2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
INVESTOR INSIGHTS SERIES
BEYOND ALLOCATION Changing roles for financial advisors and their value to clients
E XECUTIVE SUMMARY Our fourth annual Global Survey of Financial Advisors comes at a time of significant change in the advice business. Increased fee pressures, tightening regulations, and growing competition from automated advice platforms, coupled with continued market volatility, all pose challenges to business growth for advisors around the globe. To succeed, many advisors will need to reconsider their value proposition and look at how they add value to client relationships above and beyond asset allocation. In this new frontier, we see three key roles that advisors will need to assume as they look to gain new clients and win a larger share of assets from their current clients.
• Client Therapist: More than eight in ten advisors say their biggest challenge to
business success is the emotional decisions clients make in times of stress. Unfortunately, large numbers of investors fail to see rash reactionary decisions as detrimental to achieving their goals. In this role, advisors become educators, helping investors overcome fear with knowledge of how the markets and investing work. • Investment Pragmatist: More than three-quarters of advisors believe that a traditional stock and bond portfolio is no longer enough to effectively manage risk and pursue returns. Fortunately, continual innovation has provided access to new asset classes, new pricing structure and new portfolio tools, allowing advisors to make practical decisions about which tool will best fit client goals and investment objectives.
• Marketing Strategist: Baby Boomer clients are retiring in large numbers,
and the tactics that have helped them accumulate wealth need to be reconsidered as these clients now need to generate income. On the other end of the spectrum, the Millennial generation is coming of age, bringing with them digital service preferences and a clear preference for alternative investments.1 Smart advisors are adapting their practice to service these two distinct client bases. In the end business success may be determined by advisors’ ability to adapt their practices to these changing roles, even as volatile markets make the essential role of managing client assets harder.
1 An alternative is an investment that is not one of the three traditional asset types (stocks, bonds and cash). Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts. Alternative investments involve specific risks that may be greater than those associated with traditional investments, and there is no assurance that any investment will meet its performance objectives or that losses will be avoided.
TABLE OF CONTENTS
2015 Global Survey of Financial Advisors 5
INTRODUCTION Beyond allocation
8
SECTION ONE Client Therapist
13
SECTION TWO Investment Pragmatist
16
SECTION THREE Marketing Strategist
21
CONCLUSION Getting down to business
24
PROGRAM OVERVIEW Investor Insights Series
As advisors look to demonstrate how they add value beyond asset allocation, they will need to play three critical roles.
INTRODUCTION
Beyond allocation
intro
Changing roles for financial advisors and their value to clients
Despite ever-present waves of market events, financial crisis, and the looming specter of tightening regulations, financial advisors have a positive outlook on their business prospects at the midpoint of 2015. The 2,400 advisors we spoke with across the Americas, Asia and Europe believe their business will grow by an average of 12.3% over the next 12 months. Advisors place the responsibility for achieving this growth projection on their own abilities. Lacking the tailwind that bull markets have provided in recent years, threequarters of advisors say growth will come from acquiring new clients, while seven in ten say it will also hinge on gaining a larger share of assets from current clients. However, there are forces at play that could derail advisors from achieving these results.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
5
intro
2015 Global Survey of Financial Advisors
ABOUT THE SURVEY Natixis Global Asset Management surveyed 2,400 advisors globally in June and July 2015 with the goal of understanding the roles and responsibilities of today’s financial advisor in a continually changing market landscape. Advisors from the Americas, Asia, Europe and the Middle East are represented in the survey.
300 U.S.
150
150
300
France
U.K.
Canada
150
Germany
150 Italy
150
Switzerland
150 Spain
150
Panama
150 UAE
150 Chile
150
150
Uruguay
Hong Kong
150
Singapore
2,400
total respondents
PROJECT BACKGROUND AND METHODOLOGY 2015 marks the fourth year in which Natixis Global Asset Management has conducted its Financial Advisor Survey. CoreData Research was commissioned by Natixis to conduct the study of 2,400 advisors in 14 countries and territories in order to better understand the attitudes and needs of this key collective of individuals to the financial services industry.
6
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
INTRODUCTION
Macro barriers and emotional challenges Advisors see both market forces and client behavior as potential barriers to their
TOP ADVISOR CONCERNS
success. On the market side, volatility tops advisor concerns with two-thirds worried about its impact on their business growth. Many advisors also see increased regulation (54%) and mounting fee pressures (34%) as significant challenges. More telling, though, may be their concerns about client behavior, particularly in periods of volatility. Eight in ten advisors believe their ability to keep clients from making
67%
emotional decisions is a critical success factor.
Market performance/volatility
These challenges can translate into a powerful opportunity for financial advisors to show just how much of a difference they make in helping to deliver a better quality financial life for clients if they are equipped with the right skills. Some advisors will require enhancing soft skills in the areas of client management and education; others
54%
will require new technical skills in the areas of investment management. As advisors look to demonstrate how they add value beyond asset allocation,
Heightened regulation/ disclosure requirements
they will need to play three critical roles:
• Client Therapist: After 15 years of boom and bust, it’s no longer enough
to ask clients to stay invested for the long term. Advisors now need to help clients work through their emotions, educate them on the markets and investing, and help them develop a rational perspective that’s focused on
34%
Downward fee pressure
achieving goals rather than responding to market events.
• Investment Pragmatist: Traditional investment models may not hold up
in today’s complex markets, forcing advisors to rethink both the role of alternatives and the mix of active and passive investments they implement
THE INFLUENCE OF EMOTIONS
in portfolio strategies.
• Marketing Strategist: With Boomers aging and Millennials massing on
the horizon, advisors will need to learn how to best tailor their offerings to the unique needs of these powerful demographic groups in order to build a business that can endure. Today’s markets present significant changes for advisors. A spate of new regulations in markets around the world could challenge not just how advisors will deliver advice, but whom they can advise. The rise of new automated advice platforms presents a whole new source of competition, and advisors will need to continuously demonstrate their value above and beyond asset allocation. In addition, changing demographics will challenge the foundations upon which they have established their practices, and advisors will need to channel efforts in order to service clients with very different needs. Ultimately, continued volatility and high correlations will challenge advisors to reconsider their assumptions about portfolio construction.
