Our fifth annual Global Survey of Financial Advisors1 finds that financial advisors globally anticipate business growth of 9.4% over the next 12 months. But less than half say that market action will drive an increase in assets under management. Instead, eight in ten advisors say gaining new clients and earning a larger share of assets from current clients will be their critical growth factors.
As they build their practice, advisors will need to answer three critical questions about managing their business, managing clients and managing investments.
1. How will I adapt my business to meet new regulatory requirements?
From client therapist, to investment pragmatist, to marketing strategist, we’ve written in the past about advisors needing to fill multiple roles. Faced with heightened regulation and increased fee pressures, many advisors are focusing in on another critical role: business owner.
New regulations such as the Department of Labor’s fidiuciary rule2 are leading many advisors to look closely at how to structure their practice. Seven in ten say they will make at least some changes in their business model as a result of new regulations, and close to half (48%) say they will need to change their business model in order to sustain business growth.
The pressure to adapt is great and some advisors are not ready to go it alone. Many are looking at options beyond managing fees and trimming client rosters. More than a quarter (27%) of the advisors we surveyed in the U.S. say they are considering selling their book, merging with another firm, retiring, or getting out of the business altogether.
Advisors across the globe are facing up to new regulations. For many it can be an opportunity to reassess their practice and refine their value proposition. It can mean honing your area of expertise, such as focusing on entrepreneurs or aligning more closely with other professionals to offer a full-service financial services practice, or it could mean leveraging your reputation as a teacher to focus more closely on client education.
2. How do I help clients establish realistic return expectations?
Managing clients is another area advisors are giving considerable attention in 2016. While they say making emotional decisions is the biggest mistake individual investors can make, 86% of advisors also say their ability to manage clients’ return expectations is an important success factor for their business. From what we’ve seen, advisors have their work cut out for them.
Individual investors in the U.S. are outwardly optimistic, saying they expect returns of 8.5% above inflation.3 This is in direct conflict with what they tell us about risk: More than eight in ten investors tell us they value safety over investment performance and nearly three-quarters tell us they are cautious investors. Advisors are more pragmatic in their views on returns, saying clients can realistically expect returns of 5.9% above inflation.
Bridging this expectations gap of 44% is critical. Generally, the conversation can begin by explaining why clients will need to temper expectations. It includes an honest discussion of the level of risk that can be assumed in pursuing what is in essence a double-digit return goal – based on historic levels of inflation.
Given recent bouts of market volatility, clients are likely to find it more meaningful to put risk first in the discussion. It starts by discussing the risks presented by the equity markets and asking how confident clients are in their ability to weather potential volatility. With this kind of honest discussion, clients may realize that they cannot stomach the same level of risk that their expectations may belie.
3. How will I show clients the difference between price and value?
In recent years we’ve seen investor preference for lower-cost passive investments growing. But almost seven in ten advisors tell us these low-cost options give clients a false sense of security, and another 66% say investors are not aware of the inherent risks of passive.
Results from our 2016 Investor Survey4 show that advisors have good reason to be worried. While individuals realize that index funds can give them market returns at a lower fee, many extend greater benefits to passive. A large majority of investors say index funds are less risky and will protect them from a market loss.
These misconceptions add up to an important teachable moment: helping individuals to understand that by their very nature, passive strategies offer no built-in risk management. Clients should understand that while they may get market returns when the index is up, they are also exposed to market losses when the index is down. Investors holding index funds at the start of 2016 were likely to have felt the sting of one of the worst January sell-offs in history. The lesson learned: You get what you pay for.
Advisors themselves report that they implement passive strategies in client portfolios, but their rationale is clear. They tell us they mainly use passive to help manage fees and gain access to efficient asset classes. Explaining how and when you recommend the use of passive can be an effective way of demonstrating the value that you, an investment professional, bring to the table.
Putting it all together
Success for many financial advisors in 2016 may really be a balancing act. Your ability to grow a successful practice is likely to be linked directly to your ability to adapt to new regulations, to lead clients away from emotional decisions, and to make sound, strategic decisions in how you select investments for client portfolios. To see how advisors around the globe are facing up to these challenges, download the full report from our 2016 Global Survey of Financial Advisors.
1 Natixis Global Asset Management, Global Survey of Financial Advisors conducted by CoreData Research, July 2016. Survey included 2,550 financial advisors in 15 countries.
2 Under the Department of Labor’s fiduciary rule, financial advisors providing investment advice for retirement accounts will now be subject to a fiduciary standard requiring them to put the client’s interests first. This differs from the previous suitability standard, which required that investment recommendations be made on a reasonable basis based on information provided by the customer.
3 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February-March 2016. Survey included 7,100 investors from 22 countries, 750 of whom are U.S. investors.
4 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February-March 2016. Survey included 7,100 investors from 22 countries.
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.
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