Advisors Fear Skittish Investors in Wake of Market Swings

The long run of the bull market left clients emotionally unprepared for what's likely to come

401k, market swings, active strategies, riskDeep breaths.

It was a good run, but it had to end sometime.

Thanks to the second-longest string of market gains on record, many advisors fear investors have developed a false sense of security and are ill-prepared for an impending return to volatility.

And quelling clients’ anxiety may be particularly challenging for money managers, who predict global turmoil, rising interest rates and more are likely to pose a threat to investment returns this year, according to new research.

In a poll of 300 wirehouse advisors, registered investment advisors and independent brokers and dealers in the U.S., Natixis Investment Managers found “nearly half (46 percent) of professionals reported that their clients reacted emotionally to recent market movements. Moreover, eight in 10 (82 percent) believe the prolonged bull market has made investors complacent about risk, and they fear this could translate into moves driven by emotion and panic” in the future.

Those surveyed aim to grow assets under management by 14 percent over the next year in the face of several concerns:

Threats to investment performance: Financial advisors see geopolitical events as the biggest potential threat to the markets. Sixty-eight percent say it would negatively affect overall investment performance, followed by interest rate increases (66 percent), rising volatility (57 percent) asset bubbles (54 percent) the low yield environment (47 percent), unwinding of quantitative easing (46 percent) and regulation (43 percent).

Impact of short-term rate increase: Advisors say an increase in central bank short-term interest rates is expected to adversely affect bond volatility (74 percent), the housing market (74 percent), the credit market (65 percent), overall market volatility (61 percent) and stock values (52 percent).

Portfolio risks: Top risk concerns include interest rate hikes (59 percent), asset-price volatility spikes (55 percent) and inflation (40 percent). Notably, financial advisors already are acting in response to rising rates with half saying they are positioning client portfolios for rising rates by managing bond durations.

Concerns about bubbles: Advisors show the most concern for crypto-currencies, and after a considerable run up in 2017, nearly three-quarters (74 percent) see the potential for this bubble to burst in 2018. They also believe asset bubbles exist within the bond market (25 percent), real estate (24 percent), the tech sector (21 percent) and the stock market (18 percent).

In response, more than eight in 10 advisors now favor actively managed investments and are allocating the majority of assets as such, up from 66 percent in 2016. Almost three-quarters of those surveyed believe clients only choose passive investments to enjoy lower fees or because they are unaware of the risks involved and think passive investing is safer.

Aside from the shift to active, survey results also show 80 percent of respondents are now recommending alternative investments in attempt to lessen the impact of drastic market swings. “The strategies they are putting to work include real estate/REITS (50 percent), real assets (29 percent), commodities (28 percent) infrastructure (27 percent) and hedge fund strategies (24 percent). Nearly half (48 percent) give an alternative strategy more than three years to prove itself,” reported Natixis.

And finally, financial professionals are acknowledging the broad scope of their duties, as “their skills will be in high demand as clients could get caught in the crossfire of a market shift” this year. Above and beyond giving advice, those surveyed say their role entails:

  1. Guiding clients through “emotional” decisions (88 percent)
  2. Providing ongoing financial education (71 percent)
  3. Providing guidance on identifying and achieving life goals (70 percent)
  4. Help in navigating life events (66 percent)
  5. Help with mediating family financial affairs (41 percent)

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