What Advisers Say, What Investors Hear

And not all financial advisers use written investment policy statements with their clients, according to global asset manager Russell Investments. In Russell’s latest quarterly survey of U.S. advisers, the Financial Professional Outlook, only 39% of advisers said they create a written statement of risk and return objectives along with implementation guidance for all of their clients. About a third (33%) said they only create investment policy statements for their highest-net-worth clients, and a fifth (21%) of advisers do not use these statements at all.

“With the industry shift toward advisory-based relationships, it is surprising that so many advisers remain uncommitted to the best practice of utilizing investment policy statements with all clients,” said Rod Greenshields, consulting director for Russell’s U.S. adviser-sold business. “One of the best ways an adviser can fulfill their fiduciary duty and encourage a client to stick to a long-term, disciplined plan is to develop a statement of their objectives and related recommendations. These statements can serve as a type of commitment device, reminding investors of their goals and helping them make productive decisions in times of uncertainty.”

A majority of advisers surveyed (60%) said that in 2012, they were asked by clients to deviate from an agreed-upon investment policy to reduce their exposure to risk assets.

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Possibly more disconcerting, almost as many advisers (59%) said that investors who looked to stray from the investment policy statement were acting on nonprofessional advice from the media, family or friends. Russell called the finding troubling in light of the strong showing of equity markets in 2012.

Greenshields said there are two common investor biases that are responsible. The first he calls “recency bias,” when investors assume the patterns they have experienced will continue indefinitely. “The second is availability bias, which occurs when an investor places more weight on the information they see most frequently,” Greenshields explained.

These biases are responsible for amplifying the political, economic and market events of the past few years, Greenshields said, “distorting investor perceptions of market volatility and reducing some investors’ ability to stay focused on their long-term plans.”

But when clients ask to deviate from the agreed-upon investment policy, it can be an opportunity to revisit the client’s objectives. Almost half of advisers (47%) said they use this tactic to review objectives or the full financial plan. Thirty-eight percent said they take the opportunity to revisit the investment policy or the portfolio asset allocation, or both.

When asked what advice they are offering clients for the duration of the year, many advisers pointed to the importance of a financial plan based on long-term objectives, but some also noted that they are emphasizing that a “buy and hold” strategy may not be appropriate in today’s investment environment.

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One adviser tells clients: “Stick to the plan. Don’t get too excited by rising markets or too depressed about declining markets. Our asset allocation recognizes both up and down markets are certain to occur.” Another offered, “Remember that portfolios are allocated to match their risk/reward profile, and that we will make adjustments as needed to keep that balance in effect.”

“A disciplined, long-term plan does not necessitate a static approach,” Greenshields pointed out. “In fact, a plan can benefit from elements of flexibility and adaptability that allow for appropriate response to changes in an investor’s goals and circumstances, as well as changes in the market. Yet, reacting to every short-term market event is not the answer. Advisers employing an investment process that responsibly adapts to the investor’s situation and provides opportunities to actively manage risk are likely better able to keep clients on track.”

The Financial Professional Outlook survey also examined the differing market views of investors by age, growing optimism about the market by both investors and advisers, and most frequent topics of conversation between investors and advisers.

The Financial Professional Outlook survey, fielded February 5 to February 19, includes responses from 479 financial advisers in 115 national, regional and independent advisory firms throughout the country. More information about the survey, including a video and a full report of findings, is here.