83%
believe their ability to keep clients from making emotional decisions is a critical success factor.
We think the ability of advisors to adapt to changes and adopt new roles into their practice will be a key measure of their long-term success around the globe.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
7
SECTION ONE
Client Therapist
section one
one
Money and investing are among the most emotionally charged issues for individuals and families. Where an investment professional’s objective view might see figures on a statement, clients may see assets through a more personal lens: their investments represent lifetime achievements, personal empowerment, and the legacy they will leave to their family. DIFFERENT VIEWS ON RETURNS
As a result of these associations, sudden and severe drops in value often lead to
Advisors and clients have very different views on the average returns needed to meet long-term goals section
equally severe, emotionally driven decisions. It’s this kind of visceral reaction that
two
9.7% above inflation
6.6%
often leads investors to buy high and sell low. Advisors see this response as a threat to both their business and the financial success of their clients. In fact, 83% of advisors surveyed globally believe that preventing clients from making emotional decisions is important to their business success. Unfortunately, investors may not see the connection between emotional decision making and achieving financial goals. Of the 7,000 people who participated in our 2015 Global
above inflation
Survey of Individual Investors, less than half believe that avoiding emotional decisions will better enable them to meet their financial goals.2 Compounding the problem are investors’ inconsistent views on risk and return. Globally, individuals told us they believe they will need average annual returns of 9.7% above inflation to meet their goals, a level of return that normally requires taking considerable risk. But they are not willing to take additional risk, and 84% of those surveyed say they prioritize the safety of their assets over investment
Advisor view
Client view
performance.2
2 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February 2015. Survey included 7,000 investors from 17 countries.
8
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
section three
Grounding clients with goals One reason behind this irrational view may be that individuals are lacking the grounding needed to make sound investment decisions. Among those we surveyed, 57% said they have no financial goals and 67% said they had no financial plan. When it comes to investing, 77% said they go on instinct alone when making financial decisions. According to the advisors we spoke with, each of these factors ranks among the top five mistakes investors can make. Independently, each represents a significant problem for investors. Together, they form a perfect storm that can leave clients without clear direction on how to handle the ups and downs that are an inevitable part of the investment experience.
Even after witnessing client reactions to a ten-year period of volatility, advisors are aware that emotion is not merely a downside variable.
At a time when 90% of advisors worldwide say their ability to demonstrate value beyond portfolio construction is an increasingly important factor in their business, the time is right to counsel clients through these financial planning basics to ensure they are better equipped emotionally to handle volatile and uncertain markets.
Emotion is a two-sided coin Even after witnessing client reactions to a ten-year period of volatility, advisors are aware that emotion is not merely a downside variable. Emotion can be a powerful force on the upside too. Our survey findings show that even in regions where we find the highest risk tolerances, advisors are acutely aware of the sway that client emotions can hold. For example, in Hong Kong, investors demonstrate a risk tolerance that is almost twice as high as in other countries, yet the percentage of advisors there who say client emotions pose business risks is on par with our global average. One might suppose that tempering the exuberance of an aggressive investor poses as many challenges as assuaging the fear and anxiety that risk-averse investors feel in down markets.
one
Perhaps what is most important to advisors in managing emotions is getting to know clients more completely. More than nine in ten advisors in our survey group said getting a complete view on client goals and risks is the most important factor in their own business success.
TOP FIVE MISTAKES ADVISORS SAY INVESTORS MAKE
1
2
3
4
5
Making emotional decisions
Short-term focus
No financial plan in place
No clear goals
Not staying the course
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
9
one
SECTION ONE
RISK AVERSION ACROSS COUNTRIES
Risk Aversion Coefficient
1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85
Sw itz er lan d
Ca na da
Ar ge nt ina
Fr an ce
UK
one
UA E
Ja pa n
Ch ile Si ng ap or e Au str ali a
Gl ob al
Ita ly
US Ge rm an y
Sp ain
Co lom bia
M ex ico
Ho ng Ko ng
0.80
Source: MIT/Natixis project, 2015; based on findings from the Natixis 2015 Global Survey of Individual Investors. The risk aversion coefficient measures investor appetite for risk. Investors with higher risk aversion are generally less willing to take risk and prefer safer investments.
ADVISORS WHO SAY CLIENTS ARE MORE INTERESTED IN DISCUSSING RISK OVER THE PAST YEAR
Risk: an ever-present force Risk continues to be an important part of the client conversation, with six in ten advisors saying clients are more interested in discussing risk than in previous years. What’s more telling are the large numbers of advisors in Germany (76%), Italy (75%)
76%
Germany
75% Italy
69% 75%SEE SOME ADVISORS France Spain LIMITATIONS WITH AUTOMATED ADVICE 62% U.S.
62%
Uruguay
and Spain (75%) who report clients want to discuss risk. Our survey was conducted at the height of the Greek debt crisis, which presented unique risks for the region and could explain the extra attention given to this issue in recent months.
The real value of advice At a time when it would appear that investors could benefit from more personal advice, there are a number of measures at play globally that could have unintended consequences for their ability to access it. The Uniform Fiduciary Standard currently under consideration by the U.S.
