It was a good run, but it had to end sometime.
Thanks to the second-longest string of market gains on record, many
advisors fear investors have developed a false sense of security and are
ill-prepared for an impending return to volatility.
And quelling clients’ anxiety may be particularly challenging for money
managers, who predict global turmoil, rising interest rates and more are likely
to pose a threat to investment returns this year, according to new research.
In a poll of 300 wire house advisors, registered investment advisors and independent
brokers and dealers in the U.S., Natixis Investment Managers found “nearly half (46
percent) of professionals reported that their clients reacted emotionally to
recent market movements. Moreover, eight in 10 (82 percent) believe the
prolonged bull market has made investors complacent about risk, and they fear
this could translate into moves driven by emotion and panic” in the future.
Those surveyed aim to grow assets under management by 14 percent over
the next year in the face of several concerns:
Threats to investment performance: Financial advisors
see geopolitical events as the biggest potential threat to the markets.
Sixty-eight percent say it would negatively affect overall investment
performance, followed by interest rate increases (66 percent), rising
volatility (57 percent) asset bubbles (54 percent) the low yield environment
(47 percent), unwinding of quantitative easing (46 percent) and regulation (43
Impact of short-term rate increase: Advisors say an
increase in central bank short-term interest rates is expected to adversely
affect bond volatility (74 percent), the housing market (74 percent), the
credit market (65 percent), overall market volatility (61 percent) and stock
values (52 percent).
Portfolio risks: Top risk concerns include interest rate hikes
(59 percent), asset-price volatility spikes (55 percent) and inflation (40
percent). Notably, financial advisors already are acting in response to rising
rates with half saying they are positioning client portfolios for rising rates
by managing bond durations.
Concerns about bubbles: Advisors show the most concern for
crypto-currencies, and after a considerable run up in 2017, nearly
three-quarters (74 percent) see the potential for this bubble to burst in 2018.
They also believe asset bubbles exist within the bond market (25 percent), real
estate (24 percent), the tech sector (21 percent) and the stock market (18
In response, more than eight in 10 advisors now favor actively managed investments and are allocating the
majority of assets as such, up from 66 percent in 2016. Almost three-quarters
of those surveyed believe clients only choose passive investments to enjoy
lower fees or because they are unaware of the risks involved and think passive
investing is safer.
Aside from the shift to active, survey results also show 80 percent of
respondents are now recommending alternative investments in attempt to lessen
the impact of drastic market swings. “The strategies they are putting to work
include real estate/REITS (50 percent), real assets (29 percent), commodities
(28 percent) infrastructure (27 percent) and hedge fund strategies (24
percent). Nearly half (48 percent) give an alternative strategy more than three
years to prove itself,” reported Natixis.
And finally, financial professionals are acknowledging the broad scope
of their duties, as “their skills will be in high demand as clients could get
caught in the crossfire of a market shift” this year.
Click here for the original article from 401k Specialist.