Taking the Pulse of Affluent Advisory Clients

More affluent clients of advisory firms often seek out the latest services and strategies—making the group a helpful barometer of investment industry trends and challenges. 

Discussing a recent AMG Funds survey of affluent Americans with $250,000 in investable assets, Bill Finnegan, the firm’s chief marketing officer, says he hopes investors’ behavior in 2016 will prove to be as positive as their stated intentions.

“Despite the fact that the weeks leading up to our more recent survey brought significant turmoil in the broad equity markets, as represented by the S&P 500 Index falling by 12.2% at one point, investors have not widely hit the eject button on equities,” Finnegan tells PLANADVISER. Some assets moved out of the markets after a difficult January and February, he notes, but the outflows have been more muted than many expected so far this year, especially as equity performance turned more positive in March.

“It’s still too soon to say what the first quarter will look like in terms of inflows and redemptions, but I think it’s fair to expect that investors will prove pretty resilient,” Finnegan says. “Nearly everyone surveyed, 96%, said they have accepted the fact that ‘moderate’ to ‘very high’ equity market volatility will be experienced in the years ahead. We just have to hope that their actions match their intentions.”

While affluent investors are concerned about short-term swings in equity pricing, they feel some optimism on the fundamentals, Finnegan adds. For example, a majority of those surveyed believe interest rates will rise (64%) and that inflation will increase (54%). While 58% agree that “large swings in the stock market make me very uncomfortable,” just about half (48%) say they accept that “there is no good way to significantly reduce volatility in a portfolio without compromising growth.”

There’s obviously still room for improvement in these stats, Finnegan says, but given the very small number of respondents—just 7%—who indicated they would “sell some or all equity exposure in response to a 20% drop in the market,” investors are apparently starting to absorb some of the lessons advisers have been pushing since the financial crisis—namely, avoiding buying high and selling low.

“Other findings from the survey should serve as a warning to advisers,” Finnegan warns. “Even affluent and engaged clients carry misconceptions and misunderstanding about investing concepts. We found there was some disagreement, for example, as to what it mean to be diversified in today’s markets.”

According to the survey, nearly 50% of investors believe owning a broad range of stocks is enough to provide adequate diversification for a portfolio. “As an adviser, it is important to help clients understand that diversification extends beyond simply investing in a broad range of stocks,” Finnegan explains. “Low correlation is the key to diversification and investors should rely on a variety of asset classes and investment strategies.”

NEXT: Other common misconceptions 

Another commonly used phrase that is widely misunderstood is “alternatives,” the survey results show.

“Just one-third of advised investors owning alternatives understood that they are good for minimizing downside risk,” Finnegan explains. “Nearly two-thirds of all respondents expressed a lack of understanding about alternative investing—and only 10% said they feel highly confident in selecting alternatives on their own.”

For that reason, he agrees with other defined contribution (DC) retirement plan industry commentators that the value of alternatives is best delivered in a pre-packaged and professionally managed context.

There is even some confusion about concepts most advisers will take to be very basic: “What does it mean to be a long-term investor?” On average, Finnegan says, investors defined a long-term investment as nine years, but to 21% of investors, a long-term investment is less than five years. Others cited other time frames as “long-term,” though few pointed to a decade or longer.

“This is discouraging because we know also know that investors tend to hold a given mutual fund, on average, for just a handful of years,” Finnegan explains. “One will always need to make adjustments even to a long-term portfolio, but it is important to set a strategy and stick to it, at least over a full market cycle.”

Also discouraging, Finnegan observes one quarter of all respondents “indicated they would need access to a significant portion of their investments as cash within the next five years,” implying lower growth prospects and other inefficiencies. “This seems consistent with other third-party studies, which show that mutual fund retention rates range between four to five years for equities—and even shorter for bonds.”

Finnegan concludes that, “even for engaged and affluent clients, it is important to make sure you are on the same page with regard to investment horizon, diversification and the other cornerstones of retirement readiness.”