72% 83% Department of Labor and Retail Distribution Reform (RDR) measures enacted two
agree that automated advice cannot deliver point to the lack of personal support years agoasby the U.K. Financial Conduct Authority (FCA) strive to afford greater the tactical assetboth allocation needed, during volatile times a significant especially during down markets drawback for robo-advisors protection to investors. While advisors see the regulations as something they can
61%
Singapore
60%
Switzerland
60% UAE
58% U.K.
take in stride, some believe these provisions may not provide the best results for those they were intended to protect – clients. In the U.S., advisors demonstrated mixed concerns about the regulation’s potential impact on their practice, with about half saying it will be beneficial for advisors and clients alike and close to the same number saying it will be good for business. But in its efforts to redefine what constitutes a fiduciary relationship, advisors believe the regulation could shut out smaller investors. Three-quarters (74%) of U.S. advisors say
58%
Hong Kong
58% Chile
it will limit access to professional advice, and seven in ten say it will limit investment opportunities for individuals. In the U.K., advisors have been operating under RDR regulations for more than a
56%
Canada
55%
Panama
year. Prior to implementation, there was much speculation on the impact it would have on financial advisors in terms of ending commission payments, regulating fees and tightening standards for what can be considered independent advice.
10
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
Fifteen months later, advisors say that RDR has had some impact on their business: 20% of U.K. advisors say they have had to end a significant number of client relationships because of RDR, and another third report they are seeking to join a larger network to reduce the regulatory demands on their practice. While advisors suggest that the direct effect of new regulations on their business has been limited, they express concern that regulations have impacted clients. Seven in ten report the new regulations have made it more difficult to deliver advice to clients, and 73% report that RDR has actually limited investors’ ability to seek financial advice. Recent regulatory moves would appear to back advisor opinion, as the FCA has introduced measures to address the unintended consequences of RDR.
one
Advice automation presents growing threat Alongside regulatory reforms, technological advances could disrupt established advice models in coming years. As automated advice platforms, or “robo-advisors,” RISK AVERSION ACROSS grow market share, advisorsCOUNTRIES are showing concerns about their potential impact on business. Nearly four in ten see automated advice models as a threat to their 1.15 solutions will make advisors work harder to demonstrate their value to clients. 1.10
0.85 0.80
Ja pa n
Ch ile Si ng ap or e Au str ali a
Gl ob al
Ita ly
US Ge rm an y
Sp ain
Co lom bia
M ex ico
Ho ng Ko ng
Nonetheless, advisors recognize a key limitation of robos that differentiates their own service offering: one-on-one human interaction. More than eight in ten advisors point to the lack of personal support during volatile times as a significant drawback for
Sw itz er lan d
0.90
exchange-traded funds (ETFs) and index stocks that are offered at a lower fee.
Ca na da
0.95
by deploying algorithms to manage allocations within a portfolio composed largely of
Ar ge nt ina
charged for professional advice. Robos appeal to investors who hold these concerns
Fr an ce
market where some question the benefits of active management and the fees 1.00
While advisors suggest that the direct effect of new regulations on their business has been limited, they express concern that regulations have impacted clients. UK
The1.05 simplified and streamlined framework for delivering advice is attractive in a
UA E
Risk Aversion Coefficient
1.20 business success, and two-thirds of those surveyed believe that automated
the robo-advisors. Recognizing that those interactions can often lead to investment Source: MIT/Natixis project, also 2015; based on findings the Natixis 2015 Global Survey of Individual risk aversion coefficient measures investor appetite for risk. moves, advisors believe that from these automated services cannotInvestors. deliverThethe Investors with higher risk aversion are generally less willing to take risk and prefer safer investments.
tactical asset allocation to help address market movements.
This personal attention cannot be overestimated. Modern markets present a continual set of challenges that can take investors off track. Advisors, in their role as client therapists, are well suited to talk clients though the short-term turbulence and help them stay on track with their long-term investment goals.
ADVISORS SEE SOME LIMITATIONS WITH AUTOMATED ADVICE
83%
point to the lack of personal support during volatile times as a significant drawback for robo-advisors
72%
agree that automated advice cannot deliver the tactical asset allocation needed, especially during down markets
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
11
Identifying and quantifying risk is a complex process where many advisors appreciate a deeper look at portfolio performance.
14
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
SECTION T WO
Investment Pragmatist
section two
If advisor therapy puts clients on the path to becoming better investors, then their investment portfolio is where the rubber meets the road. But portfolio construction is no longer just a matter of picking an appropriate mix of stocks and bonds to meet clients’ goals, risk profiles and time horizons. Continual innovation in the asset management industry has given advisors access to
77%
new asset classes, a broader array of investment strategies and new pricing structures, all of which have become important considerations in building client portfolios. Couple these factors with an investment environment in which market action half a world
49%
50%
2013
2014
away can drive losses at home and advisors know something has to change.
section three Advisors question traditional investment models and measures
For many, it starts with the basic notion of what investments belong in client portfolios. More than three-quarters of advisors say a traditional stock and bond
2015
SOMETHING HAS TO CHANGE
portfolio may no longer be enough to meet return goals and balance risk. This
Advisors who say a traditional stock and bond portfolio is no longer the best way to pursue return and manage risk
represents a 27% increase over our 2014 survey.3 As they look to find the right solution, advisors are discovering that the fundamental measures of diversification that have been in place for decades are not helping to address these concerns. Nearly seven in ten advisors say traditional style box analysis is no longer enough to ensure adequate diversification. Another 63% say advisors need to replace traditional portfolio construction and diversification techniques to achieve results – a 13% increase over our 2014 findings.
SOMETHING HAS TO CHANGE Advisors who say a traditional stock and portfolio is no longer the best way to pursue return and manage risk
3 Natixis Global Asset Management, Global Survey of Financial Advisors conducted by CoreData Research, September 2014.bond Survey included 1,800 financial advisors in 10 countries.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
77%
13
SECTION T WO
Risk analysis gaining favor Where returns-based analysis has long been a key consideration in portfolio construction, risk also plays a prominent role. Nine in ten advisors globally say that INVESTOR PORTFOLIO CONCERNS LEAD TO A DISCUSSION OF ALTERNATIVE INVESTMENTS
risk analysis plays an important role in their investment selection. It is interesting to note that in Hong Kong, where we have found the highest risk tolerances globally, slightly more advisors (93%) report applying risk analysis to the process. Given the state of markets around the world and the ever-growing set of risks to be considered, this kind of analysis can be a formidable challenge. While 87% of advisors say they have an accurate understanding of the risk in client portfolios, extensive analysis on advisor model portfolios conducted by our Portfolio Research and Consulting Group has found that identifying and quantifying risk can be a complex process where many advisors appreciate a deeper look at portfolio performance. After analyzing thousands of advisor models globally, the Portfolio Research and Consulting Group has found that advisors can find it difficult to accurately measure without the right tools. There is no one measure or one point in time
say they are looking for better diversification
that accurately measures portfolio risk. Along with standard deviation, advisors could consider value at risk, max drawdown or beta-to-benchmark as risk measures. Which approach is right depends on what advisors are looking for.
