Advisors cite maximizing risk-adjusted returns (67%) and minimizing downside risk (62%) as the two main drivers behind their portfolio construction processes. Other primary drivers include targeting long-term wealth growth, diversification, cost efficiency and mitigation of idiosyncratic risk.
Unfortunately for advisors, risk tolerances vary widely from one client to another. In an ideal world, where client risk tolerances match those of off-the-shelf solutions, advisors would have no need to customize client portfolios. But clients rarely match up perfectly with model portfolios. Moreover, the risk landscape is constantly changing which drives an ongoing need to adjust allocations in step. For instance, more than twothirds of advisors surveyed (69%) see inflation risk as a primary concern over the next six months. Meanwhile, more than half (54%) are focused on market risks in the form of overvaluation and volatility in domestic markets. Tax risk related to a possible increase in the capital gains tax rate and the need for tax efficiency in portfolios is also a concern in more than half (54%) of advisors surveyed.