TORONTO--(BUSINESS WIRE)--Financial advisors are caught between two rocks and a hard place: clients’ mismatched performance expectations, an investing environment dominated by heightened fee sensitivity, and new regulations expected to increase costs and limit growth options, according to a study published today by Natixis Global Asset Management Canada.
The study found that advisors are under cost and regulatory pressure. As a result, many have yielded to a demand for low-cost passive investments, but 69% worry that investors don’t know about or appreciate the downside market risks associated with passively managed funds. A significant majority says market complexity and volatility lends itself to active management and professional guidance. Yet it’s harder for advisors to satisfy clients, comply with new regulations and manage a thriving practice on their own. The pressure on advisors may compel many to reinvent their businesses or exit the industry entirely.
Natixis surveyed 150 Canadian financial advisors and found:
- Over the next three years, 30% are planning a dramatic change by selling their book of business, merging with another firm, leaving the financial industry altogether or retiring.
- Nearly a third (32%) say they will disengage with smaller clients due to new regulations.
- 73% say that meeting strict regulatory and disclosure requirements is the biggest challenge to the growth of their business.
Natixis also found that managing investors’ performance expectations is a top priority for advisors, especially given that failing to do so is the primary reason investors have said they leave their advisors. Except that investors expect an average annual return of 9.3%1 above inflation, fully 94% higher than advisors say is realistic in the current market. That’s a problem, says Natixis, for an industry where dialogue between clients and their advisors has been disproportionately focused on market performance, rather than on risk management and investor goals and behavior. In fact, 91% of advisors say their success depends on gaining a more accurate picture of their clients’ risk tolerance.
“The challenges facing financial advisors are tougher than ever, as they are asked to do more with less in an environment that seems to put low fees ahead of all other considerations, including risk management,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “We applaud the efforts of financial advisors to understand their clients’ risk tolerance and financial goals and tailor their portfolios accordingly. Low cost does not always equate to good value, 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.”
Advisors surveyed agree that active investments are a stronger choice than passive for most objectives, including generating alpha, providing risk-adjusted returns, taking advantage of short-term market movements, and gaining access to emerging markets and exposure to uncorrelated assets.
The survey reveals that one of the reasons advisors use passive investments is that clients prefer them. About half (46%) use passive investments because many so-called active portfolios are really “closet indexers,” meaning they closely track market benchmarks. For advisors, the challenge is striking the right balance between clients’ interest in passive investments and the best way to help them achieve their investment goals.
Demonstrating Value Beyond Asset Allocation
Ninety-four percent of advisors say their success depends on their ability to demonstrate value beyond asset allocation and conversations primarily about investment performance. This may be because clients’ progress toward goals can be easily undermined by what advisors say are the three biggest mistakes investors continue to make: letting emotions drive investment decisions, setting unrealistic return expectations and focusing too much on short-term market movements.
Financial advisors say clients are asking for a broader range of services to achieve their goals. More than half (51%) say that, over the past year, clients have asked for help managing volatility. In response, 75% of advisors said that active strategies will play an important role in addressing increased market volatility. Many advisors are using a diverse mix of non-correlated investments to help protect their portfolios and stabilize returns; nearly three-quarters (74%) believe a traditional 60/40 portfolio allocation is no longer the best way to pursue return and manage investment risk for most investors.
Putting investors’ risks and goals first
Nearly all advisors (98%) have now incorporated goals-based planning into their practice and client conversations. This approach shifts the focus from market performance to better understanding clients’ risks, financial goals and personal values as the basis for investing decisions, behavior and return expectations. About one in three advisors (31%) say clients are asking for goals-based planning. While this offers opportunities, it also brings challenges: 62% find it hard to manage clients’ performance expectations when it comes to integrating goals-based planning into their businesses.
Meanwhile, advisors or their teams are managing the majority (62%) of their clients’ discretionary assets themselves. More than a third (38%) of their assets are either in their firm’s model portfolios or managed by external consultants. This is likely to increase, since 5% of advisors say they plan to outsource investment decisions as the result of new regulations.
Time spent on asset allocation and increased client communication leaves little time for advisors to focus on building their practice. They expect to grow by 10%, on average, over the next year; 88% anticipate attracting new clients and 85% expect to draw more assets from existing clients.
“To reach their goals for growth, advisors must overcome significant challenges ranging from new regulations that may limit the clients they serve and the services they offer, to an investment environment dominated by heightened fee sensitivity, to managing in an era of uncertain markets,” said Abe Goenka, CEO of Natixis Global Asset Management Canada. “The environment necessitates that advisors meet these challenges head on and adapt quickly in order to succeed.”
Automated Advice a Positive Development
Advisors believe that a potential advice gap, particularly among younger and low- or middle-income investors, can be addressed in part by new technology-enabled business models or automated advice platforms, also known as robo-advisors.
For the most part, advisors see the automation of professional advice for certain investors as a positive development. The survey found:
- Nearly three-quarters (74%) of advisors believe the automated model provides some investors better access to advice.
- 53% believe a front-end automated advice platform could be a way to improve the efficiency of their own business.
- 82% are not concerned that automated advice will make the traditional, high-touch advisory model obsolete. For instance, they do not think robo-advisors can deliver the tactical asset allocation needed, particularly in down or volatile markets.
Natixis’ 2016 financial advisor research was conducted in July 2016 with 150 financial advisors in Canada. The survey is part of a larger global study of 2,550 advisors in 15 countries and territories in Asia, Europe, Latin America, the United Kingdom and the Americas. For more information, visit http://durableportfolios.com.
About Natixis Global Asset Management, S.A.
Natixis Global Asset Management serves thoughtful investment professionals with more insightful ways to understand and manage risk. Through our Durable Portfolio Construction® approach, we help them construct more strategic portfolios that seek to produce better outcomes in today’s unpredictable markets. We draw from deep investor and industry insights and partner closely with our clients to put objective data behind the discussion.
Natixis is ranked among the world’s largest asset management firms.2 Uniting over 20 specialized investment managers globally ($874.5 billion AUM3), we bring a diverse range of solutions tailored to meet every strategic challenge. From insight to action, Natixis helps our clients better serve their own with more durable portfolios.
Headquartered in Paris and Boston, Natixis Global Asset Management, S.A.’s assets under management totaled $874.5 billion as of June 30, 2016.3 Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include Active Index Advisors;4 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;5 Dorval Finance;6 Emerise;7 Gateway Investment Advisers; H2O Asset Management;6 Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors;4 McDonnell Investment Management; Mirova;6 Natixis Asset Management; Ossiam; Seeyond;8 Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Global Asset Management Private Equity, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Visit ngam.natixis.com for more information.
1 Natixis Global Asset Management’s 2016 Survey of Canadian
2 Cerulli Quantitative Update: Global Markets 2016 ranked Natixis Global Asset Management, S.A. as the 16th largest asset manager in the world based on assets under management ($870.3 billion) as of December 31, 2015.
3 Net asset value as of June 30, 2016. Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.
4 A division of NGAM Advisors, L.P.
5 A brand of DNCA Finance.
6 A subsidiary of Natixis Asset Management.
7 A brand of Natixis Asset Management and Natixis Asset Management Asia Limited, based in Singapore and Paris.
8 A brand of Natixis Asset Management.