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Portfolio > Portfolio Construction

Clients’ Emotional Decisions Give Financial Advisors Angst

By Michael S. Fischer

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Financial advisors should be brimming with excitement as they anticipate surging demand for their services in the next year. Client behavior checks their enthusiasm, however.

Ninety percent of advisors in a survey released Tuesday by Natixis Global Asset Management said their top challenge in the coming year was clients’ emotional reactions to market movements.

“When investors make emotional decisions, they decrease the odds of reaching their financial goals,” John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia, said in a statement.

“Financial advisors cannot control the markets, but they can head off adverse reactions by creating portfolios designed to stand up in a variety of market conditions. Just as important, they can work with clients to agree on what to do before market-changing events occur. By doing this, they can help take the emotions out of investing.”

Natixis said these findings stood in sharp contrast to what it heard from individual investors in a separate survey conducted in May.

Few of those investors acknowledged a relationship between emotions and investment success. Only 8% answered “yes” when asked whether putting their emotions aside could better enable them to meet their financial goals.

“Managing emotions may be easier said than done,” Hailer said. “Investors may not realize the potential negative effects hasty decisions can have on their investment portfolios.”

Another 88% of advisors surveyed said managing investor behavior and confidence would be a major challenge, and 84% expected hard work in persuading clients to stick with their financial plans.

Eighty-four percent of advisors in the survey also expressed concern about the potential effect of rising interest rates and inflation on client portfolios.

If rates should increase, 57% said they would change investing strategies, and 53% would do so if the stock market should plummet.

Natixis’ 2014 research was conducted online in June with 300 financial advisors in the U.S.

Goals-Based Investing, Use of Alternatives

Ninety-one percent of advisors reported that their clients’ investment portfolios were based on personal objectives — an indication, Natixis said, that advisors had embraced the principles of goals-based investing.

According to the study, 84% of advisors agreed that their clients would be happy if they achieved their investment goals over a year even if their portfolio underperformed the market.

Likewise, 84% believed investors thought more about missing their investment objectives than about falling short of a benchmark.

Fifty-four percent of financial advisors in the study said their clients questioned traditional buy-and-hold investing strategies, though less so in the past two years as the stock market has soared and as investors focus less on making up for past losses.

Eighty-three percent of advisors said they had spoken with clients about using assets not directly correlated to the markets. However, only 50% of investors surveyed by Natixis in May said they had discussed alternative strategies with their advisor.

“There is an opportunity for advisors to talk to clients about using alternative strategies as portfolio construction tools,” Hailer said.

“It might be time to focus more on the role specific alternative strategies can play within a portfolio rather than attempting to educate clients on a wide array of very different strategies.”

The study found that only 35 of financial advisors regularly used alternative strategies in client portfolios, while 60% used them infrequently. Although 87% of advisors purported to have a strong understanding of alternatives, they also ranked such investments highest on a list of products and services they needed to know more about.

And 72% of advisors thought their clients knew little or nothing about alternative strategies, but Natixis’ earlier survey showed that 42% of investors knew a good deal about them.

Business Expansion Surveyed advisors said they expected their businesses to expand by 18% on average in the coming year. Half anticipated that business growth would come from net new client assets, while others said growth would be driven by new assets from existing clients, market gains and other factors.

Advisors face challenges managing their time and resources.

Fifty-seven percent spend the majority of their time in meetings, phone and e-mail conversations with existing clients and in managing their accounts.

They spend 16% of their workdays on general administration and regulatory paperwork, and 13% on education about portfolio construction, marketing, social media and monitoring industry developments.

A tenth of their time goes to seeking new clients.

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