Advisors exploring the alternatives One area where the industry has looked to enhance risk management has been the use of alternative investments. About seven in ten advisors say they implement these alternatives in client portfolios, most frequently for those clients with $1 million to $4.9 million in investable assets. Those strategies that are outside the traditional realm of long-only equity and fixed-income may offer better diversification potential and the potential for enhanced say they are seeking ways of better managing the balance between risk and return
risk-adjusted returns. Yet, they may also present an added level of complexity to explain to clients who have been unnerved by the performance of traditional assets. Compounding the problem are the misconceptions that clients hold about these strategies. Our own research shows many clients believe alternatives are riskier, have higher fees and are not available to individual investors. Advisors recognize the communications challenge this presents. A majority of advisors (64%) say clients have little or no understanding of alternative investments, and fewer than four in ten believe clients understand non-correlated asset classes. While 92% of advisors report they understand the role of non-correlated asset classes in a portfolio, more than a third also say they need to learn more about alternatives before implementing them in client portfolios. We have also found that – without saying it directly – investors are stating the need for implementing alternatives: 76% say they are looking for better diversification, 80% say they are seeking ways of better managing the balance between risk and
say they want strategies that can help insulate them from volatility
return, and 76% say they want strategies that can help insulate them from volatility.4 Educating clients on alternatives and their place in portfolio construction will be a critical mission for advisors as they look to address client risk concerns.
4 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February 2015. Survey included 7,000 investors from 17 countries.
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2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
two THE ACTIVE ADVANTAGE Advisors say they would choose active investments when looking to achieve the majority of the following benefits. THE ACTIVE ADVANTAGE Advisors say they would choose active investments when looking to achieve the majority of the following benefits.
Benefit
Active
Passive
Minimizing fees Generating alpha
Benefit
Active
Passive
Providing risk-adjusted returns Minimizing fees Taking advantage of short-term market movements Generating alpha Accessing emerging market opportunities Providing risk-adjusted returns Exposure to non-correlated asset classes Taking advantage of short-term market movements Generating stable income Accessing emerging market opportunities Exposure to non-correlated asset classes
Active vs. passive
Generating stable income
Given the prolonged bull market run between 2011 and 2015, passive investments such as index funds and ETFs have become attractive choices for many investors based on their ability to deliver benchmark returns at a low cost. Add to this the problems some active managers have had in outperforming on the upside and there is plenty of fodder to fuel a heated debate on which is the right way to invest. Our survey results indicate that from the advisor’s view, both passive and active approaches play a specific role within client portfolios. Globally, advisors report their portfolios are composed of 65% active investments and 35% passive. Among the countries included in our study, we find only one outlier – Spain. Here advisors
65% Active
35% Passive
65% Active
report a mix of 54% active and 46% passive.
35% Passive
Globally, advisors say they implement passive investments because they provide simplified access to efficient asset classes (59%) and present clients with a lowerfee investment option (58%). Client preferences also factor into the equation for 34% of respondents, with larger numbers in Germany (48%), the U.K. (48%) and Hong Kong (45%). Regardless of why advisors implement passive investments, they have
THE AVERAGE MIX Active and passive investments used in client portfolios THE AVERAGE MIX
a clear opinion on their role and the role of active investments in client portfolios.
Portfolio roles Out of the seven factors we tested for, passive investments outrank active strategies in only one category: fees. When it comes to generating alpha and taking advantage of
Active and passive investments used in client portfolios
short-term market movements, advisors believe active investments are the stronger choice. Recognizing that passive strategies can expose investors to both the upside and the downside of market returns, advisors also give the edge to active strategies for generating risk-adjusted returns. Active also gets the nod for providing access to non-correlated asset classes and emerging markets and for generating a stable income. In the role of investment pragmatist, advisors will continue to focus on client investment needs but will consider which strategies will be most effective in helping clients to meet their goals across a wider range of variables.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
15
section two
SECTION THREE
Marketing Strategist
section three
A wave of powerful demographic change is under way, creating two large pools of clients and prospects with two very different sets of goals, objectives and preferences for managing their investments. One is Baby Boomers, who are transitioning from building wealth to generating retirement income. The other is tech-savvy Millennials, who may be more willing to trust algorithmic investment models than face-to-face interactions with an advisor. Each group presents advisors with opportunities to tailor their service models. As Baby Boomers’ goals shift from building wealth to generating stable income, advisors will need to adapt to new investment concerns and implement new portfolio strategies.
At an average age of 46, the advisors we surveyed find themselves directly in the middle of these two powerful demographic forces. But it would appear that advisors are not yet ready to focus their offerings on the needs of these two very different generations. Six in ten say they do not believe they need specialized niche or segment strategies to focus on Millennials, women or entrepreneurs.
From building wealth to spending it Clients from the Baby Boom generation (born between 1946 and 1964) have been the backbone of growth for advisors and the financial industry worldwide for a long time. As their goals shift from building wealth to generating stable income, advisors will need to adapt to new investment concerns and implement new portfolio strategies. As much as things change for retiring clients, advisors see that a lack of fundamental financial planning will continue to dog these investors.
