Financial advisors today find it harder to satisfy clients, comply with new regulations and manage a thriving practice on their own, prompting some to reinvent themselves and others to exit the business entirely.
A study released Thursday by Natixis Global Asset Management found that advisors felt cost and regulatory pressure to yield to the demand for lower-cost passive investments, but 75% worried that investors were unaware of or did not appreciate the associated risks. A significant majority thought volatility lent itself to active management.
Twenty-seven percent of financial advisors polled said they were planning a dramatic change within three years by selling their book of business, merging with another firm, leaving the financial industry altogether or retiring. More than a third said they would disengage with smaller clients because of new regulations.
And 86% acknowledged that meeting strict regulatory and disclosure requirements were among the biggest challenges they faced in growing their business.
Natixis conducted its research in July with 300 U.S.-based financial advisors. The survey is part of a larger global study of 2,550 advisors in 15 countries and territories in Asia, Europe, Latin America, the U.K. and the Americas.
Managing Expectations
Managing investors' expectations was advisors' chief priority, the research found, which is not surprising considering investors in a February poll told Natixis that unmet performance expectations was their number-one reason to leave their advisor.
This is a big problem for advisors because investors in that poll expected an average annual return of 8.5% above inflation, which is 44% higher than advisors say is realistic in the current market.
Natixis noted that dialogue between clients and their advisors has been disproportionally focused on market performance, and not enough on risk management and investor goals and behavior. In fact, 85% of advisors said their success depended on obtaining a more accurate picture of their clients' risk tolerance.
"The challenges facing financial advisors are tougher than ever, as they are asked to do more with less in an environment that seems to put low fees ahead of all other considerations, including risk management," said John Hailer, chief executive of Natixis Global Asset Management for the Americas and Asia.
Advisors in the new survey agreed active investments were a stronger choice than passive ones for generating alpha, providing risk-adjusted returns, taking advantage of short-term market movements and gaining access to alternatives and exposure to uncorrelated assets. Still, advisors reported that they often used passive investments because clients preferred them and because they were less costly. In addition, 43% of advisors said they used passive investments because many active managers were really "closet indexing."
Natixis said advisors are faced with striking the right balance between clients' interest in passive investments and the best way to help them achieve their investment goals.
Beyond Asset Allocation
For 87% of advisors in the study, success depends on their ability to demonstrate value beyond asset allocation and portfolio construction. Natixis said this may be because clients can undermine progress toward goals by mistakes they continue to make, including:
• Letting emotions drive investment decisions.
