Portfolio > Portfolio Construction

Advisors Bullish on Markets, While Clients More Positive on Returns

Your article was successfully shared with the contacts you provided.

A recent survey of U.S. financial advisors finds that most advisors, 78%, are highly optimistic about market performance over the next three years. But just 18% of advisors believe their clients concur with such views, Russell Investments said Wednesday about its latest Financial Professional Outlook (FPO) results, adding that this figure stood at 9% when it released its previous results in December.

At the same time, though, the survey of nearly 600 FAs at some 140 firms — which took place about eight weeks ago — disclosed that clients have slightly higher expected market returns than their brokers.  

In terms of performance in 2012, advisors expect a 5.9% return for a balanced portfolio, and they report that their clients’ return expectations were 6.5%.

The survey finds that advisors anticipate an average 3.9% return for a conservative portfolio, 5.9% for a balanced portfolio and 8.3% for an aggressive portfolio. Plus, despite the general lack of market optimism among clients, advisors say that clients’ return expectations are “on par and even slightly higher than their own,” at 4.3% for a conservative portfolio, 6.5% for a balanced portfolio and 9.3% for an aggressive portfolio.

“The broad equity markets have already met or surpassed the expectations of advisors and their clients in the latest FPO, with the U.S. broad market Russell 3000 Index up 9.49%, the Russell Global ex-U.S. Index up 13.5% and the Barclays Capital U.S. Aggregate Bond Index up 0.85% year-to-date as of February 29,” said Frank Pape (left), director of consulting services for Russell’s U.S. advisor-sold business, in a press release.

Still, Pape says, it’s early in 2012, and “anything could happen.” Since current results have come with “very little volatility,” he notes, advisors have to keep talking with clients” to set realistic expectations and refocus them on the most important success metrics for investing.”

Portfolio Priorities

The FPO results also show that 41% of advisors identify portfolio rebalancing/shifting portfolio asset allocation as the main topic of conversation initiated with clients, but only 11% say clients raise this topic themselves.

“Advisors play a critical role in helping their clients define desired outcomes and performance expectations from the outset,” added Pape. “With a common understanding of the end goals in hand, advisors can develop plans that take a total portfolio perspective towards achieving the outcome — not just beating a benchmark or achieving a specific return.”

In addition, the survey reveals that a majority of reps, 53%, measure performance with a long-term view, while only a minority of investors, 29%, do so.

Instead, advisors say clients typically performance by short-term factors, such as one-year returns (54%), the portfolio’s absolute return (49%) and portfolio volatility (41%). Advisors state that their objective is to focus on using portfolios to meet clients’ broader investing goals and financial plans.

“With the market volatility seen in 2011, it’s not surprising that individual investors are fixated on one-year returns and portfolio volatility. But there is little actionable value in these short-term, backward-looking measures for the individual investor,” explained Pape.