16
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
According to financial advisors, the overall lack of planning identified in our investor survey carries through from saving for retirement to living in retirement. When asked, only 13% of advisors said their clients understand retirement savings goals very well. Similarly, only 12% of advisors believe clients understand their retirement income goals very well and 16% of advisors believe their clients understand their retirement lifestyle goals very well. This planning gap leaves many investors to operate under rough estimates of what they will need as replacement income in retirement.
Client estimates come up short Our investor survey showed clients expect they will need to replace 63% of their current income, despite the fact that experts most frequently cite a figure of 75%–80% as more realistic.5 Consider the impact of that difference for an
three
individual making $100,000 per year. That miscalculation of $17,000 per year translates into a $500,000 shortfall in retirement funding. Here is where assuming the role of income expert can be expected to help advisors better service this still-influential client base.
Income generates new portfolio concerns Income portfolios require a different approach from what may have been in place for a client’s accumulation phase. Drawdowns are the single biggest factor in determining how long client assets will last in retirement. It is important to remember that the rate at which funds are spent down has a ripple effect on decisions about risk management, return generation and which sources of income are tapped when.
In building retirement income portfolios, advisors see their greatest challenge in generating income above and beyond their clients’ most basic needs.
In building retirement income portfolios, advisors see their greatest challenge in generating income above and beyond their clients’ most basic needs. A lack of definition in client lifestyle goals can only compound this problem. Generating stable income is the next highest ranked concern, as fickle markets challenge advisors’ ability to deliver income streams that are critical to retirees. The next set of concerns is focused not on producing income but on generating returns that beat inflation, followed by minimizing risk and generating returns simultaneously.
ADVISORS IDENTIFY THE BIGGEST CHALLENGES TO BUILDING RETIREMENT INCOME PORTFOLIOS
53%
47%
46%
40%
35%
32%
29%
inc Ge om ne e f rati n o be r lif g e yo es no nd tyl ug ba e g h sic oa ne ls Ge ed s ne ra tin gs tab le inc om e Ge ne ra tin g wi ret ll b ur ea ns t in tha fla t tio n Gr ow ing m ass in et sim imiz s an ult ing d an ris eo k us ly Ef fec tiv ely m vo ana lat gin ilit g yr isk Pr es er aft ving er dis prin tri cip bu al tio ns Ac dr com a m gr wdo od ow w ati ing ns ng po whi rtf le oli os M ain tai nin g fu of a rat tu ss io re et lia s to bil itie s
18%
5 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February 2015. Survey included 7,000 investors from 17 countries.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
17
SECTION THREE
three
An institutional look at income needed The answers to retirement income challenges here may be to look at retirement income from a more institutional perspective. Liability-Driven Investing (LDI) has INVESTORS ARE UNCLEAR ON RETIREMENT GOALS Advisors say few clients have a solid understanding of key goals
been a critical strategy within the pension world for years. In essence, LDI looks to establish the long-term liabilities facing the organization – the payouts it will need to make to pensioners over time – and then invest in a way that shores up its ability to meet those obligations. Advisors looking to serve a retiree base may want to adopt this approach, not just in portfolio construction, but in helping clients to better understand their income needs from a financial planning perspective. Our recent Retirement Income Survey of U.S. Advisors illustrates the need to adapt practices to meet the needs of an aging client base as it enters retirement. The 400 U.S.-based advisors we spoke with in this survey reported that more than two-thirds of their clients are over age 50. This aging client base already has advisors in the U.S. thinking of strategies similar to LDI, with half of those surveyed deploying the strategy of laddered bond portfolios that spread durations to ensure a continual income stream over time.6
13%
understand retirement savings goals very well
The echo boom offers new opportunity Whether they are called Gen Y, Millennials or the Echo Boom, the (2.5 billion globally) children of Baby Boomers born between 1980 and 2000 represent a significant growth opportunity for advisory practices. While it is tempting to think of these as younger investors fresh out of school and just getting started, the oldest Millennials turn 35 this year. Getting it right with a new generation of investors is a critical success factor for advisors. More than three-quarters of advisors say they believe the transfer of wealth to younger generations is their greatest growth opportunity. In addition, 63% of advisors believe attracting investors under 35 is an important part of their growth plans. Securing the business of Millennials will depend on understanding their unique
12%
understand retirement income goals very well
needs, which may run counter to what advisors have grown accustomed to in servicing older, more experienced clients.
Risk-on for younger investors Millennial investors demonstrate an appetite for risk, with 69% saying they are willing to take more risk now than one year ago. Comparatively, 51% of investors overall agree with that statement. Advisors may want to watch risk tolerances carefully, however, as 75% of Millennials say they would change their allocations if the market declined 10%–20% and 78% would do the same if markets increased by 10%–20%. This compares to just 52% of Baby Boomer investors who would make allocation changes in either scenario.7 Our findings in the area of Millennial investor sentiment run counter to some
16%
understand retirement lifestyle goals very well
recent studies of this demographic group that suggest they are highly conservative investors. Our survey concentrates on active investors with $200,000 in investable assets or more.7 Perhaps we are seeing that, as investors gain assets, they are becoming more comfortable with investing and the vagaries of the market and are therefore more willing to participate.
6 Natixis Global Asset Management Retirement Income Survey conducted by CoreData Research, December 2014. Survey included 400 financial advisors in the U.S. 7 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February 2015. Survey included 7,000 investors from 17 countries. Of the 7,000, 2,247 are Millennials and 1,968 are Baby Boomers.
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2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
three A NEW GENERATION WITH NEW PREFERENCES
Millennials age 18–33
Baby Boomers age 50–68
Investors overall
say they are willing to take more risk
69%
51%
say they invest in alternatives
61%
35%
say they would change their allocations if the market declined 10-20%
75%
52%
50% say they would change their allocations if the market increased 10-20%
78%
52%
Source: 2015 Global Survey of Individual Investors
Open to alternatives Millennials also tell us they are more comfortable with new investment approaches. Seven in ten say traditional stock and bond portfolios are no longer enough to manage risk and pursue returns, which is on par with our broader investor base. Six in ten (61%) of the Millennials we spoke with say they invest in alternatives, significantly higher than the 35% of Baby Boomers and the 50% of overall investors who say they do.7 It is safe to assume that portfolios constructed for Millennial clients will look a lot different from those constructed for their parents. Advisors may want to consider new allocation models that incorporate a broader set of asset classes in Millennial portfolios.
