Client Service August 25, 2020

Advisers’ New Challenge Is Helping Investors Navigate Volatility

On the heels of a 12-year bull market, investors unrealistically still expect outsized returns, Natixis finds.

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In its 2020 Global Survey of Financial Professionals, Natixis took a look at investors’ performance expectations and what advisers foresee will happen in the markets. Without question, according to Natixis, investors still expect outsized returns, and advisers who can temper those expectations and develop a strategy to help their clients weather market volatility will succeed.

The survey found that financial professionals expect that the MSCI World Index will be down 7.3% by the end of 2020 and that the S&P 500 won’t fare much better, declining 7% for the year.

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“As the 2,700 professionals in 16 countries who participated in the 2020 Natixis survey contemplate the reality of the biggest market drawdown since the global financial crisis, they know the road to profitable long-term growth won’t follow the status quo,” Natxis says. One key area that advisers will need to manage, according to the investment firm, is being able to successfully “evaluate and address the expectations of clients struggling with an uncertain world and risky investment landscape.”

Natixis notes that the S&P enjoyed a 12-year bull market in which the average returns were 13% a year. However, in the 2020 survey, only 47% think markets will contribute to their practices’ growth.

“As the first step to growth, advisers will need to shore up current AUM [assets under management] by helping clients overcome emotional reactions to the pandemic market,” Natixis says. Seventy-five percent of professionals say investors forget that the 12-year bull market was unprecedented.

“The evidence in support of professionals’ concern is clear,” Natixis says. “Our own survey data shows a 121% gap between the market returns of 11.7% above inflation clients expect and the 5.3% above inflation professionals say is realistic.”

In the U.S., investors expect returns of 10.9% above inflation, whereas professionals say that is likely to reign in at 6.7%—an expectation gap of 62%.

Making the problem worse, according to Natixis, is that 76% of financial professionals say investors don’t recognize risk until it has already been realized, and 57% say investors don’t understand the risks of the current market.

Natixis also found an expectation gap between what investors think they can handle and what their advisers say they actually can.

Eighty percent of investors say they understand the risks of the current markets, while, as noted above, only 57% of professionals believe that is actually the case.

Sixty percent of investors say they are not focused on short-term returns, but 79% of professionals think that they are.

To manage this discrepancy, professionals believe they will have to do more than helping their clients’ investment performance (47%), Natixis says; they will also need to prevent their clients from making emotional decisions (44%).

Advisers are looking for other revenue streams, specifically, getting to know clients’ next generation heirs (43%) and offering services beyond investing (27%).

In order to realistically manage clients’ expectations, Natixis says, client communication is critical. The majority of advisers agree, with 54% saying frequent client communication is a critical element to growing client relationships. Forty-one percent say regularly reviewing clients’ financial plans is a must, and 50% say it is important to get to know clients personally.

“Financial professionals know well what’s at stake,” Natixis says. “In their assessment of why clients leave professionals, investment performance is near the bottom of the list. Instead, they rank not listening to the needs of clients (60%) and the failure to meet client expectations on communications (58%) as the two top reasons for losing clients.”

The Markets August 24, 2020

More Employers Including ESG Investments in Executive Compensation, Retirement Programs

Surveys find plan sponsors and participants have a growing interest in environmental, social and governance issues.

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A survey by Willis Towers Watson found that while only 27% of employers currently include environmental, social and governance (ESG) investments in their executive compensation programs, that is slated to double to 54% in the next three years.

“Pressure has been mounting for companies to demonstrate a commitment to ESG,” says Heather Marshall, senior director, executive compensation, Willis Towers Watson. “Some investors are becoming increasingly vocal on environmental issues, while the pandemic and social unrest are accelerating the focus on social issues by many boards. This is driving companies to consider incentive plan metrics that link variable pay outcomes to the successful execution of ESG aspects of their business strategies.”

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Interest in ESG is starting at the corporate level, as more companies are learning that applying these principles to how a company is run can lead to higher profits over the long term, Charles Nelson, chief executive officer of retirement and employee benefits at Voya, tells PLANADVISER. “On a global basis, you see the data quite clearly spell this out,” Nelson says. “We are bit behind in the U.S.”

After considering their bottom-line profits, companies are turning to ESG in their retirement and executive compensation plans, he says. “It would be inconsistent for them to run their business one way and to treat their employees differently in their benefits program.” Nelson says 30% of Voya’s clients are offering ESG investments in their retirement plans, either as a standalone investment or as an element of a target-date fund (TDF).

“This is only a small percentage of total assets, but we think that will grow over time, particularly as a recent survey we did found that 76% of consumers think it is important to apply ESG to workplace benefits plans,” Nelson says.

Employers embracing ESG in their retirement plan that also have executive compensation plans are offering these types of investments in the latter, as well, as investment lineups in executive compensation plans often mirror retirement plans, Nelson says. “Academic research has found that investors believe ESG will create greater value over the long term, so they tend to be more patient about this kind of investing, Nelson says.

Don Delves, head of the executive pay consulting group at Willis Towers Watson, says his firm analyzed the proxy statements of S&P 500 companies a year ago to look for any measure of ESG investing in their executive pay programs. Willis Towers Watson found that 51% of these companies offered some type of ESG investment in their executive compensation programs.

Granted, Delves says, some of these are “soft” types of ESG investments, such as employee safety or customer satisfaction, but Willis Towers Watson researchers thought that the prevalence of ESG was interesting. The company is currently in the process of its 2020 analysis, which it will issue within the next few weeks, he says.

Delves says that while investors have been interested in governance issues “for decades,” environmental and social issues have been gaining traction only in the past few years. He points out that these are three very different issues. What appears to be of the greatest interest to investors, he says, is “human capital management. They are asking companies to be able to tell their human capital story, such as safe working conditions.”

Underscoring the importance of this, he continues, “about a year ago, the SEC [Securities and Exchange Commission] came out and said it would like companies to do a better job of reporting on human capital and other intangibles. We know that 70% of companies’ value is comprised of intangibles, and part of that is human capital. So, in essence, the SEC was asking companies to provide more poignant information about such things as inclusion and diversity, employee turnover, employee development and succession planning.”

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