The U.S. Department of Labor’s Conflict of Interest Rule is one of a large number of reforms introduced globally with the aim of more closely aligning the financial industry to the best interests of investors. Many of these measures focus first on fees and transparency, but underneath each is clear direction that demands that investment professionals get to know their client better than ever before.

Potential volatility makes knowing investors’ limits essential. Risk profiling is a long accepted practice for getting to know how clients think, but traditional methods may only scratch the surface. Our investor research shows that individuals can present conflicting views that could make it difficult to get an accurate read on where they really stand.

Do return expectations meet risk tolerances?
Across the U.S. we found that individual investors have return expectations of 8.5% above inflation on average. Assume a 3% rate of annual inflation as seen over the past 50 years, and what investors may actually expect is closer to 12% annual returns.1 Investing to achieve this level of return, even if it’s attainable, would likely mean relying heavily on equities. But many investors say they are not ready to take on the risk exposures that equities present.

Among the same group of investors who told us they expect near double-digit returns, 73% describe themselves as “cautious” rather than “aggressive,” and six in ten say protecting capital is more important than pursuing returns.2 These traits do not fit the description of an individual ready to take on a volatile market in hopes of high returns.

A more pragmatic view from advisors
If investors sound optimistic about returns, we’ve found that U.S. advisors are more pragmatic. Those included in our Advisor survey tell us returns of 5.9% above inflation are a more realistic expectation for investors.2 Herein lies the crux of the challenge for advisors. They say their ability to get an accurate picture of clients’ risk tolerances and return expectations is important to their business success, but clients may not actually recognize the risks associated with their own expectations.

Clear communication is essential
Given the potential for volatile markets ahead, it’s important to focus on relationships. While investors say their top reason for leaving an advisor is investment performance, a large number say retention comes down to good communication skills and clarity of purpose. While there’s only so much an advisor can do to control market performance, there’s plenty they can do to control clients’ investment experience and it generally begins with setting the right expectations.


1 Natixis 2016 Global Survey of Individual Investors – Natixis Global Asset Management commissioned CoreData Research to conduct a global study of individual investors, with the goal of understanding their views on the markets, investing and measuring their progress toward financial goals. Data was gathered throughout February and March 2016. The study included 7,100 investors in 22 countries including 750 in the U.S.

2 Natixis 2016 Global Survey of Financial Advisors – Natixis Global Asset Management commissioned CoreData Research to conduct the study of advisors in 15 countries in order to assess advisor attitudes on a range of topics such as business growth, portfolio construction (including volatility, risk and income), client service, advice and investment challenges. An online quantitative survey was developed and hosted by CoreData Research. A sample of 2,550 advisors in 15 countries including 300 in the U.S. was obtained for the purposes of this study. Results are analyzed with segmentation from a range of perspectives.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

Diversification does not guarantee a profit or protect against a loss.

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