Individual investors are facing many emotional conflicts that, if left unresolved, could put their financial future at risk.
They say they want to grow assets, but don’t want to take on risk. They understand passive investments have lower fees, but transfer the cost advantage into greater benefits. They want to evaluate their investment performance based on personal goals, and then admit they really don’t have clear goals. And the list goes on.
Our research finds investors struggling to reconcile these conflicts, with few tools to help them. But as they look to address critical questions about their risk and return, large numbers say they believe professional advice can increase their chances of success.
Cautious, but searching for double-digit returns
A majority of individuals surveyed (73 percent) call themselves “cautious” investors, compared with only 27 percent who say they’re aggressive. In the same breath, they also say they need to generate returns of 8.5 percent a year above inflation to meet their goals. That means investors could actually be looking for real returns of 11 percent to 12 percent. Pursuing that level of gains would expose investors to significant volatility.
Not many are likely to stomach the risk, especially because 82 percent of investors say they’d take safety over investment performance if forced to choose. What investors need is education about and help in understanding risk and clarity about just how much risk they are willing to take on.
See low fees and assume greater benefits
Investors understand that index investments have lower fees. A surprising number also assume the funds have greater benefits, too.
Seven in 10 say index strategies are less risky and 64 percent think they can help minimize losses. By their very nature, though, passive investments have no built-in risk management. When markets rise, they generate market returns. And when markets decline, they generate market losses.
Passive strategies have a place in portfolios right alongside active investments. Investors need to be better informed about how active and passive strategies can be used for tactical advantage. Of course, investing involves risk, including the risk of loss, and there is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Institutional investors surveyed in 2015 agree with individuals on lower fees, but when it comes to pursuing alpha (benchmark-beating returns) and generating better risk-adjusted returns, they believe active is the better choice.
Goal-oriented, but lack clear goals
Seventy-six percent of investors say they evaluate their investment performance against personal goals. And 81 percent would be happy to achieve their goals even if they underperformed the market.
But we find that just 55 percent of investors say they have clear financial goals in the first place. Fewer still (48 percent) have a financial plan.
The first step forward for any investor is to take the time to write down specific goals and work with a financial professional to set a realistic plan for reaching them.
Professional help on their own terms
Investors have much to resolve and recognize they need help getting past the challenges. A majority of individuals (71 percent) tell us they believe professional advice is worth the fee. Even more (73 percent) say individuals who get professional advice are more likely to meet their goals.
However, we find that investors today have a clear vision of what they want from an advisor — and it’s not a hot stock tip. They want their investment professional to help them become more informed. They want solutions for managing risk. They want help setting goals and plans. It tells us they want a more collaborative relationship with their advisor.
For financial professionals, the best way we can put investors first is to get on the same side of the table with clients. We need to put risk in the investment discussion to help investors realize what they can realistically expect from their investments.
We need to stop talking about investment products, get clients focused on goals and start talking about building a portfolio designed to fit their unique objectives. If investors are to be successful, we need to help them learn more about investing and the markets.
It’s our responsibility to help them make informed decisions about their financial futures.
David Goodsell is executive director of the Natixis Global Asset Management Durable Portfolio Construction Research Center.