The Markets May 23, 2018

Advisers See Investor Reaction to Market Volatility as a Challenge

Besides providing investment advice, 88% of advisers think they need to guide clients through emotional decisions.

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Nearly half of financial professionals (46%)—wirehouse advisers, registered investment advisers (RIAs) and independent broker-dealers—say their clients are reacting emotionally to the recent market volatility, according to a survey by Natixis Investment Managers. Eighty-two percent say that the prolonged bull market has made investors complacent about risk, and they fear that investors will panic in the face of continued volatility.

While these financial professionals have the goal of growing their assets by 14% over the next 12 months, they see a number of roadblocks that could dampen investment returns: geopolitical events (68%), interest rate increases (66%), rising volatility (57%), asset bubbles (54%) the low yield environment (47%), unwinding of quantitative easing (46%) and regulation (43%).

Seventy-four percent say that an increase in central bank short-term interest rates will make the bond market volatile and adversely impact the housing market (74%), the credit market (65%), overall market volatility (61%) and stock values (52%).

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Asked about risks to portfolios, the financial professionals cite interest rate hikes (59%), asset-price volatility spikes (55%) and inflation (40%). Seventy-four percent think the crypto-currency bubble will burst in 2018 and that bubbles exist as well in the bond market (25%), real estate (24%), the tech sector (21%) and the stock market (18%).

“After an exceptional year in 2017, volatility is back, and investors are feeling as uncertain as the markets,” says David Giunta, CEO of the U.S. and Canada at Natixis Investment Managers. “Our research shows investors often make decisions based on emotions, so it’s more important than ever for advisers to fortify close relationships with their clients to help them put their emotions aside, and consider active portfolio design approaches that could be better suited to weather today’s markets.”

Eighty-three percent of the advisers say in light of the market volatility, active management is favored; sixty-six percent of the assets they manage are devoted to active management, and 34% to passive. However, within three years, they expect 57% of the assets they manage to be actively managed, and 43% to be passively managed. Seventy-three percent say passive strategies are used for their lower costs, but 74% do not think investors are aware of the risks of passive investing. In fact, 73% say investors have a false sense of security about passive investing.

Eighty percent are recommending alternative investments—including real estate/REITS (50%), real assets (29%), commodities (28%), infrastructure (27%) and hedge fund strategies (24%).

For diversification, advisers are turning to multi-alternative choices (47%) and global tactical asset allocation (47%). To provide stable income, their choices are option writing (29%) and real estate (20%). To manage volatility risk, they are using market-neutral funds (32%) and long-short equity funds (25%). To hedge against inflation, 12% of advisers are investing in real estate and managed futures. To mitigate risk, their top choices are market-neutral funds (32%), long-short equity funds (20%) and long-short credit (19%).

Besides providing investment advice, 88% of advisers think they need to guide clients through emotional decisions, provide ongoing financial education (71%), provide guidance on identifying and achieving life goals (70%), navigate life events (66%) and help them mediate family financial affairs (41%).

CoreData Research conducted the survey of 2,775 financial professionals in 16 countries for Natixis. In the U.S., 300 financial professionals were surveyed.

Data & Research May 23, 2018

Older Americans Have Learned to Balance Income and Spending

A survey from the Society of Actuaries suggests that if retirees are able to survive financially to age 85, concerns about finances drop significantly.

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Seventy-eight percent of retirees ages 85 and older say they are at least somewhat secure in their finances, with 33% reporting they are very secure, according to a Society of Actuaries (SOA) survey.

By comparison, the SOA’s ninth biennial Risks and Process of Retirement Survey identified an overall increase in the level of concern for finances among respondents ages 40 to 80. A significant number of retirees and pre-retirees reported in that survey that they feel unprepared to navigate financial shocks and unexpected expenses.

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The new survey suggests that if retirees are able to survive financially to age 85, concerns about finances drop significantly.

Most of those ages 85 and over are comfortable with their finances for a couple of reasons: They have a shorter time horizon than at an earlier stage of retirement and no longer think about longevity as a big factor in their finances, and they also tend to be frugal and don’t have a large amount of expense to cover. “These older Americans have learned to balance income and spending in the short run, and this has become integral to their financial management process,” the survey report says.

Almost all respondents (96%) receive Social Security income and about half (53%) receive income from a pension. The SOA found that even though most have incomes of less than $2,000 per month, they usually do not spend more than their income. Most report spending less now than they did in the past, especially on travel and entertainment. And, while most have far fewer assets than might be recommended, they use these assets as an emergency fund that they don’t tap often at their current age except to take the required minimum distribution, which they don’t necessarily spend.

Those 85 and older do not often report that financial shocks, such as increased utility bills (23%) home repairs (13%), medical expenses (19%), car repairs (5%), or dental bills (13%), have a major impact on their finances.  In comparison, 61% of pre-retirees and 47% of retirees feel unprepared for expenses in retirement that could deplete their assets, based on the previous SOA survey of consumers ages 45 to 80.

Eighty-six percent of retirees ages 85 and older report receiving no financial aid support from family, although 32% receive support with physical activities such as transportation, meals or household chores.

While the SOA did find greater financial security among older retirees, one thing it found lacking was preparation for long-term care needs. Despite the relatively modest asset levels of the population sampled, a significant number feel that they can save for long-term care by cutting back on spending and putting money away. “Some of the unrealistic financial expectations of this population may stem from a lack of acceptance of what long-term care may involve some day… A significant number of those ages 85 and over receive some type of physical support from their children. The in-depth interviews suggest that many understand that the level of support will have to increase as they age—they simply don’t understand how extensive the help needed would be in the event of a major physical or mental decline. While most people would prefer to be cared for at home, among adult children who have parents requiring care, most of those parents ended up in assisted living or a nursing home. It seems that the care pieced together by aides/home health workers and children eventually falls apart. Thus, while most of those 85 and over can manage financially while healthy, they are not prepared for the financial burden of intensive care,” the SOA says.

But, the findings suggest hope for future generations. More than one-quarter of adult children say that caring for a parent has taught them to better prepare financially.

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