The Expectation Gap

A new survey reveals that advisors face major challenges relating to client expectations regarding rates of returns on investments. Fiona Collie, contributor with Investment Executive, explores a new survey in the following article. 

There’s a significant expectations gap between financial advisors and their clients as it relates to market performance and the investment strategies employed to achieve investment returns, according to the results of a new survey from Toronto-based Natixis Global Asset Management Canada released on Thursday.

The poll found that clients typically expect an annual market return of 9.3% above inflation, almost double the 4.8% average annual market return that advisors say is more realistic.

Further widening the gap between clients and advisors is the strategy each group prefers to manage market volatility. Most clients prefer low-cost passive investments over actively-managed products, which are the preferred investment choices of advisors surveyed.

In fact, 69% of advisors surveyed said they’re concerned clients don’t fully appreciate or understand the potential downside market risks of passive investments.

Furthermore, most advisors don’t believe that the traditional 60% equities/40% fixed-income asset allocation in portfolios is the best option for clients in today’s market. Instead, advisors are focused on portfolios with a diverse mix of non-correlated investments, the Natixis survey finds.

“Low cost does not always equate to good value,” says John Hailer, CEO of Paris-based Natixis Global Asset Management SA for the Americas and Asia, in a statement, “and what’s lost in the big picture is the importance of professional guidance and risk management, especially in today’s complex and volatile markets.”

Fees will remain a focus for advisors in client discussions, particularly in light of new disclosure requirements under the second phase of the client relationship model (CRM2). Indeed, more than 90% of advisors say their success depends on their ability to demonstrate value beyond asset allocation and conversations focused on solely on investment performance.

One way advisors are doing this is by incorporating goals-based planning into their businesses. According to the results of the Natixis survey, one in three advisors say clients are asking for such a service. As such, 98% of advisors surveyed said they had incorporated the service into their practice.

Nevertheless, some advisors believe they will have to exit the investment industry or change their businesses significantly in light of new regulations and clients’ higher expectations. For example, 30% of advisors surveyed said they’re planning to sell their books of business, merge with another firm or leave the industry altogether over the next three years. Another 32% said they would have to stop working with clients who have smaller accounts.

Yet, advisors are hopeful that technology will be able to fill any potential advice gap that those potential changes would create as 74% of advisors surveyed said automated platforms, such as robo-advisors, could provide some investors with better access to advice.

The results of the poll were gathered from 150 Canadian advisors surveyed in July. The survey is part of a larger global study of 2,550 advisors in 15 countries and territories in Asia, Europe, Latin America, the U.K. and the Americas.

Source: Investment Executive