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84 % of French advisers warn that investors may not be fully aware of the risks associated with passive investments

85% say they need a more accurate picture of their clients’ risk tolerance. It’s not volatility that worries advisors the most, it’s how their clients react to it. Ensuring investors set tangible goals and have realistic expectations remains a major challenge

Article also available in : English EN | français FR

According to a study of 2550 financial advisers around the globe published today by Natixis Global Asset Management, 76% of French advisers (68% globally) say investors have a false sense of security regarding their investments. 84% of them believe investors may not be fully aware of the risks associated with over-reliance on passive investments.

On almost every measure, advisers agree that active investment management outperforms passive investment, including generating alpha, providing risk-adjusted returns, taking opportunistic advantage of short-term market movements and contributing to better diversification (access to alternatives and exposure to non-correlated asset classes).

While advisers see a role for passive investments in portfolio construction, they express concern that much of the shift from active to passive investments may be motivated not because they add more value but because they lower costs.

The survey found that two-thirds of French advisors’ portfolio assets are still actively managed and 57% of advisors are utilizing liquid alternative, primarily to add diversification and to reduce risk rather than to enhance returns. Many are using a diverse mix of non-correlated investments to help protect their portfolios and stabilize returns.

A more accurate picture of investors’ risk tolerance is needed

According to 85% of French advisers (93% globally), it’s important to have a more accurate picture of their clients’ risk tolerance. More than nine out of 10 advisers (97% in France) have already incorporated goals-based planning into their practice and client conversations.

This approach places greater emphasis on understanding clients’ risk tolerance, financial goals and personal values as the basis for investment decisions, investor behavior and return expectations.

"Low cost does not always equate to low risk, nor does it always make a product more appropriate for an investor’s portfolio," said John Hailer, CEO of Natixis Global Asset Management for the Americas & Asia and Head of Global Distribution. ”Investing starts with understanding risk, so it is particularly troubling that so many investors seem to be ignoring the inherent risks in their portfolios. Add to that the volatility and complexity of today’s markets and there is great cause for concern."

The real challenge is to manage investors’ reactions to markets and volatility

Financial advisers say clients are asking for a broader range of services to achieve their goals. For example, 63% of French advisors (55% globally) say that over the past year, clients have asked for help managing volatility.

Protecting client portfolios from the effects of market swings and the risk of further volatility is daunting given market dynamics. According to 91% of French advisors, volatility is the biggest challenge to the growth of their business, followed by the low yield environment that has loomed over the markets since 2008.

Underneath it all is a sense that it’s not the markets and volatility that worry advisors the most; it’s how clients will react to volatility that gives them the greatest concern. When asked about the effects of the U.K’s Brexit vote, advisors predicted it would have a greater effect on investors themselves than the markets.

Managing clients and their emotions is a whole other level of concern for advisors. According to 76% of French advisors, a key factor for their success is the ability to demonstrate value beyond asset allocation and investment performance.

“French advisors are aware that their clients’ ability to achieve their financial goals may be undermined by three recurrent pitfalls: letting emotions drive investment decisions, setting unrealistic return expectations and focusing too much on short-term market movements”, explain Mehdi Rachedi, Head of external distribution France and Monaco at Natixis Global Asset Management. “That’s why the role of financial advisors is so crucial. To avoid these pitfalls, investors need the guidance and advice from a professional, who can help them to focus on the long term and build more robust portfolios, better suited to today’s complex markets.”

Growing pains and business model challenges

Many advisors worldwide are planning to change their business models and fee structures given regulatory pressures. Whether it’s the U.K.’s Retail Distribution Review (RDR), Canada’s CRM2, The European Union’s MiFID I and II, or similar acts in Australia, Germany, and Singapore, the goals are clear – to make advisor compensation more transparent and ensure the industry is acting in the best interest investors. 62% of French advisors say that meeting heightened regulatory and disclosure requirements are significant challenges to the growth of their business.

The survey found that as a result of new regulations:

  • 58% of French advisors will have to make at least some change to their business model;
  • 43% expect their ability to provide the desired level of service clients need will be restricted;
  • 35% expect their ability to acquire new clients will be limited; and
  • 29% will likely disengage with certain clients who have lower assets.

The Robo-advisors, an opportunity

Financial advisors believe that the 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.

The vast majority of advisers (82%) aren’t concerned that automated advice will make the traditional, high-touch advisory model obsolete. Indeed, 84% of French advisors think that robo-advisors can’t deliver the tactical asset allocation needed, particularly in down or volatile markets.

The survey found that 52% of French advisors believe a front-end automated advice platform could be a way to improve the efficiency of their own business, and 56% expect firms that have a front-end automated advice platform will have a competitive advantage over those that don’t.

“Robo-advisors could be an opportunity for financial advisors to develop further. For them, this is also a possibility to demonstrate their added value to their clients: beyond asset allocation, advisors can provide investors with personal support, help them to define tangible goals and elaborate a financial plan that truly meets their expectations in terms of risk and return,” concludes Mehdi Rachedi.

Next Finance , October 3

Article also available in : English EN | français FR

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