Advisors have to bridge the divide between risk and asset-accumulation goals
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In a recent survey of investors, Cerulli Associates found that more than 75% of respondents have preferred protection-focused portfolios over ones that aim for outperformance for three years running.
The anti-risk sentiment ran particularly deep among those with between US$250,000 and US$500,000, as well as those with more than US$5 million, reported Financial Advisor IQ. The feeling was also present among 84% of advisor-directed investors — those that put investment control in the hands of their advisors.
Christopher Cooke, partner and senior institutional consultant of Cooke Financial Group in the US, attributed this risk-averse attitude to a daily stream of negative news surrounding investment, which overpowers positive big-picture stories like the US economy’s five-year growth streak. Deep trauma from the 2008 financial crisis also contributes to people’s hesitation: many have sat out the nine-year bull market for fear of it all ending in a disastrous collapse.
The study warned that investors left to their own devices would steer themselves away from portfolios that are most likely to achieve asset accumulation goals. Risk aversion, coupled with their lack of knowledge when it comes to best practices for long-term portfolio construction, is also likely to leave clients disenchanted when markets struggle. To prevent that scenario, advisors have to help their clients contain risk without compromising performance.
Focusing on the fixed-income side, Cooke said investors might have to take a long, hard look at their bond portfolios. The bond market has shifted tremendously, and the impact of a potential return of inflation on the market means investors would have to assume more risk. It would then fall on advisors to set reasonable performance baselines for their clients, especially if there are no other sources of such information.
Meanwhile, Matt Taylor of Frontier Wealth Management Group said his firm continually revisits clients’ medium- and long-term goals to determine whether portfolio allocation and risk levels are where they should be. Clients who appear to be falling short of their goals, but are uncomfortable with taking on more risk, can work with their FAs to make adjustments to their spending habits or other aspects of their financial plan.
The important thing, Taylor stressed, is communication: clients must have realistic expectations and a good picture of what’s needed to meet them. And with various sources saying market-altering changes are on the way, those conversations are better held sooner than later.