Ready for personal advice It is widely understood that Millennials are tech-savvy children of the Internet age who are comfortable using an app to run virtually any part of their life. Financial services industry pundits often point to this tendency to illustrate the potentially disruptive force of robo-advisors. But these one-size-fits-all solutions may not be enough. We know that 84% of Millennials say it’s important to get professional advice when making financial decisions and another 77% say professional advice is necessary to manage investments and meet retirement goals. While many Millennials may find
It is safe to assume that portfolios constructed for Millennial clients will look a lot different from those constructed for their parents.
automated advice to be a simple solution, other Millennials are just now coming of age. The oldest wave of the generation has been in the workforce for ten years. They’re getting married and starting families. Their financial lives are beginning to get more complicated, and this is likely to increase their need for personal advice from a skilled professional who can address their specific planning needs. That may be the real opportunity with this generation.
7 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February 2015. Survey included 7,000 investors from 17 countries. Of the 7,000, 2,247 are Millennials and 1,968 are Baby Boomers.
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19
Navigating the change under way in the market is a challenge to which advisors are well suited.
conclusion
CONCLUSION
Getting down to business
Change is ever-present in the financial markets and the lives of financial advisors. Even as they adapt to new opportunities by assuming wide and varied roles beyond portfolio construction, the investment acumen of advisors will continue to be put to the test as they look to manage portfolios that can help clients achieve long-term investment goals. The challenges here are many: volatility continues to spike globally in response to events like the Greek crisis and the Chinese market meltdown. Interest rates remain at historic lows, and movements in one country’s economy have the potential to spur a response half a world away. Advisors must be prepared to adapt their investment strategies to this dynamic environment.
Whatever their plans, advisors will continue to be tested in their ability to deliver on multiple fronts.
New strategies for fixed-income Potential action on interest rate increases in the U.S. and other markets is prompting advisors to plan out an equal reaction for positioning client portfolios. Those we spoke with are considering a range of strategies in advance of any rate movements.
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21
CONCLUSION
Six in ten plan to shorten durations in client bond portfolios, while almost half plan to reduce bond holdings altogether. In response, the same number of advisors (46%) plan to increase stock allocations, although given the turmoil that has sprung up in markets since we fielded our survey in June, fewer may take action in this direction. Fewer advisors (37%) say they will increase allocations to alternatives in response to an increase in interest rates. That number could increase as advisors look to mitigate equity risk in portfolios. Still, a fairly large number of advisors – 38% – say they will do nothing.
Beyond allocation Whatever their plans, advisors will continue to be tested in their ability to deliver on multiple fronts. As Client Therapists, they will need to lead clients through periods of uncertainty such as the recent shock waves from China that have been felt in markets around the world. It starts by getting clients focused on their goals and returning to their financial plan – these are the touchstones advisors can use to talk clients through difficult times. As Investment Pragmatists, advisors will need to reconsider how they construct client portfolios. They will need to look at portfolios with a closer eye toward risk and look at how they can deliver the right level of performance for clients while also managing costs. Liquid alternatives and other alternative investments are beginning to make non-correlated strategies more accessible, and advisors will want to consider their role in client portfolios. As Marketing Strategists, advisors will need to consider how to best tailor the servicing offering which has driven their success to date to meet the rapidly changing needs of clients young and old. Navigating the change under way in the market is a challenge to which advisors are well suited. Perhaps the best advice for advisors is that which they offer to clients: focus
conclusion
on goals for business growth, establish a plan for achieving success and continually
measure the opportunity at hand against what you are trying to achieve in the long term.
ADVISOR MOVES IN RESPONSE TO RISING RATES
38%
say they will do nothing
60%
plan to shorten durations in client bond portfolios
46%
plan to increase stock allocations
46%
plan to reduce bond holdings 22
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
37%
say they will increase allocations to alternatives
FIVE TENETS OF DURABLE PORTFOLIO CONSTRUCTION ®
Put risk first
Maximize diversification
Use alternative investments
Make smarter use of traditional asset classes
Be consistent
Toward more durable portfolios In markets across the globe we have seen investors of all types challenged to meet the competing priorities of generating returns through short-term market cycles and funding long-term financial liabilities. In our view, meeting these modern market challenges demands a more consistent investment framework. We believe Durable Portfolio Construction® can make a difference to individuals, advisors and institutions as they look to build portfolios that can help address risk concerns while also pursuing long-term asset growth. Our tenets for Durable Portfolio Construction include: Put risk first – Risk profiles for some indexes have been relatively stable in recent years, while returns have been widely varied. Targeting a consistent range of risk, rather than a potential range of returns, may lead to more predictable results. Maximize diversification – Considering the broadest possible range of asset classes and investment strategies such as long and short exposures to equities, fixed-income and commodities is one way to manage portfolio volatility. Use alternatives – Alternative investments may help lower correlations, temper volatility and offer new sources of return. Make smarter use of traditional asset classes – Applying new, efficient ways to capitalize on the long-term return potential of stocks and bonds can potentially enhance long-term returns or reduce short-term risks. Be consistent – Following a consistent investment philosophy is a critical first step to ensuring portfolio durability, but equally important is establishing a consistent, personal measure of investment performance to guide decisions and gauge progress.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
23
