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.

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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 more assets from existing clients.

Automated Advice

Financial advisors believe that a potential advice gap, particularly among younger and low- or middle- income investors, can be addressed in part by new technology-enabled business models or automated advice platforms, also known as robo-advisors.

For the most part, advisors see the automation of professional advice for certain segments as a positive development. The survey found:

  • Eight in 10 (84%) of advisors believe the automated advisory model provides greater access for low balance investors.
  • Half (51%) believe a front-end automated advice platform could be a way to improve the efficiency of their own business.
  • The vast majority (86%) are not concerned that automated advice will make the traditional, high- touch advisory model obsolete. For instance, they do not think robo-advisors can deliver the tactical asset allocation needed, particularly in down markets.

Methodology

Natixis’ 2016 financial advisor research was conducted in July 2016 with 300 financial advisors in the United States. The survey is part of a larger global study of 2,550 advisors in 15 countries and territories in Asia, Europe, Latin America, the United Kingdom and the Americas. For more information, visit http://durableportfolios.com.

Risks

All investments carry risk, including the risk of loss. Alternate investments involve unique risks that may be different than those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing.


About Natixis Global Asset Management, S.A.

Natixis Global Asset Management serves thoughtful investment professionals with more insightful ways to understand and manage risk. Through our Durable Portfolio Construction® approach, we help them construct more strategic portfolios that seek to produce better outcomes in today’s unpredictable markets. We draw from deep investor and industry insights and partner closely with our clients to put objective data behind the discussion.

Natixis is ranked among the world’s largest asset management firms.1 Uniting over 20 specialized investment managers globally ($874.5 billion AUM2), we bring a diverse range of solutions tailored to meet every strategic challenge. From insight to action, Natixis helps our clients better serve their own with more durable portfolios.

Headquartered in Paris and Boston, Natixis Global Asset Management, S.A.’s assets under management totaled $874.5 billion as of June 30, 2016.2  Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include Active Index Advisors;3 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;4 Dorval Asset Management;5Emerise;6   Gateway Investment Advisers; H2O  Asset  Management;5  Harris  Associates; IDFC  Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors;3 McDonnell Investment Management; Mirova;7  Natixis Asset Management; Ossiam; Seeyond;7  Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Global Asset Management Private Equity, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Visit ngam.natixis.com for more information.

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  1. Cerulli Quantitative Update: Global Markets 2016 ranked Natixis Global Asset Management, S.A. as the 16th largest asset manager in the world based on assets under management ($870.3 billion) as of December 31, 2015.
  2. Net asset value as of June 30, 2016. Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.
  3. A division of NGAM Advisors, L.P.
  4. A brand of DNCA Finance.
  5. A subsidiary of Natixis Asset Management.
  6. A brand of Natixis Asset Management and Natixis Asset Management Asia Limited, based in Singapore and Paris.
  7. Operated in the U.S. through Natixis Asset Management U.S., LLC.

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