Advisors have a high hurdle to clear if they are to meet client expectations for growth, according to anew report from investment management firm Lattice Strategies.
The firm’s Allocator’s Dilemma Survey Report finds that 86% of advisors say their clients expect average returns of 4% or more over the next three years. This is despite returns of -0.9% in U.S. equities the previous 12 months.
“Today’s conditions — high valuations and low yields relative to history — make for a very challenging growth environment going forward,” said Ted Lucas, Lattice Strategies managing partner and investment committee chairman, in a statement. “Addressing these challenges will require allocators to think critically and engage their clients with fresh ideas.”
The research – which reflect responses of 47 investment professionals, primarily RIAs, conducted online from Jan. 22 through Feb. 21. – shows that 31% of advisors’ clients expect returns of 4 to 5%, 42% expect 5 to 7%, and more than 13% expect returns higher than 7% per year over the next 36 months.
With client return expectations higher than many experts’, this puts significant pressure on the equity portion of the portfolio to generate the expected level of returns, which may be why the majority of advisors view non-U.S. equities as the most favorable risk/reward opportunity over the next 36 months.
According to Lattice’s research, about 55% of the advisors surveyed are looking to increase allocations to international equities, both in emerging market and developed international equities. The survey found that 45% of advisors are positioned for long-term growth potential in emerging markets despite near-term risks.
In addition to international equities, advisors see exchange-traded funds as the most popular approach to achieving that growth.
The research shows that 45% of advisors expect to increase allocations to ETFs in the next 12 months and 41% say those ETFs will be smart beta strategies, which the report says is “an area of great interest among advisors.”
Of the 60% of advisors who already own smart beta ETFs, the report indicated two distinct deployment trends. According to Lattice, 37.5% of the advisors surveyed say they use smart beta to complement or replace passive ETFs, while 37.5% use the strategies to complement or replace active mutual funds. According to Lattice, these findings solidify “the role of newer multi-factor strategies packaged as ETFs as ‘the space between’ active and passive.”
The research also highlights a host of potential risks that may stand in the way of delivering on those expectations. According to the report, 73% of survey respondents qualified an economic recession as among the primary risks to portfolios. The survey also found that about three quarters of respondents said energy prices and geopolitical risks are also major risks to investment returns, along with two-thirds citing terrorism as another.
According to the report, 48% of the advisors surveyed say the U.S. presidential election poses a moderate risk to investments.
The report also looks at how the investment advisor community is navigating these potential hazards.
Of items within their direct control, the report finds some are exercising conservatism.
According to the survey, 64% of respondents say they are sticking with bonds or other alternatives with the prospect of rising interest rates already reflected in their portfolios.
And 34% of advisors surveyed say a response to falling commodity prices is already baked into portfolios.
— Related on ThinkAdvisor: