With 2014 coming to a close, it is tempting to think that the market volatility we’ve accepted as normal since 2008 may finally be shrinking in our rear-view mirrors. Corporate earnings show signs of growth and corporate and consumer confidence appear to be back on a steady keel. Investment flows should continue to improve as investor confidence increases.
Still, the global economy remains sluggish at best and concern about a potential tightening of monetary policy in 2015 is mounting. With all of this in mind, now is the time for advisors to reassess the big picture to understand what investors will need in 2015. Advisors need to determine how well their own resources match up to those needs and how to communicate all of this effectively to their clients in the coming year.
We have learned much more about the markets and investors as we enter 2015. The behaviors and expectations of retail investors continue to rapidly evolve, giving rise to increasingly complex demands on advisors. Advisors are dealing with a spectrum of client types, ranging from emerging investors to the mass affluent to ultra-high-net-worth investors, the needs of which variously overlap and diverge. This is putting more pressure on investment models, among other things. For example, preparing for a retirement that is two or three years away is notably different from what it was only a few years ago. At the other end of the scale are Millennials, with completely different time horizons, communication preferences and priorities.
Critical Factors in 2015
Faced with such a complex range of challenges, advisors who command a macro view of their target markets and who can employ the right strategies for the job will be well-positioned entering 2015. One critical strategy that I see taking hold is “investor/advisor alignment.”
Akin to the alignment between general and limited partners in any successful private equity firm, alignment of interests between broker-dealers and advisors, and advisors and their clients has gone from nice to have to necessary. But that alignment is not something one can set and forget. The steady pulse of new and emerging asset types, investment strategies and continually shifting market trends demand that this alignment remain dynamic.
These and other considerations all come to bear on four specific areas for investors: risk, allocation/construction, reporting and distribution of assets.
If we have learned anything after the financial crisis, it is the importance of a 360-degree view of risk. Risk tolerance is arguably topic one between advisors and investors. For advisors, formulating a macro view starts by asking the question: How well does my client understand his or her own risk tolerance? How much downside is your client willing to tolerate in the pursuit of a certain range of growth? Does the client understand the material differences between market risk (broad exposure), structural risk (security-level exposure) and liquidity risk (generally a factor of both of these)? How well would your business continuity communication plan hold up in the face of the next flash crash or a cyber-breach?