France based asset management firm Natixis Global Asset Management surveyed 2,550 financial professionals globally in July 2016 to understand the contemporary attitudes and needs of investors and advisers to the financial services industry. Advisors from the Americas, Asia, Europe, and the Middle East participated in the survey. While the survey did not include views of Indian investors and advisers, the results are universal in nature.
As a professional managing a book of business with hundreds of clients, each financial adviser has a unique view into the day-to-day behaviors of individual investors. Here are investors top 5 mistakes identified by advisers:
Making emotional decisions is the number-one investor mistake. Next, they point to unrealistic return expectations, focusing too much on short-term noise, followed by failing to have a plan, and not understanding their own risk tolerance. It is these human factors that may hurt investors most, and they may not recognize the impact of their behaviors.
The survey found that few investors recognize that they could be making the very same mistake advisers say can hurt them most. For example, more than half of the investors surveyed (56%) say they struggle with making emotional decisions when market shocks occur, but only 29% believed they could have a better chance of succeeding if they were able to stop making emotional decisions. Compounding this problem is the large number of investors who may be making two more of the mistakes cited by advisers: not setting goals and not making plans. Globally, the survey found that 51% of investors say they have no clear financial goals and 63% report that they have no financial plans.
Getting at the goals
Advisory firms across the globe recognize the need to get investors focused on personal goals and have introduced models that are more likely to resemble those from financial planners than traditional investment management. Investors appear to be open to a move toward goals-based investing in concept, but advisers realize that there are some significant pitfalls in its execution.
Despite their lack of clear goals and well-defined financial plans, investors say they are open to a goals-focused approach that could get them off a market performance treadmill. More than seven in ten investors said they would be happy to achieve their goals over a one-year period even if it meant they underperformed the market. While this is good news, advisers understand how human nature and investor behavior can thwart goals-based investing efforts.
From the adviser’s perspective, this shift from looking to the market as a benchmark to focusing on personal goals leaves investors open to emotional decisions. The top problem according to 59% of advisers is managing clients’ return expectations. This could be particularly problematic when markets are on the upswing and investors do not capture the same level of returns. On the downside, advisers see the second biggest problem: clients’ ability to maintain focus in volatile markets (48%). Beyond client behavior, the next set of considerations is related to their ability to effectively implement goals-based investments on behalf of their clients.
On their side of the equation, advisers believe it is difficult to translate goals-based plans into investment strategy (31%). Some worry about the accuracy of current risk profiling tools, while others believe that personalized performance reporting and benchmarking may be lacking. Among all of the issues that Natixis asked advisers about on this subject, they are least worried about setting a fee for planning services.
Edited excerpts from 2016 global survey of financial advisers.