Financial services providers and advisors frequently focus
on beating their benchmarks, but investors prefer an emphasis on downside
protection by a three-to-one margin, according to a new report from a global
research and consulting firm Cerulli Associates.
The report — Cerulli’s
third-quarter issue of The Cerulli Edge – U.S. Retail Investor Edition —
compares the responses of protection-focused investors with their
performance-seeking peers to help better understand the dynamics facing
participants in the retail investor market.
“Our most recent research suggests that providers must take
a proactive stance to help investors become comfortable with the realities of
equity market exposure,” Scott Smith, director of advice relationships at
Cerulli Associates, said in a statement. “Balancing downside protection with
the growth potential necessary to help investors reach their wealth
accumulation goals is one of the most challenging scenarios facing financial
According to the report, more than three-quarters of
investors explicitly state that they would prefer a protection-focused portfolio
versus one that outperforms.
The report then examines which investors are more
protection-focused based on age and wealth.
When viewed on a wealth tier basis, the highest
concentrations of this protection-focused opinion are among those investors with
$250,000 to $500,000 (83%) and greater than $5 million (80%).
According to the report, this opinion might make sense for
those in the higher wealth tiers, as their current asset levels are generally
sufficient to meet retirement income needs.
However, those in the $250,000 to $500,000 level underscore
the challenge that advisors may face.
“These investors have made headway in accumulating a
considerable portfolio, but are reluctant to take on the market risk that is
likely necessary to attain their accumulation objectives,” the report states.
Meanwhile, looking by age, the report finds that a
protection mindset is highly concentrated among investors who are 60 and older
and among affluent investors under 30 years old.
“With a relatively short investment horizon, those age 60
and older have adopted an appropriate approach to their wealth, while those
under age 30 have an extended window to overcome any downmarket periods, but
are reluctant to take on volatility,” the report states.
As the report notes, these results underscore the
importance of advisory relationships for investors. If investors were left to
their own devices, they would tend to “skew away” from creating portfolios that
would provide them with the greatest likelihoods of achieving their
accumulation goals, according to the report.
“While there are myriad avenues to educate themselves on
the basics of portfolio construction, most investors lack the willingness,
confidence or time to take this on themselves,” Smith said in a statement.
“This is simply not an area that most investors are eager to spend substantial
time and effort learning.”
The gap between investors’ preferences and accepted best
practices in long-term portfolio construction leaves advisors facing a real
threat of disenchanted customers when markets struggle.
“To help bridge this gap, [advisors] must make every effort
to help investors view their appetite for risk in terms of their risk capacity,
rather than independently,” Smith said in a statement.
The report suggests having recurring discussions after
establishing a baseline agreement on appropriate portfolio risk. According to
the report, these discussions must be a recurring part of an advisory
relationship to reinforce the likelihood of down markets and to help view them
as opportunistic discounts rather than tragedies.
here for the original article from Think Advisor.