November 16, 2011

RIAs Prepare for Lower Risk Tolerance Among Clients

Advisors expect tolerance to remain low for 12 months

RIAs believe market volatility in the past 12 months has made clients more risk averse, according to an Invesco market research study released Wednesday. Only 15% believe clients will become more tolerant in the next year.

It’s not just that clients are more risk averse; 70% of advisors said volatility was their clients’ top concern and 99% said it was in their top three concerns. Accumulating assets barely registered, with just 6% citing it as a top concern.

"This new investment environment and the resulting change in investors' risk tolerance is prompting advisors to re-evaluate how they manage client assets and which methods are most effective in mitigating risk," Andrew Scherer, managing director of Invesco's RIA Division, said in a statement. Forty-five percent of advisors now say managing risk is their top portfolio priority, ahead of wealth preservation, exceeding benchmarks and delivering absolute returns.

One strategy many advisors have adopted, Invesco found, is to combine actively managed products and exchange-traded funds. The report found RIAs believe ETFs will represent on average 22% of client portfolios in the next year and 30% by 2014.

Scherer cautioned that the industry has a long way to go to educate RIAs on the benefits and risks of ETFs in general, and which products are best for their clients’ needs, in particular. "Thirty-nine percent of RIAs say they don't have an above-average understanding of ETFs and 53 percent say don't have a high knowledge level of existing ETF products," he said.

Eileen RomingerOn Oct. 19, Eileen Rominger, director of the Securities and Exchange Commission’s Division of Investment Management, told a Senate panel that the commission would begin reviewing the adequacy of investor disclosure about ETFs, their liquidity and whether they contribute to market volatility.

Others in the industry argue that ETFs do not contribute to market volatility, though. Scott Burns, director of ETF Research at Morningstar, told AdvisorOne that “if the SEC is looking at the same data we are, they won’t find anything.”

Eric Noll, executive vice president of transaction services at NASDAQ OMX, said, “We are seeing no signs that ETFs add to volatility in the market. [There are] other factors in the market that far overwhelm any effect ETFs have” on market volatility. 

Communicating strategies that help manage risk to their clients is another challenge advisors are struggling with, Scherer said. Just 55% say they are very confident in their ability to explain complex investment principles to their clients.

"While 83 percent of RIAs are using tools developed internally to help guide those discussions, 83 percent also have an interest in seeking guidance from trusted investment management firms on this topic," Scherer said.

For more on risk tolerance, read Olivia Mellan's article from the October issue of Investment Advisor in which she plumbs the risk-wise mind of Geoff Davey of FinaMetrica.

See also Davey's latest blog postings on risk at AdvisorOne.

Reprints Discuss this story
This is where the comments go.