Clients Focus on Short-Term Portfolio Performance

Most advisers and their clients have different opinions on how a portfolio’s performance should be measured, according to Russell Investments’ latest quarterly survey of U.S. financial advisers.

According to Russell Investments’ Financial Professional Outlook (FPO), the majority of advisers (53%) indicated that they measure performance in terms of the portfolio’s progress toward meeting the client’s investing goals, but only 29% say clients also measure performance this way.

Advisers said that clients typically gauge portfolio performance by short-term factors such as one-year returns (54%), the portfolio’s absolute return (49%) and portfolio volatility (41%).

“With the market volatility seen in 2011, it’s not surprising that individual investors are fixated on one-year returns and portfolio volatility. But there is little actionable value in these short-term, backward-looking measures for the individual investor,” said Frank Pape, director of consulting services for Russell’s U.S. adviser-sold business.

Clients Not Optimistic About Market, Want to Discuss Market Volatility  

According to the latest FPO survey, advisers were optimistic about the capital markets over the next three years (78%), but reported their clients were not. Only 18% of advisers believed that clients were optimistic about the markets. This is higher than the 9% recorded in the December iteration of the FPO survey, but the overall level of perceived optimism among clients remains below the levels of early 2011.

With respect to assumptions for portfolio returns in 2012, advisers said that on average they expect a 3.9% return for a conservative portfolio, 5.9% for a balanced portfolio and 8.3% for an aggressive portfolio. Despite the overall lack of market optimism amongst clients, advisers say clients’ return expectations are on par and even slightly higher than their own: 4.3% for a conservative portfolio, 6.5% for a balanced portfolio and 9.3% for an aggressive portfolio.

In a continuation of a trend seen in previous iterations of the FPO survey, advisers and their clients continue to hold different priorities about discussion items. When asked to pinpoint the main topics of conversations they initiated with clients over the past three months, advisers identified portfolio rebalancing/shifting portfolio asset allocation as the most common subject (41%), but only 11% say clients raised this topic themselves.

Additional topics introduced to clients by advisers included portfolio performance (34%) and running out of money in retirement (30%), while advisers say clients most often initiated conversations around market volatility (56%), concerns with government policy (49%), global events (39%) and portfolio performance (39%).

The current iteration of the FPO includes responses from nearly 600 financial advisers working in 141 national, regional and independent advisory firms nationwide.