PROGRAM OVERVIEW About the Durable Portfolio Construction Research Center Investing can be complicated: Event risk is greater and more frequent. Volatility is persistent despite market gains. And investment products are more complex. These factors and others weigh on the psyche of investors and shape their attitudes and perceptions, which ultimately influence their investment decisions. Through the Durable Portfolio Construction Research Center, Natixis Global Asset Management conducts research with investors around the globe to gain an understanding of their feelings about risk, their attitudes toward the markets, and their perceptions of investing. Research agenda Our annual research program offers insights into the perceptions and motivations of individuals, institutions and financial advisors around the globe and looks at financial, economic and public policy factors that shape retirement globally with: • Global Survey of Individual Investors – reaches out to 7,000 investors
in 17 countries. • Global Survey of Financial Advisors – reaches out to 2,400 advisors,
consultants and decision-makers in 14 countries. • Global Survey of Institutional Investors – reaches out to more than 600
investors, consultants and decision-makers in 27 countries. • Natixis Global Retirement Index – provides insight into the environment for
retirees in 150 countries based on 20 economic, regulatory and health factors. The end result is a comprehensive look into the minds of investors – and the challenges they face as they pursue long-term investment goals.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
2014 INVESTOR INSIGHT SERIES
2015 GLOBAL SURVEY OF INDIVIDUAL INVESTORS
This communication is for information only. Analyses of the survey referenced herein are as of September 2014. There can be no assurance that developments will transpire as may be forecasted in this material. This material may not be distributed, published, or reproduced, in whole or in part. Although Natixis Global Asset Management believes the information provided in this material to be reliable, it does not guarantee the accuracy, adequacy or completeness of such information. In the EU (ex UK) Distributed by NGAM S.A., a Luxembourg management company authorized by the CSSF, or one of its branch offices. NGAM S.A., 2 rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. In Switzerland Provided to Qualified Investors by NGAM, Switzerland Sàrl. In the UK Approved for use by NGAM UK Limited, authorized and regulated by the Financial Conduct Authority. In the DIFC Distributed in and from the DIFC financial district to Professional Clients only by NGAM Middle East, a branch of NGAM UK Limited, which is regulated by the DFSA. Registered office: Office 603 - Level 6, Currency House Tower 2, PO Box 118257, DIFC, Dubai, United Arab Emirates. In Singapore Provided by NGAM Singapore (name registration no. 5310272FD), a division of Absolute Asia Asset Management Limited, to Institutional Investors and Accredited Investors for information only. Absolute Asia Asset Management Limited is authorized by the Monetary Authority of Singapore (Company registration No. 199801044D) and holds a Capital Markets Services License to provide investment management services in Singapore. Address of NGAM Singapore: 10 Collyer Quay, #14- 07/08 Ocean Financial Centre, Singapore 049315. In Taiwan This material is provided by NGAM Securities Investment Consulting (Taipei) Co., Ltd., a Securities Investment Consulting Enterprise, regulated by the Taiwan Financial Supervisory Commission. Registered address: 16F-1, No. 76, Section 2, Tun Hwa South Road, Taipei, Taiwan, Da-An District, 106 (Ruentex Financial Building I), R.O.C., license number 2012 FSC SICE No. 039, Tel. +886 2 2784 5777.
2015 GLOBAL RETIREMENT INDEX
In Japan Provided by Natixis Asset Management Japan Co., Registration No.: Director-General of the Kanto Local Financial Bureau (kinsho) No. 425. Content of Business: The Company conducts discretionary asset management business and investment advisory and agency business as a Financial Instruments Business Operator. Registered address: 2-2-3 Uchisaiwaicho, Chiyoda- ku, Tokyo. In Hong Kong This document is issued by NGAM Hong Kong Limited and is provided solely for general information only and does not constitute a solicitation to buy or an offer to sell any financial products or services. Certain information included in this material is based on information obtained from other sources considered reliable. However, NGAM Hong Kong Limited does not guarantee the accuracy of such information. In Latin America This material is provided by NGAM S.A. The above referenced entities are business development units of Natixis Global Asset Management, the holding company of a diverse line-up of specialized investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Global Asset Management conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions.
An in-depth assessment of welfare in retirement around the world
In Mexico This material is provided by NGAM Mexico, S. de R.L. de C.V., which is not a regulated financial entity or an investment advisor and is not regulated by the Comisión Nacional Bancaria y de Valores or any other Mexican authority. Registered address: NGAM México, S. de R.L. de C.V., Torre Magenta, Piso 17, Paseo de la Reforma 284, Colonia Juárez 06600, México D.F., México. This material should not be considered investment advice of any type and does not represent the performance of any regulated financial activities. Any products, services or investments referred to herein are rendered or offered in a jurisdiction other than Mexico. In order to request the products or services mentioned in these materials it will be necessary to contact Natixis Global Asset Management outside Mexican territory. NGAM Mexico, S. de R.L. de C.V. is a business development unit of Natixis Global Asset Management, a subsidiary of Natixis that is the holding company of a diverse line-up of specialized investment management and distribution entities worldwide.
BEYOND ALLOCATION Changing roles for financial advisors and their value to clients
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Investor expectations and the need for concrete financial plans
This material should not be considered investment advice nor a solicitation to buy or an offer to sell any product or service to any person in any jurisdiction where such activity would be unlawful. Copyright © 2014 NGAM Advisors, L.P. – All rights reserved.
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2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
1068548.1.1 WP110-1214
UNDER PRESSURE Facing up to the challenge of balancing short-term performance needs with long-term liabilities
About the surveys referenced in this paper
Glossary of terms
2015 Global Survey of Individual Investors – Natixis Global Asset Management
Standard Deviation: uses historical
commissioned CoreData Research to conduct a global study of individual investors,
returns (i.e. monthly) and measures the
with the goal of understanding their views on the markets, investing and measuring
total risk of an investment or market.
their progress toward financial goals.
Standard deviation accounts for both market risk and specific risk by measuring
Data was gathered throughout January and February 2015. The study included
the variation of dispersion of returns over
7,000 investors in 17 countries.
time. The higher the standard deviation, the more volatility (risk) experienced.
