Market volatility is the leading challenge to the growth of advisers’ businesses, according to findings in the Natixis 2015 Financial Advisor Survey, sparking them to use investment strategies that can provide stability and balance risk in up and down markets. More than three-quarters of advisers (77%) agree that traditional portfolio allocation—the classic 60% stocks/40% bonds—is not the best way to pursue return and manage investment risk for clients.
About two-thirds (65%) say traditional diversification and portfolio construction techniques should be replaced with new approaches to achieve results. A majority of advisers (81%) are employing alternatives—hedge funds, private equity, commodities or long-short funds—in client portfolios. Most often, with 62% of advisers employing the strategy, alternatives are used for investors with assets of $1 million to $4 million.
Active strategies have the lead, with advisers investing 65% of clients’ money in active strategies and 35% in passive assets, such as index funds or exchange-traded funds (ETFs). When they do choose passive investments, advisers cite the following reasons: simplified access to efficient asset classes (62%), low fees (62%) and higher performance after fees (38%). But actively managed assets trump passive, they say, for taking advantage of short-term market movements (74%), providing risk-adjusted returns (67%) and generating stable income (62%).NEXT: The biggest loser, in the face of an interest-rate hike.
Advisers surveyed believe a rise in interest rates will affect capital markets negatively, with bond markets taking the biggest hit (58%), followed by stock values (48%). In the face of rising rates, the top portfolio adjustments advisers say they’ll recommend to clients are to shorten the duration of clients’ bond portfolios as interest rates rise (65%), reduce bond holdings (42%), raise stock allocations (38%) and increase allocations to alternative assets (34%).
The robo-advice model represents real competition, according to advisers surveyed by Natixis, and they acknowledge it will encourage them to step up their game. More than half (56%) say the emergence of so-called "robo-advice" will have a long-term effect on the industry, and 46% say robo-advice is a threat to their business models. But more than two-thirds (70%) say the rise of automated, online advice will improve traditional advisers’ performance, requiring them to work harder to demonstrate their value to their clients.
The competitive advantage? Offering personal advice. Eighty percent of advisers believe robo-advice cannot deliver the tactical asset allocation needed, especially during down markets, and 91% say clients who use robo-advice will cash out during volatile times because they won’t get the individual attention financial advisers can deliver. But robo-advice could have a place in an adviser’s practice, and 54% say they believe they could compete better and cater to less affluent clients by introducing a robo-advice arm to their business.
Typical investors are making seven major financial mistakes, advisers say, from making emotional investment decisions, to focusing on short-term market noise and changes, to failing to have a financial plan.
Natixis conducted an online survey in June of 300 financial advisers in the United States, who collectively oversee a total of nearly $11 billion in client assets, as part of a larger global study of 2,400 advisers in 14 countries and territories in Asia, Europe, Latin America, the United Kingdom and the Americas.