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7 Mistakes Investors Are Making Before Rate Hike: Natixis

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With interest rates in the U.S. expected to rise as soon as next month, some anxious investors are making sudden changes in their portfolios among other self-defeating mistakes, according to a poll of financial advisors released Tuesday by Natixis Global Asset Management.

If that weren’t enough to worry about, so-called robo-advisors are forcing advisors to prove their value to clients.

Natixis conducted the online poll of 300 U.S. financial advisors in June.

Fifty-eight percent of advisors in the survey expected bonds to become more volatile as rates rose, 48% thought higher rates would hurt stock values and 41% anticipated reduced consumer spending.

Investor anxiety is running high, and some investors might find it difficult to resist changing their investment portfolios, John Hailer, chief executive of Natixis in the Americas and Asia, said in a statement. “But we’ve often found that unguided, emotional investment decisions don’t work out as intended. Investors would do well, instead, to work toward long-term goals.”

If the financial markets should falter, investors may be prone to making even more errors, according to advisors surveyed.

Indeed, they have identified seven key mistakes by investors:

  1. Making emotional investment decisions
  2. Focusing on short-term market noise and changes
  3. Failing to have a financial plan
  4. Not setting clear financial goals
  5. Not staying on course
  6. Keeping too much in cash
  7. Investing too little in stocks

Demand for Innovative Strategies

Given changing markets, advisors said they were likely to use more innovative investment strategies to help investors avoid mistakes in more volatile markets ahead.

Seventy-seven percent agreed that traditional portfolio allocation — 60% stocks and 40% bonds — though still valuable for a portfolio was not the best way to pursue return and manage investment risk.

Alternative assets, they felt, were important because they could provide characteristics not found in traditional asset classes. Eighty-one percent of advisors said they used exposure to commodities, currencies, real estate and other alternatives in the portfolios of at least some clients.

Most advisors believed active and passive investments should be a part of their clients’ portfolios. On average, they invested 35% of clients’ money in passive assets, such as index funds or exchange-traded funds.

According to 62% of advisors who used passive investments, these are better for low fees and for providing easy access to efficient asset classes.

Among all advisors surveyed, 74% gave higher marks to actively managed assets than passive investments for their ability to respond to short-term market moves, and 67% said active investments provided higher risk-adjusted returns.

Opportunities and Challenges

Advisors in the survey looked to millennials as their best chance for growth in the next three years. They expected investors under 35 to represent 18% of their clientele in 2018, up from 12% this year. At the same time, 71% of respondents acknowledged that working with younger clients would force them to adopt a more flexible fee arrangement.

Older investors represent the bulk of advisors’ business today, and 45% of respondents said capturing their assets as they shift from retirement saving to spending was one of their top challenges to business growth, trailing only market performance and heightened regulation.

Asked about building retirement income portfolios for clients, 53% expressed concern that these would not provide enough income for lifestyle expenses, 47% that they would not generate stable income, 46% that they would not outpace inflation and 40% that it would not grow assets while keeping risk in check.

Emerging Business Models

Advisors in the survey said robo-advice services were changing both their industry and their own businesses:

  • 56% said automated, online advisor services would have a lasting effect on their business
  • 46% agreed that automated advice was a real threat to their business models
  • 70% said the competition would force them to work harder to show clients the merits of their services

Fifty-four percent of advisors said they could compete better for less-affluent clients if they had some automated advice services to offer, but 91% said that because robo-advisors do not provide individual support, they would suffer big redemptions in volatile times.

The survey also asked advisors about the implications of the Department of Labor’s proposed fiduciary standard on the professional advice industry.

Seventy-one percent of advisors said the rule would limit the investment options made available to investors. Yet, 55% said the rule would result in more innovative advice models and fee structures for underserved investors.

“Clearly the investing landscape is changing, but advisors are up to the challenge,” Hailer said. “They are telling us they expect the industry will respond and create services to meet the needs of a growing set of investors who will be better served in the end.”

— Check out It’s Not Easy Being a Cash Investor on ThinkAdvisor.