Even after nine years of roaring bull markets, our industry is still working to restore many investors’ trust. The 2018 CFA Institute Investor Trust report shows we have succeeded far more with institutional than retail investors: 44% of retail investors trust financial services providers, compared with 70% of institutions.

It does not help that equity markets have grown expensive and growth and income are getting harder to deliver, but better understanding and meeting the needs of retail investors remains crucial. Like it or not, “Main Street” wants more from us before they will move forward with us.

To that end, Legg Mason brought together a group of our distribution partners who collectively manage more than $675 billion for clients. We asked them about the major issues investors bring to them, and the top challenges they face in helping clients achieve their investment goals.

The financial advisors reported their clients’ two top priorities as managing downside risk and achieving growth. That seems contradictory, since conventional wisdom holds that risk-taking is necessary to achieving growth. Yet it leads to two important questions for investors:

Are the risks they take the right ones? And are they thinking enough about the long term?

Advisors reported being most worried about U.S. equities: More than half are overweight to them, and nearly 80% believe their clients should reduce U.S. stock exposure.

The stocks that led the market’s historic rise are now highly weighted in the major indexes. Some (particularly the FAANGs — Facebook, Amazon, Apple, Netflix and Google parent Alphabet) are not only very richly valued, but they could face high-profile challenges from consumers and regulators.

Most of the financial advisors suggested that U.S. investors should consider investing outside their home markets. There may be more room for growth in other countries, both developed and emerging markets. Clients may not be familiar with those markets, however, so we must help them understand where the best opportunities may be — and the pitfalls to avoid.

More than two-thirds of the advisors also reported that, over the next 12 months, they expect to face significant challenges from volatility and rising interest rates. Both surged in relevance in the first quarter after years of substantial dormancy, signaling potential returns to historic norms. That could lead to an environment in which solid active management can once again prove its merits.

Volatility may not feel great to investors, but it can present opportunities. Hedge funds and private debt strategies seek inefficiencies across markets and frequently find their best opportunities during moments of greatest turmoil.

To achieve meaningful long-term growth, it is important to avoid steep paper losses. Portfolios can be designed that seek to manage volatility and minimize downside risk while still achieving growth. Options include simple low-volatility or dividend-paying equity strategies, or more esoteric alternative strategies such as global macro, equity market neutral, hedge fund and private debt, as well as private real estate and infrastructure. All can provide unique return streams with potentially lower equity beta.

In a rising rate environment, investors are right to worry about fixed income returns. Core-plus funds can offer enhanced flexibility by maintaining core bond exposure while hedging certain risks, and taking advantage of opportunities in additional fixed income sectors.

Bond investors also may be wise to consider strategies with even greater flexibility, such as global macro focused funds. Many of these funds utilize negative duration strategies that can increase in value as interest rates rise. Generally, they can also invest across sectors and geographies to find rich potential opportunities, such as emerging market local currency bonds or structured products.

One message resounds from our small but substantive survey: Financial advisors are recommending that their clients diversify. With global markets more and more roiled, helping investors balance their portfolios may be the best way to earn the fullest measure of their trust.


Jeff Masom, CFA, is a Senior Managing Director of all U.S. sales for Legg Mason. Jeff is a member of the Global Distribution Management team, various internal and investment affiliate steering groups as well as the ICI Sales and Marketing committee and SIFMA’s Asset Management committee.

Jeff started his career as an analyst for Smith Barney’s Consulting Group division. He joined Legg Mason in 1997. He holds a Bachelor of Arts degree from Elizabethtown College and a Juris Doctor degree from Delaware Law School. He passed the Bar examination in Maryland, Pennsylvania and New Jersey, and is also a Level III candidate in the CFA Program.