Financial advisors are exposed to numerous risks to their investment performance in 2018 — from growing geopolitical uncertainty to rising interest rates to inflation.
However, according to research released by Natixis Investment Managers, managing the emotional reactions of clients could be their greatest challenge.
Natixis’ Center for Investor Insight surveyed 300 U.S. financial professionals, which includes wirehouse advisors, registered investment advisors and independent brokers and dealers, and found that few believe investors are ready for a return to more normal market ebbs and flows.
Nearly half (46%) of professionals reported that their clients reacted emotionally to recent market movements. Moreover, eight in 10 (82%) believe the prolonged bull market has made investors complacent about risk, and they fear this could translate into moves driven by emotion and panic once volatility strikes again.
According to Dave Goodsell, executive director of Natixis Investment Managers’ Center for Investor Insight, advisors are finding themselves in the need of being able to look at their business from both sides of the brain.
“On the left hand side, markets are becoming more complicated,” he explained to ThinkAdvisor. “The way you calculate risk is changing. So you really have to have those skills in mind: How do I look at the markets? How do I factor in where the risks are? How do I position portfolios for this?”
On the other hand, the research shows that advisors need to be emotionally intelligent with clients, and anticipate how they’re going to react, Goodsell said.
“I think in this industry we tend to be really comfortable with the left brain stuff,” he added. “We’re analytical. We want to look at portfolios. We want to talk about Sharpe ratios. Probably where most of the success is going to be found is in how do you help clients connect back to that?”
Only 38% of the advisors surveyed believe investors understand the risks of the current market environment, and a slightly smaller number (36%) believe that investors are prepared for a market downturn.
According to Natixis, clients will need practical education in today’s choppy markets. Financial advisors see geopolitical events as the biggest potential threat to the markets. Other potential threats, according to the advisors surveyed, are interest rate increases, rising volatility, asset bubbles, the low-yield environment, unwinding of quantitative easing, and regulation.
Based on advisors’ views on what markets have in store for the next 12 months, their skills will be in high demand as clients could get caught in the crossfire of a market shift. According to the survey, other than giving investment advice, financial professionals describe their role with clients as: guiding clients through “emotional” decisions (88%), providing ongoing financial education (71%), providing guidance on identifying and achieving life goals (70%), helping navigate life events (66%) and mediating family financial affairs (41%).
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