Affluent Investors’ Confidence Slowly Rebounds, but Loyalty to Advisors in Flux

Northstar/Sullivan study finds great anxiety around ability to meet financial and retirement goals

Many affluent investors are still risk averse and not confident about reaching their financial goals despite the significant rise in equity markets since September 2008, according to a new survey by Northstar/Sullivan.  

The study found that although trust in financial institutions and advisors is on the rise, a growing number of investors appear willing to leave their current financial advisors and move their assets elsewhere. 

The second edition of the Northstar/Sullivan Rebuilding Investor Trust study sampled 1,290 individual U.S. investors with investable assets of at least $100,000; 15% of those polled had investable assets exceeding $1 million.

The comprehensive market research study was conducted to help financial services companies better understand the mindset of today’s affluent investors, Barbara Sullivan, managing partner of Sullivan, said in a telephone interview with AdvisorOne. Four risk-tolerance themes emerged from the study, she said, one of them a surprise.

Investors are becoming less conservative, but have a long way to go to reach prerecession levels. Whereas 22% of people in 2008 perceived themselves as somewhat or very conservative, in 2009 when the first study was conducted, it jumped to 54%. It then fell back to 41% in the most recent study.

Investors become more conservative as they grow older. Among four age groups surveyed, the youngest people were the least conservative and the oldest people the most. Specifically: 26% aged 25 to 45 viewed themselves as somewhat or very conservative up to 52% of people aged 65 and older.

Women are more conservative than men. Fifty percent of women saw themselves as somewhat or very conservative, versus 34% of men.

And in something of a surprise, according to Sullivan,attitude toward risk varies with marital status. Divorced and widowed people were more conservative than single or married (or partnered) people. This was true for both men and women. Sullivan said there probably was some age overlay in this finding, but the study turned up insufficient data to break out the age differences.

The survey findings affect investments in two major ways, Sullivan said.

One is unexpected. “Although people are becoming less conservative, they have buckets of money in cash, and most surprising, those with the most money in cash are the youngest people,” she said. Forty-four percent of those surveyed aged 25 to 45 have at least half their assets in cash, compared with only 25% for people aged 65 and older who have half or more of their assets in cash.

Sullivan said this was surprising because one would expect younger people who are less risk averse to have more money in noncash assets, yet they have the most money in cash. Her analysis: “We know that the people who don’t have an investor relationship are much more apt to have more money in cash. Twenty percent of

people who don’t have an advisor relationship have three-quarters or more of their entire portfolio in cash. That’s an incredible amount of money.”

In comparison, only 7% of people with an advisor have three-quarters or more of their money in cash. There are gender differences as well. Thirty-eight percent of women have half or more of their portfolios in cash, compared with 25% of men.

The second effect on investments was less surprising, Sullivan said. “Retirement remains the number one concern.” Only one-fifth of those polled said they were very confident about meeting their financial and retirement goals. Among those with less confidence, 84% said they were uncertain about where things are going, and 90% were concerned about being able to retire comfortably.

“The top things they’re looking for are a big-picture financial plan and an estate plan,” Sullivan said. “Of all products and services, those are the two that have the greatest demand among people who haven’t retired.”

Investor loyalty at risk

The survey found that firms are at greatest risk of losing investors who are least impressed with their service: women, younger investors and those with assets in the $250,000 to $500,000 range.

Sullivan said that of people considering moving their assets away from a current advisor in the next year, 40% work with a bank advisor, and only 20% work with an investment advisor/firm advisor. She said satisfaction is least strong among regional and national banks, where service tends to be less personalized.

“People want to feel their investor is there for them,” she noted. “Regular contact does seem to mitigate the desire to move assets. Forty-two percent of investors with a once-a-year advisor contact might move assets in the next year, versus 22% to 36% of those with more frequent contact. And it gets even worse, depending on the performance of their portfolio.”

Sullivan said the study is “actionable” for financial advisory firms, and laid out five main conclusions:

  • The role of the advisor is becoming even more important as people become less worried and angry, less conservative. This is influencing portfolio selection and asset allocation.
  • It is important for advisors to think about and have dialogue around a comprehensive financial plan and potentially an estate plan if they are a full-service firm—not just talk about immediate asset allocation, but the future.
  • With investors’ concern about retirement in mind, advisors should emphasize the long-term nature of the relationship.
  • An opportunity exists to focus on the underserved population, primarily younger people who don’t have an advisor relationship and aren’t making good decisions.
  •  Honest, straightforward and transparent communications are of utmost importance.
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