The argument has long been made that longer lifespans (and therefore retirements) require longer investments in equities in order to ensure the assets last. But research and consulting firm Cerulli Associates points to a common conundrum—how to get participants to stay invested in higher-risk stocks when questionnaires and verbal preferences dictate otherwise.
“The latest research from [Cerulli] finds that the biggest challenge for advisors is bridging the gap between their endorsement of appropriate risk to maximize long-term portfolio returns and investors’ risk aversion,” according to the Boston-based firm. “Advisors must balance education and guidance to help reach an agreement that results in optimal returns.”
When investors who work closely with advisors were asked about their self-reported risk tolerance over time, only 4 percent classified themselves as aggressive investors.
“This result underscores the paradox of risk in investment management relationships; advisors embrace a long history of research indicating that higher levels of equity risk will maximize long-term portfolio returns, but those interested in using advisors are the most reluctant to embrace portfolio risk,” Scott Smith, director at Cerulli, said in a statement.
Disagreements between advisors and clients regarding the appropriate level of risk in the clients’ portfolios are a common cause of formal complaints.
Advisors are obviously obligated to act in the investor’s best interest, but they must also “get to know their clients” to craft the best possible investment solution for each, he added, and advisors must balance expected returns with objections or complaints.
“In response to investors’ affinity for the path of least resistance, financial markets regulators and consumer advocates tout investor education as a solution to reforming the industry,” Smith concluded.
The objective for advisors is to supply just enough information and explanation to help clients better understand the uncertainties that come with the potential rewards of long-term investing.