There’s a risk to long term savings as investors’ confidence is tested by turbulent markets.
This is one of the main conclusions from a new research report from Natixis Global Asset Management. The report is based on extensive research amongst financial advisers in the UK and globally.
Other key conclusions were that advisers were increasingly acting as emotional counsellors to help investors stay the course and that access to financial advice is shrinking (people need nearly £20,000 more in assets to hire an adviser now than in 2012). What’s more, they remain unconvinced by the ability of ‘robo-advisers’ to fill the gap, because, they feel, that these services are unable to offer personalized support during tough times.
Here’s the highlights of the research report:
“In a poll of UK financial advisers, a majority (54%) said the level of investment risk their clients were willing to take was no longer increasing.
The same majority (54%) of financial advisers also said that their clients were only willing to take minimal investment risk, even if it means sacrificing returns, while nearly three quarters (73%) of advisers said their clients were conflicted between making returns and preserving their capital. This was despite the fact that more than half (54%) of the clients these advisers represented were under 50, at a stage when asset growth should still be a priority.
2015 has so far seen extraordinary levels of turbulence in the markets, with crisis after crisis acting to shake investors’ confidence. Russian military intervention in Ukraine, the flaring up of the Greek debt crisis, and the freefall of the Chinese stock market are just some of the events that have affected global markets and increased the conservatism of investors.
Advisers were concerned that individual investors were too focused on these short-term market events and risked making bad investment decisions which threatened their long-term savings. When asked which were the biggest mistakes being made by individual investors, they highlighted the following:
- Making emotional investment decisions
- Focusing too much on short-term market noise and movement
- Failing to have a financial plan in place
- Keeping too much cash
- Not setting clear financial goals
“Given the extent to which these market issues have been discussed in the media, it is worrying but no surprise investors might feel compelled to sell up and look for a safe haven,” said Chris Jackson, Deputy CEO at Natixis Global Asset Management – International Distribution. “By making emotional decisions investors are most almost always missing out on market return. Therefore it is crucial to keep long-term goals in mind; far better to keep their eyes on the prize and stay the course.”
Providing emotional support
Given the tendency among their clients towards making rash and later regretted investment decisions, one of the most important roles now played by professional advisers is as a counsellor. More than eight in ten UK advisers (82%) said that their ability to keep clients from making emotional decisions is a critical factor in their success. 78% said it was important to prevent investors from making emotional decisions with their portfolios which often prove irrational.
It is the services beyond portfolio construction where advisers really add value however; 87% of UK advisers believe that demonstrating value beyond investment guidance is critical to their success.
One of the main elements of this is helping clients develop highly specific goals as a way to benchmark their investment performance independent of market benchmarks, in order to help avoid making rash investment decisions. 75% of UK advisers said that their clients would be happy if they achieved their own investment goals over a year even if they underperformed the market.
“It is no longer enough just to ask clients to ride it out and stay invested,” said Jackson. “Advisers are particularly helpful showing clients the bigger picture and helping them to develop specific personal goals, like knowing how much they will need to save to retire at a certain age on a particular annual sum. This can help investors judge performance on the basis of whether they are on track to meeting their goals, rather than if their portfolio is returning a few basis points below the index.”
Advice gap worsens despite rise of robo-advice
A key worry highlighted by advisers was their growing inability to service mass-market clients, a problem worsened by 2012’s Retail Distribution Review (RDR), one of the most significant shakeups the UK financial industry has seen. The Natixis research found evidence that the RDR has contributed to a widening of the ‘advice gap’ – a segment of the market with money to invest, but insufficient funds to be able to afford the services of a professional adviser.
The advisers surveyed said that the average investable assets required to engage their services had risen by nearly £20,000 (from £47,610 to £66,702) since RDR took effect. Equally, 70% of UK advisers said the RDR had made it more difficult to provide financial advice to the mass market, while 73% said the regulation had limited investors’ ability to seek financial advice in the UK.
Much attention has been given of late to the trend for ‘robo-advisers’ and how these may help to plug the advice gap; however advisers were concerned about these firms’ ability to guide their clients through tough times. 83% of those surveyed predicted these firms would experience redemptions during difficult periods due to their inability to give personalised support.
In contrast, advisers have proved highly adept at helping their clients navigate around market crises – a separate piece of research in to the allocations of advisers’ model portfolios conducted by Natixis’ Portfolio Research and Consulting Group found that despite the intensely negative coverage surrounding Greece and its impact on European markets earlier this year, advisers had in fact slightly increased exposure to European equities (which have outperformed over the long-term).
A majority of advisers (61%) do not view the new automated firms as a threat to their businesses. In fact, 59% of them see it as an opportunity to better communicate their value advice to clients.
Reaching the next generation
One of the reasons the advice gap remains a major concern for advisers is that nearly three quarters (71%) said that establishing relationships with the next generation of investors was crucial to the long-term success of their businesses. A majority (53%) said that advisers with a younger clientele will grow faster over the long-term than those with an older client base.
It is, however, these same younger investors who have typically been overlooked because of the ‘advice gap’. Currently, an average of just 9% of advisers’ clients are aged under 35, and having been overlooked at this stage of their lives may feel less inclined to take professional advice later on when they have built up sufficient sums. But advisers recognise the importance of having a greater focus on younger generation and to start adapting their businesses to suit their needs.”