The Markets March 23, 2016

Taking the Pulse of Affluent Advisory Clients

More affluent clients of advisory firms often seek out the latest services and strategies—making the group a helpful barometer of investment industry trends and challenges. 
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Discussing a recent AMG Funds survey of affluent Americans with $250,000 in investable assets, Bill Finnegan, the firm’s chief marketing officer, says he hopes investors’ behavior in 2016 will prove to be as positive as their stated intentions.

“Despite the fact that the weeks leading up to our more recent survey brought significant turmoil in the broad equity markets, as represented by the S&P 500 Index falling by 12.2% at one point, investors have not widely hit the eject button on equities,” Finnegan tells PLANADVISER. Some assets moved out of the markets after a difficult January and February, he notes, but the outflows have been more muted than many expected so far this year, especially as equity performance turned more positive in March.

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“It’s still too soon to say what the first quarter will look like in terms of inflows and redemptions, but I think it’s fair to expect that investors will prove pretty resilient,” Finnegan says. “Nearly everyone surveyed, 96%, said they have accepted the fact that ‘moderate’ to ‘very high’ equity market volatility will be experienced in the years ahead. We just have to hope that their actions match their intentions.”

While affluent investors are concerned about short-term swings in equity pricing, they feel some optimism on the fundamentals, Finnegan adds. For example, a majority of those surveyed believe interest rates will rise (64%) and that inflation will increase (54%). While 58% agree that “large swings in the stock market make me very uncomfortable,” just about half (48%) say they accept that “there is no good way to significantly reduce volatility in a portfolio without compromising growth.”

There’s obviously still room for improvement in these stats, Finnegan says, but given the very small number of respondents—just 7%—who indicated they would “sell some or all equity exposure in response to a 20% drop in the market,” investors are apparently starting to absorb some of the lessons advisers have been pushing since the financial crisis—namely, avoiding buying high and selling low.

“Other findings from the survey should serve as a warning to advisers,” Finnegan warns. “Even affluent and engaged clients carry misconceptions and misunderstanding about investing concepts. We found there was some disagreement, for example, as to what it mean to be diversified in today’s markets.”

According to the survey, nearly 50% of investors believe owning a broad range of stocks is enough to provide adequate diversification for a portfolio. “As an adviser, it is important to help clients understand that diversification extends beyond simply investing in a broad range of stocks,” Finnegan explains. “Low correlation is the key to diversification and investors should rely on a variety of asset classes and investment strategies.”

NEXT: Other common misconceptions 

Another commonly used phrase that is widely misunderstood is “alternatives,” the survey results show.

“Just one-third of advised investors owning alternatives understood that they are good for minimizing downside risk,” Finnegan explains. “Nearly two-thirds of all respondents expressed a lack of understanding about alternative investing—and only 10% said they feel highly confident in selecting alternatives on their own.”

For that reason, he agrees with other defined contribution (DC) retirement plan industry commentators that the value of alternatives is best delivered in a pre-packaged and professionally managed context.

There is even some confusion about concepts most advisers will take to be very basic: “What does it mean to be a long-term investor?” On average, Finnegan says, investors defined a long-term investment as nine years, but to 21% of investors, a long-term investment is less than five years. Others cited other time frames as “long-term,” though few pointed to a decade or longer.

“This is discouraging because we know also know that investors tend to hold a given mutual fund, on average, for just a handful of years,” Finnegan explains. “One will always need to make adjustments even to a long-term portfolio, but it is important to set a strategy and stick to it, at least over a full market cycle.”

Also discouraging, Finnegan observes one quarter of all respondents “indicated they would need access to a significant portion of their investments as cash within the next five years,” implying lower growth prospects and other inefficiencies. “This seems consistent with other third-party studies, which show that mutual fund retention rates range between four to five years for equities—and even shorter for bonds.”

Finnegan concludes that, “even for engaged and affluent clients, it is important to make sure you are on the same page with regard to investment horizon, diversification and the other cornerstones of retirement readiness.”

