New survey results reveal that few financial advisers believe investors are ready for a return to more normal market ebbs and flows, with many believing investors will make what FAs foresee as their biggest mistake: emotional investment decisions.
According to findings by Natixis’ Center for Investor Insight, more than 80% of investment advisers believe the prolonged bull market has made investors complacent about risk and they fear this could translate into moves driven by emotion and panic once volatility resurfaces. More than 60% of advisers do not believe investors are prepared for a downturn and nearly half (46%) reported that their clients reacted emotionally to recent market movements.
The survey of 300 U.S. financial advisers with nearly $25 billion in AUM, including wirehouse advisors, RIAs and independent brokers and dealers, offers insight about their market challenges and how they are positioning clients’ portfolios as they face investment risks.
While seeking to grow AUM by an average of 14% over the next year, the report notes that FAs see several potential roadblocks as they navigate the market, believing the following will negatively affect investment performance in 2018:
- Geopolitical events (68%)
- Interest rate increases (66%)
- Rising volatility (57%)
- Asset bubbles (54%)
- Low-yield environment (47%)
- Unwinding of quantitative easing (46%)
FAs reportedly are already acting in response to rising interest rates, with half saying they are positioning clients' portfolios by managing bond durations.
Meanwhile, there continues to be a “clear preference” for actively managed investments, the report contends. According to the survey, 83% of advisers believe the current market environment is likely to be favorable for active portfolio management.
It notes that FAs who responded to Natixis’ 2016 survey reported that 66% of the assets they manage were allocated to active strategies and 34% to passive. Advisers at the time projected that within three years they would adjust their active allocations to 57% and increase passive allocations to 43%. Yet, allocations to active have actually increased in the past two years to 67%, according to the new findings.
“After nine years of steady growth, volatility has returned to the markets, and investors are having to get reacquainted with the feeling of uncertainty,” explains David Giunta, Natixis Investment Managers’ CEO for the U.S. and Canada. “Our research shows investors often make decisions based on emotions, so it’s more important than ever for advisers to fortify close relationships with their clients to help them stick to their plans, and consider active portfolio design approaches that could be better suited to today’s markets.”
Meanwhile, nearly three-quarters (74%) of advisors believe that individual investors are unaware of the risks of passive investing and a similar level (73%) say individuals have a false sense of security about passive investing.
Advisers also reportedly believe it is important to invest in alternatives to moderate volatility, produce alpha and generate stable income. According to the results, 80% of respondents recommend alternative investments to clients today, with strategies including real estate/REITs (50%), real assets (29%), commodities (28%), infrastructure (27%) and hedge funds (24%).
Financial advisers’ role as communicators will be important, particularly in more volatile markets, the report further emphasizes. “Based on advisers’ views on what markets have in store for the next 12 months, their skills will be in high demand as clients could get caught in the crossfire of a market shift,” the report states.
In addition to giving investment advice, FAs describe their role with clients as:
- guiding them through “emotional” decisions (88%);
- providing ongoing financial education (71%);
- providing guidance on identifying and achieving life goals (70%);
- helping to navigate life events (66%); and
- helping to mediate family financial affairs (41%).
David Goodsell, Executive Director of Natixis Investment Managers’ Center for Investor Insight, suggests that FAs will need a “strong analytical grasp” of the forces driving the market in order to adjust investment strategy, as well as an understanding of investor motivations in order to “avoid emotional decisions that could disrupt their long-term goals.”