternative asset classes and strategies. And many of these managers have found that the most efficient way to deploy such an approach, for retail advisors in particular, is through the use of ETFs.

Advisors looking to make ETFs work for their clients have increasingly turned to ETF managed portfolios, which are primarily available as separate accounts and represent one of the fastest-growing segments of the managed-account universe. Morningstar tracked 605 strategies from 140 firms in 2013's first quarter. Total assets in these strategies increased to $73 billion, an uptick of 12% for the quarter. This impressive growth comes on the heels of the 60% growth these strategies experienced in 2012. The continued strong asset growth in this space is indicative of the demand for ETF-based investment strategies both as stand-alone investment options and as complete portfolio solutions.

In Practice

Increased volatility and higher levels of risk have become structural qualities of today's investment markets. This makes solutions that deal with risk more critical as a tool for planners. As part of an overall allocation, tactical approaches can mitigate the risk found in traditional portfolios. In fact, financial planners often times employ tactical managers to fill the need for a "risk managed" allocation in a client's portfolio. And many will find approaches that take advantage of the low cost, daily liquidity and range of investment options provided by ETFs, particularly ETF managed portfolios are likely to represent an ever growing share of client portfolios.

Jeff Montgomery is Chairman and CEO of Innealta Capital, a boutique provider of investment solutions for the evolving needs of advisors and individual investors. Prior to 2008, Jeff most recently served as president and CEO of NFP Securities, a FINRA-member broker-dealer and registered investment advisor with more than 1,500 employees.