Financial advisors expect continued strong demand for their services in the next year, but worry that rash investor reaction to market events could harm their businesses and their clients’ well-being, according to a survey by Natixis Global Asset Management.
"When investors make emotional decisions, they decrease the odds of reaching their financial goals," said John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia.
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"Financial advisors cannot control the markets, but they can head off adverse reactions by creating portfolios designed to stand up in a variety of market conditions. Just as important, they can work with clients to agree on what to do before market-changing events occur. By doing this, they can help take the emotions out of investing."
Advisors say the top three challenges they face are clients’ emotional reactions to market movements (90%), managing investor behavior and confidence (88%), and persuading clients to stick with their financial plans (84%).
This is in sharp contrast to what Natixis heard from individual investors in a separate survey1 earlier this year. Few investors acknowledged the relationship between emotions and investment success. When asked if putting their emotions aside could better enable them to meet their financial goals, only 8 percent of U.S. respondents answered "yes."
"Managing emotions may be easier said than done," said Hailer. "Investors may not realize the potential negative effects hasty decisions can have on their investment portfolios."
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By GlobalDataThe vast majority of advisors (84%) also expressed concern about the potential effect of rising interest rates and inflation on client portfolios. Most advisors would change investing strategies if interest rates increased (57%) or if the stock market dropped severely (53%).
Goals-based investing, more moderate expectations
Advisors seem to have embraced the principles of goals-based investing. Rather than focusing on a particular index or benchmark, 91 percent say their clients’ investment portfolios are based on personal objectives.
The study found:
- 84 percent of advisors agree their clients would be happy if they achieved their investment goals over a year even if their portfolio underperformed the market.
- Likewise, 84 percent believe investors think more about missing their investment objectives than about falling short of a benchmark.
Use of alternative strategies
A little more than half (54%) of financial advisors say their clients question traditional buy-and-hold investing strategies, though less so in the past two years as the stock market has soared and as investors focus less on making up for past losses.
The majority of advisors (83%) say they have spoken with clients about using assets that aren’t directly correlated to the markets. While advisors say they’re telling clients about the benefits of alternative strategies, investors don’t necessarily agree. Only half (50%) of investors surveyed by Natixis earlier this year said they have discussed alternative strategies with their advisor.
"There is an opportunity for advisors to talk to clients about using alternative strategies as portfolio construction tools," Hailer said. "It might be time to focus more on the role specific alternative strategies can play within a portfolio rather than attempting to educate clients on a wide array of very different strategies."
Alternatives can include investments such as hedge funds, long-short strategies, real estate, commodities and private equity. The returns of these assets often don’t correlate to the broader markets, so they can be used in portfolios to limit risk or curb volatility.2
The study found:
- Only 35 percent of financial advisors regularly use alternative strategies in client portfolios. Sixty percent use them infrequently.
- Though 87 percent of advisors say they have a strong understanding of alternatives, they also ranked alternatives highest on a list of products and services they need to know more about.
- Nearly three-quarters (72%) of advisors think their clients know little or nothing about alternative strategies. However, 42 percent of investors in Natixis’ earlier survey said they know a good deal about alternatives.
Business growth and resources
In the year ahead, advisors expect their businesses to expand by 18 percent on average. Many advisors (49%) anticipate that business growth will come from net new client assets, while others say it will be driven by new assets from existing clients (22%), market gains (14%) and other factors (15%).
Advisors face challenges managing their time and resources. They spend:
- The majority of their time (57%) on existing clients – in meetings, phone and e-mail conversations, and in managing their accounts.
- 16 percent of their workdays on general administration and regulatory paperwork.
- 13 percent of their time on education about portfolio construction, marketing, social media and monitoring industry developments.
- 10 percent of their time seeking new clients.
