Shifting market dynamics are driving increased demand from US financial advisors for more innovative strategies to help investors balance risk and return, according to a survey by Natixis Global Asset Management.
Financial advisors are seeking solutions to help manage volatility for an increasingly broad spectrum of clients ranging from younger clients to retirees – all with very different investment needs. Many advisors say it is becoming more difficult to generate sufficient income for investors and the demands on advisors are further amplified with a large number of clients nearing or already in retirement.
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At the same time, advisors are finding it challenging to balance clients’ asset growth objectives with the need to protect principal.
John T. Hailer, CEO of Natixis Global Asset Management in the Americas and Asia, said: "U.S. advisors face a juggling act every day as they work to serve the rapidly changing needs of both their older and younger clients. Not only do they need new, more innovative strategies for managing retirement assets, they’re also looking for updated techniques to manage risk and return for younger investors."
Call for innovation
The study, released by Natixis’ Durable Portfolio Construction Research Center, reveals the challenges advisors are facing. More than half (56%) say it’s difficult to build portfolios that can simultaneously reduce risk and enhance return, and a similar number (53%) say it’s challenging to balance drawdowns for retirees with the need to keep their portfolios growing.
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By GlobalDataUnderscoring the need for innovation, 69% say they need to replace traditional diversification and portfolio construction techniques with new approaches in order to achieve results. This is a significant increase from last year’s advisor survey, in which only 46% said the same.
Hailer added: "Investors obviously need to take some risk to get returns, but the amount of event risk we’ve seen in the past year certainly could be driving this increased demand for new solutions. A focus on Durable Portfolio Construction, which emphasizes risk first and also incorporates the use of alternatives, could help advisors find that elusive balance."
The alternative conundrum
Advisors recognize that alternative strategies, including hedge funds, private equity and long-short investments, can play an important role in a client’s portfolio. Eighty-four percent say they have discussed the use of alternatives with their clients, and according to a separate investor survey released by Natixis earlier this year, 72% of investors would consider alternatives if their advisor recommended them.
But advisors often find it difficult to explain how these investments can effectively complement more traditional assets such as stocks and bonds. Nevertheless, the vast majority (89%) of advisors use alternatives with their clients, but only 25% use them frequently, and mostly with their high-net-worth clients.
When asked why they are not using alternatives more broadly, the top reasons cited were:
- They only recommend strategies they can easily explain to clients.
- A belief that clients think alternatives are too risky.
- Difficulty justifying the expense.
- Lack of knowledge about alternative strategies.
Hailer added: "These findings clearly show that it’s time to simplify the way we talk about alternatives and portfolio construction. We have an opportunity to do a better job of explaining the role alternative investments can play in a portfolio – whether they are designed to smooth volatility or increase returns by taking on more risk. It’s important to help investors understand the characteristics of the strategy – potential risks, volatility, and what to expect in various market environments."
Retirement: Optimistic outlook for clients but challenges remain
Nearly half (47%) of advisors believe most of their clients understand how much they need to save to meet their lifestyle expectations in retirement, up considerably from 28% who felt this way last year. And advisors are generally optimistic about their clients’ ability to provide for themselves in retirement, with only 10% having a negative outlook.
Still, the challenges in helping those investors who are already retired are growing more acute. Fifty-six percent say it’s difficult to deliver strong investment performance for retirees when interest rates are low, as they are today, and 52% say they’re challenged to generate enough income for retired clients.
The financial advice business
Advisors are also challenged in terms of managing their time and resources. The survey reveals that they spend almost twice as much time on administrative tasks (11% on general administration and 6% on regulatory compliance) as they do seeking new clients (9%).
Due to these pressures, 43% are not actively seeking new and younger clients despite the graying of their existing client base. Clients over the age of 67 make up 36% of the average advisor’s business; clients aged 46 to 67 represent 42%; and clients 45 and under make up 22%.
Although time may be a challenge, advisors continue to make time to learn about their industry. Advisors rate their ability to explain investments to clients as their top strength and report that they spend 5% of their time reading about the industry and 4% educating themselves on new portfolio construction techniques. Still, nearly two-thirds (64%) point to a need for more education.
Hailer concluded: "As demands from existing clients grow, advisors are finding it difficult to balance that work with marketing efforts to attract new business."