Data & Research March 23, 2016

Most Women Feel Misunderstood by Investment Industry

The more advisers lean on misperceptions about how women approach investing, the more difficult it can be to engage them.
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And, says State Street Global Advisors, perpetuating these misperceptions is hazardous to women’s wealth. To better serve female investors, advisers need to understand the real factors that drive their behavior.

Women have significant influence over household investments, says a study from State Street Global Advisors, but they are undermined by a persistent feeling of being misunderstood by the investment industry. The result is a disconnect that costs investors who could benefit from partnering with an adviser, and that also blocks advisers from successfully engaging female investors.

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According to “Assessing the Landscape: Female Investors and Financial Advisors,” misperceptions are to blame. To make real progress, outdated assumptions must be challenged and stereotypes shattered.

The study uncovers seven myths about women and investing that prevent the industry from seeing the female investor for who she really is: a multidimensional individual striving to make fully informed decisions in order to meet long-term financial goals.

Investment decisions are mostly made by men:  As women’s responsibility for household income has increased, so has their authority over saving and investing. Women now control around $11 trillion in investable assets. Over the next 40 years, it’s estimated that nearly $30 trillion of intergenerational wealth will be transferred to female investors. Despite their growing financial prowess, women are still overlooked at times by advisers who presume that they are not involved in investment decisions. It’s time for the industry to change its thinking.

Female investors lack confidence: As they continue to expand their role as the family’s chief investment officer, many women are becoming more experienced investors. The broad generalization of women lacking confidence as investors simply doesn’t apply. Younger women, for example, tend to be more confident in their own investing skills. Age and experience with investing are just two factors that may impact an individual’s confidence in their own investing skills.

Female Investors are Indecisive: When a female investor takes more time to make an investment decision, she is not necessarily being indecisive. Her comprehensive decision process typically involves looking at issues from multiple angles, considering various sources of information and carefully weighing the options. It is a holistic approach to a complex, multifaceted decision. This may seem indecisive, especially if compared with an overconfident investor who is more impulsive or trades more frequently, but it simply means that she is motivated to make well-informed decisions

NEXT: Females prefer female advisers. Or do they?

 Female investors prefer to work with female advisers: Advisers should know that they don’t need to be a woman to advise women — nine out of 10 female investors believe gender doesn’t matter in hiring an adviser. However, female investors who work with a female adviser tend to be more confident in their own investing skills and have higher satisfaction rates, which may point to more patience and active listening on the part of female advisers. Whether male or female, advisers with higher gender intelligence have more successful relationships with all of their investors.

“I need more time” really means “no”: When a female investor says “I need more time,” this is exactly what she means — most of the time. Advisers, on the other hand, think this is often her way of saying “No.” The female investor seeks sufficient information and time to process the decision, which allows her to own the decision and avoid regret. Over time, this helps her gain confidence. It also means that she will be less likely to blame her adviser if things don’t turn out the way she intended.

Emotion Should Remain Separate From Investing: No decision is ever detached from emotion. An investor’s experiences, current situation and expectations for the future influence each investment decision. This is not a bad thing; there is a role for intuition and emotion in the decision-making process. Advisers can help investors balance emotion with more objective information. The emotional component also presents an opportunity for advisers to deepen their client relationships. The key is in connecting investments with what they represent for the investor – security and independence.

Female investors are a lucrative market niche: Women are still underserved in financial advice, but it’s clear that this is not a niche segment. By definition, “niche” does not describe this majority investor population. More importantly, no two investors are alike. State Street Global Advisors’ research found significant differences among women’s financial goals and attitudes toward investing, risk tolerance, financial literacy, confidence in investing skills and what they seek from a financial adviser.

State Street Global Advisors surveyed 250 financial advisers and 1,000 individual female investors online for its “Assessing the Landscape” report. An omnibus survey with 946 adults, and qualitative research with 18 subject matter experts and six female investors was also conducted for more context around the findings. 

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