For the majority of advisers, risk mitigation is more crucial than the need to outperform a benchmark, according to a white paper by Invesco. Similar to last year, 40% of RIAs indicate their predominant philosophy when managing clients’ assets is to manage risk, while fewer than one in four RIAs said their primary approach is to exceed a benchmark, deliver enhanced performance or deliver absolute return.
While risk management continues to be important, this year’s results indicate that concerns regarding risk may be hitting a plateau. A year ago, 61% of RIAs reported that their level of concern with managing risk was “very high.” This year, 44% of RIAs had a similar attitude.
The lower level of concern among RIAs may be because of similar attitude shifts among their clients—16% of RIAs feel that their clients became less risk averse over the past 12 months.
When listing their clients’ top financial concerns, RIAs emphasized market volatility (60%), preservation of capital (59%), retirement planning (47%), downside protection (44%) and generating income (40%). These far exceeded wealth accumulation at 22%.
Although risk concerns may have reached their peak, the study results suggest RIAs still think risk aversion is at high levels. Thirty-eight percent said their focus on mitigating risk will increase in the next 12 months, which may reflect uncertainty with current economic policy and outlook for taxes.
Creating a blended portfolio of actively managed investments and exchange-traded funds (ETFs) is the most popular investment strategy used by RIAs to mitigate risk in client portfolios (62%). RIAs believe this investment approach adds a layer of risk insulation while allowing them to add value for their clients.
In addition, 56% of respondents said they are applying a more conservative asset allocation strategy to help mitigate risk in client portfolios; 51% are using alternative products/strategies; 45% frequently rebalance client portfolios; and 31% are using primarily passive investments like ETFs to mitigate client risk.
Alternatives are the most likely asset class to experience growth in the coming year, with RIAs turning to commodities and real estate to reduce correlations with traditional asset classes. With that said, some RIAs are skeptical about the cost of these products and their perceived lack of transparency and liquidity.
The Invesco Registered Investment Adviser (RIA) Division partnered with Cogent Research for this second annual study, conducted between August and September 2012. Cogent conducted the online, blind survey of RIAs across the U.S. with an average of $478 million in client assets.