Financial advisors expect the stock market to decline and bond volatility as rates rise. Therefore, alternative and passive assets will have increased portfolio roles, according to a wide-ranging survey from Natixis Global Asset Management.
Investors should avoid making sudden changes to their portfolios in the next few months, when interest rates are likely to rise, Natixis adds.
As soon as next month, interest rates in the United States are expected to increase for the first time in nearly a decade. The survey found that:
- More than half of advisors (58%) think bonds will become more volatile as rates rise.
- Nearly half (48%) expect higher rates to hurt stock values.
- Forty-one percent believe consumer spending will suffer.
“We’ve been expecting higher rates for a long time and, for some investors, anxiety is high,” John Hailer, chief executive officer for Natixis Global Asset Management in the Americas and Asia, said in a statement. “They might find it difficult to resist changing their investment portfolios. But we’ve often found that unguided, emotional investment decisions don’t work out as intended. Investors would do well, instead, to work toward long-term goals.”
The survey shows volatility in the market is the leading challenge to the growth of advisors’ businesses. If the financial markets turn downward, investors may be prone to making even more errors, advisors say. Already, advisors identify these seven key mistakes by investors:
- Making emotional investment decisions
- Focusing on short-term market noise and changes
- Failing to have a financial plan
- Not setting clear financial goals
- Not staying on course
- Keeping too much in cash
- Investing too little in stocks
Changing Markets, New Investment Strategies
Advisors anticipate use of more innovative investment strategies that will help investors avoid making mistakes in more volatile markets ahead. While advisors say stocks and bonds are still valuable for a portfolio, 77% percent agree traditional portfolio allocation – consisting of 60% stocks and 40% bonds – isn’t the best way to pursue return and manage investment risk.
Alternative assets, such as exposure to commodities, currencies and real estate, are important because they can provide characteristics not found in traditional asset classes. The survey found that 81% of advisors use alternatives in the portfolios of at least some clients.
Most advisors believe active and passive investments should be a part of their clients’ portfolios.
- On average, advisors invest 35% of clients’ money in passive assets, such as index funds or exchange-traded funds.
- Passive investments are better for low fees (according to 62% of advisors who use them) and providing easy access to efficient asset classes (also 62%).
Among all advisors surveyed, actively managed assets get higher marks than passive investments for their ability to respond to short-term market moves (by a margin of 74% to 26%) and providing higher risk-adjusted returns (67% to 33%).
“Advisors have recognized the particular strengths of each asset category – alternative, passive and active investments – and are using them in appropriate ways for their clients,” Hailer said.
Younger, Older Clients Represent Challenges and Opportunities
Members of Generation Y, also known as Millennials, present the greatest chance for growth in the next three years, the survey found. Those investors, under the age of 35, represent 12% of their clientele today. Looking ahead to 2018, advisors expect that figure to increase by half, to 18% of clients. A majority of advisors (71%) acknowledge that working with younger clients will require them to adopt a more flexible fee arrangement.
Serving the needs of older investors, the bulk of their business today, is a major test. Advisors say one of the top challenges to their business growth is capturing assets as clients shift from retirement saving to spending; it was cited by 45% of advisors, trailing only market performance (62%) and heightened regulation (52%).
Asked about building retirement income portfolios for clients, a sizable number are concerned they won’t provide enough income for lifestyle expenses (53%), generate stable income (47%), outpace inflation (46%), or grow assets while keeping risk in check (40%).
Emergence of New Business Models
Advisors are adapting to new business models. Traditional advisors say the rise of so-called robo-advice services will have an impact on their industry and their own businesses.
- More than half of traditional advisors (56%) say automated, online advisor services are not a passing fad and will have a lasting effect on their business.
- Just under half (46%) agree that automated advice represents a real threat to their business models.
- Seventy percent say the competition will force them to work harder to show clients the merits of their services.
Many advisors think they could learn from robo-advisors and incorporate automated tools in their businesses. Fifty-four percent say they could compete better for less-affluent clients if they had some automated advice services to offer.
But advisors don’t think robo-advisors offer the necessary personal touch to help investors in tough markets. Ninety-one percent say robo-advisors don’t provide individual support and, as a result, will suffer big redemptions in volatile times.
Separately, advisors were polled on the implications of the Department of Labor’s proposed Fiduciary Standard on the professional advice industry. Nearly three-quarters (71%) of advisors say the rule would limit the investment options made available to investors. Yet 55% say the rule will result in more innovative advice models and fee structures for underserved investors.
“Clearly the investing landscape is changing, but advisors are up to the challenge,” Hailer said. “They are telling us they expect the industry will respond and create services to meet the needs of a growing set of investors who will be better served in the end.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
