Today, Natixis Global Asset Management released the results of a survey of 300 financial advisors that captures their attitudes on investors’ expectations and behavior, active vs. passive investing, robo advice, the impact of new regulations and the future of the industry.

The findings show that investors and advisors are miles apart in return expectations; investors expect returns 44% higher than what financial advisors say is realistic. Advisors are taking notice of the conflict; in fact 85% of advisors say their success depends on gaining a more accurate picture of their clients’ risk tolerance.

Investors Expect Returns 44% Higher Than What Financial Advisors Say is Realistic
Source: Pixabay

The survey also found:

  • 86% of financial advisors say that meeting strict regulatory and disclosure requirements are some of the biggest challenges to the growth of their business
  • 37% say they will disengage with smaller clients due to new regulations.
  • 79% say new regulations will increase costs for investors
  • 27% are planning a dramatic change within three years by selling their book of business, merging with another firm, leaving the financial industry altogether, or retiring
  • 76% say investors have a “false sense of security” about passive investing
  • 75% of advisors are using liquid alternatives to diversify client portfolios
  • The vast majority (86%) are not concerned that automated advice will make the traditional, high-touch advisory model obsolete

Investors Expect Returns 44% Higher Than What Financial Advisors Say is Realistic, According to Natixis Survey

  • Investors expect returns of 8.5% above inflation; Financial advisors say 5.9% is realistic
  • 76% of advisors say investors have a “false sense of security” about passive investing
  • 79% say new regulations will increase costs for investors
  • More than a quarter of advisors expect to sell or merge their business, leave the industry or retire in the next three years

BOSTON, Sept. 29, 2016 – Financial advisors are caught between two rocks and a hard place – clients’ mismatched performance expectations, an investing environment dominated by heightened fee sensitivity, and new regulations expected to increase costs and limit growth options, according to a study published today by Natixis Global Asset Management.

[drizzle]The study found that advisors are under cost and regulatory pressure to yield to the demand for lower- cost passive investments, but 75% worry investors don’t know about or appreciate the associated risks. A significant majority feels strongly that volatility lends itself to active management. Yet it’s harder for advisors to satisfy clients, comply with new regulations, and manage a thriving practice on their own, compelling many to reinvent themselves as others exit entirely.

Natixis surveyed 300 U.S. financial advisors and found:

  • 27% of financial advisors are planning a dramatic change within three years by selling their book of business, merging with another firm, leaving the financial industry altogether, or retiring;
  • More than a third (37%) say they will disengage with smaller clients due to new regulations;
  • Nearly nine in 10 (86%) say that meeting strict regulatory and disclosure requirements are some of the biggest challenges to the growth of their business.

Natixis also found that managing investors’ performance expectations is a top priority for advisors, especially given that failing to do so is the No. 1 reason investors have said they leave their advisors1. Except that investors expect an average annual return of 8.5%2 above inflation, fully 44% higher than advisors say is realistic in the current market. That’s a problem, says Natixis, for an industry where dialogue between clients and their advisors has been disproportionally focused on market performance, and not enough on risk management and investor goals and behavior. In fact, 85% of advisors say their success depends on gaining a more accurate picture of their clients’ risk tolerance.

“The challenges facing financial advisors are tougher than ever, as they are asked to do more with less in an environment that seems to put low fees ahead of all other considerations, including risk management,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “We applaud the efforts of financial advisors to understand their clients’ risk tolerance and financial goals and tailor their portfolios accordingly. Low cost does not always equate to good value, and what’s lost in the big picture is the importance of professional guidance and risk management, especially in today’s complex and volatile markets.”

  1. Natixis Global Asset Management U.S. Survey of 750 Individual Investors, CoreData Research, February 2016.
  2. Natixis Global Asset Management U.S. Survey of 750 Individual Investors, CoreData Research, February 2016.

Advisors agree that active investments are a stronger choice than passive for most objectives, including generating alpha, providing risk-adjusted returns, taking advantage of short-term market movements and gaining access to alternatives and exposure to uncorrelated assets. Still, one of the reasons advisors use passive investments is because clients prefer them and because they’re less costly. Another 43% of advisors say they use passive investments because there are so many active managers who are really ‘closet indexing.’ For advisors, the challenge is striking the right balance between clients’ interest in passive investments and the best way to help them achieve their investment goals.

Demonstrating Value Beyond Asset Allocation

Eighty-seven percent of advisors say their success depends on their ability to demonstrate value beyond asset allocation and portfolio construction. This may be because clients’ progress toward goals can be easily undermined by what advisors say are the three biggest mistakes investors continue to make: Letting emotions drive investment decisions, setting unrealistic return expectations and focusing too much on short-term market movements.

Managing volatility

Financial advisors say clients are asking for a broader range of services to achieve their goals. About half (51%) say that, over the past year, clients have asked for help managing volatility. In response, 80% of advisors said that active strategies will play an important role in addressing increased market volatility. Many advisors are using a diverse mix of non-correlated investments to help protect their portfolios; two- thirds (66%) believe a traditional 60/40 portfolio allocation is no longer the best way to pursue return and manage investment risk for most investors. In fact, the survey found that 75% of advisors are using liquid alternatives.

Putting investors’ risks and goals first

Nine in 10 advisors (92%) incorporate goals-based planning into their practice and client conversations. This approach shifts the focus from market performance to better understanding clients’ risks, financial goals and personal values as the basis for investing decisions, behavior and return expectations. About one in three advisors (30%) say clients are asking for goals-based planning. While this offers opportunities, it also brings challenges: 61% find it hard to manage clients’ performance expectations when it comes to integrating goals-based planning into their businesses.

Meanwhile, advisors or their teams are managing two-thirds (67%) of their clients’ discretionary assets themselves. One-third (33%) of their clients’ assets are either in their firm’s model portfolios or managed by external consultants. As the result of new regulations, 9% of advisors say they plan to outsource investment decisions.

Time spent on asset allocation and increased client communication leaves little time for advisors to focus on building their practice. They expect their assets under management to change by 12%, on average, over the next year. However, more than nine in 10 see that growth coming from their ability to acquire new clients (91%) while nearly eight in 10 (79%) expect

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