2014 Global Survey of Financial Advisors – Natixis Global Asset Management commissioned CoreData Research to conduct an international study of financial
Value at Risk: calculation that uses
advisors, with the aim of better understanding the contemporary attitudes and needs
historical returns (i.e. monthly) in order to
of this key collective of individuals to the financial services industry.
derive an estimated confidence level for future losses. The calculation assumes
Data was gathered over a five-week period spanning June and July 2014. The survey
either a 95% or 99% confidence interval.
was delivered through an online quantitative survey of approximately 40 questions.
The VaR metric can be interpreted as
Globally, the study involved 1,800 financial advisors in ten countries and across four
“a 10% VaR at 95% confidence indicates
continents.
the performance should not experience losses in excess of 10% in 95% of months.”
2014 Retirement Income Survey – Natixis Global Asset Management commissioned CoreData Research to conduct a study of U.S. financial advisors, with the aim of
Maximum Drawdown: uses historical
understanding their thoughts and needs around retirement income planning.
returns (i.e. monthly) to calculate the worst period of “peak to valley” performance for
Data was gathered in December 2014, and included 400 U.S. advisors.
the return series, regardless of whether or not the drawdown consisted of consecutive
Helping to build more durable portfolios
months of negative performance.
Natixis Global Asset Management is committed to helping advisors build better portfolios that stand up to the challenges of modern markets. To learn more about
Beta-to-benchmark: uses historical returns
our Durable Portfolio Construction® philosophy, visit
(i.e. monthly) to measure an investment’s
durableportfolios.com.
volatility in relation to a benchmark where the benchmark Beta equals one. A Beta greater than one indicates that the investment has historically been more riskier (more volatile) than the benchmark. Beta only considers systematic risk in relation to the benchmark and does not account for risk specific to the investment.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
25
This communication is for information only. Analyses of the survey referenced herein are as of September 29, 2015. There can be no assurance that developments will transpire as may be forecasted in this material. This material may not be redistributed, published, or reproduced, in whole or in part. In the EU (ex UK): This material is provided by NGAM S.A. or one of its branch offices listed below. NGAM S.A. is a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of NGAM S.A.: 2, rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. France: NGAM Distribution (n.509 471 173 RCS Paris). Registered office: 21 quai d’Austerlitz, 75013 Paris. Italy: NGAM S.A., Succursale Italiana (Bank of Italy Register of Italian Asset Management Companies no 23458.3). Registered office: Via Larga, 2 - 20122, Milan, Italy. Germany: NGAM S.A., Zweigniederlassung Deutschland (Registration number: HRB 88541). Registered office: Im Trutz Frankfurt 55, Westend Carrée, 7. Floor, Frankfurt am Main 60322, Germany. Netherlands: NGAM, Nederlands filiaal (Registration number 50774670). Registered office: World Trade Center Amsterdam, Strawinskylaan 1259, D-Tower, Floor 12, 1077 XX Amsterdam, the Netherlands. Sweden: NGAM, Nordics Filial (Registration number 516405-9601 - Swedish Companies Registration Office). Registered office: Kungsgatan 48 5tr, Stockholm 111 35, Sweden. Spain: NGAM, Sucursal en España. Registered office: Torre Colon II - Plaza Colon, 2 - 28046 Madrid, Spain. In Switzerland: Provided to Qualified Investors by NGAM, Switzerland Sàrl. Registered office: Rue du Vieux Collège 10, 1204 Geneva, Switzerland. In the UK: Approved for use by NGAM UK Limited, authorized and regulated by the Financial Conduct Authority (register no. 190258). Registered Office: NGAM UK Limited, Cannon Bridge House, 25 Dowgate Hill, London, EC4R 2YA. In the DIFC: Distributed in and from the DIFC financial district to Professional Clients only by NGAM Middle East, a branch of NGAM UK Limited, which is regulated by the DFSA. Related financial products or services are only available to persons who have sufficient financial experience and understanding to participate in financial markets within the DIFC, and qualify as Professional Clients as defined by the DFSA. Registered office: Office 603 - Level 6, Currency House Tower 2, PO Box 118257, DIFC, Dubai, United Arab Emirates. In Singapore: Provided by NGAM Singapore (name registration no. 5310272FD), a division of Natixis Asset Management Asia Limited, formerly known as Absolute Asia Asset Management Limited, to Institutional Investors and Accredited Investors for information only. Natixis Asset Management Asia Limited is authorized by the Monetary Authority of Singapore (Company registration No.199801044D) and holds a Capital Markets Services License to provide investment management services in Singapore. Address of NGAM Singapore: 10 Collyer Quay, #14-07/08 Ocean Financial Centre. Singapore 049315. In Taiwan: This material is provided by NGAM Securities Investment Consulting Co., Ltd., a Securities Investment Consulting Enterprise regulated by the Financial Supervisory Commission of the R.O.C and a business development unit of Natixis Global Asset Management. Registered address: 16F-1, No. 76, Section 2, Tun Hwa South Road, Taipei, Taiwan, Da-An District, 106 (Ruentex Financial Building I), R.O.C., license number 2012 FSC SICE No. 039, Tel. +886 2 2784 5777.
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Natixis Global Asset Management consists of Natixis Global Asset Management, S.A., NGAM Distribution, L.P., NGAM Advisors, L.P., NGAM S.A., and NGAM S.A.’s business development units across the globe, each of which is an affiliate of Natixis Global Asset Management, S.A. The affiliated investment managers and distribution companies are each an affiliate of Natixis Global Asset Management, S.A.
In Hong Kong: This document is issued by NGAM Hong Kong Limited and is provided solely for general information only and does not constitute a solicitation to buy or an offer to sell any financial products or services. Certain information included in this material is based on information obtained from other sources considered reliable. However, NGAM Hong Kong Limited does not guarantee the accuracy of such information. Please note that the content of the above website has not been reviewed or approved by the HK SFC. It may contain information about funds that are not authorized by the SFC.
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WP112-0815
