Managing clients’ emotions could be greatest challenge for Canadian financial advisers in 2018: survey

Managing clients’ emotions could be greatest challenge for Canadian financial advisers in 2018: survey

Higher levels of market volatility, interest-rate hikes and possible asset bubbles will threaten investment returns for 2018, but the greatest challenge ahead this year for financial advisers will be managing their client’s emotions.

Nearly 60 per cent of Canadian advisers say they do not believe investors are prepared for a market downturn, according to a survey released on Thursday by Natixis Investment Managers.

The survey, which asked 150 Canadian financial and investment advisers about their market challenges and how they are positioning client portfolios, found that clients’ emotions could be the greatest challenge this year, as environments like the current situation can lead investors to make costly mistakes.

The survey found more than one-third of advisers reported that their clients reacted emotionally to recent volatility, and only 43 per cent believe investors are prepared for a downturn in the market. Furthermore, 94 per cent of financial advisers said preventing clients from making investment decisions based on their feelings is important to their success.

“Whether it is buying indiscriminately when markets are rising, or selling in a panic when they are declining, investors often make their worst decisions when driven by their emotions,” Natixis CEO Abe Goenka said in a statement. “Advisers have an important role to play in all markets, helping investors to be aware of the harm emotionally driven investing can cause and assisting them in dispassionately examining their goals, risk tolerance and time-frame.”

Financial advisers are prepared to have their work cut out for them this year as survey respondents saw several potential roadblocks to reaching annual growth, which would average 14 per cent over the next 12 months.

Rising volatility was noted as the biggest potential threat to the markets, with 73 per cent of advisers saying it would negatively affect overall investment performance; trailing as perils are asset bubbles (63 per cent), geopolitical events (57 per cent), unwinding of quantitative easing (57 per cent), interest rate increases (56 per cent), the low yield environment (55 per cent), regulation (43 per cent) and currency fluctuations (41 per cent).

Areas of particular concern related to asset bubbles were real estate, the tech sector, and the stock and bond markets.

Financial advisers showed the most concern for an asset bubble in cryptocurrencies, which experienced a considerable runup in 2017. Sixty-nine per cent of respondents see them as a potential bubble that could burst in 2018.

Almost 90 per cent of advisers say the risks in the market add up to an environment that favours active management.

“These professionals demonstrate a clear preference for actively managed investments and continue to allocate the majority of assets to these strategies,” Natixis said in the report. “Greater sentiment toward active management could generate a further shift to active strategies, which have become essential in recent years as advisers seek opportunities to generate alpha.”

More than half of financial advisers say that passive strategies, in contrast, are used mainly for their lower fees. Notably, 75 per cent of advisers believe individual investors are unaware of the risks of passive investing and have a false sense of security about it.

“Financial advisers see a world in flux in the coming year, and their ability to serve their clients will require a unique pairing of skills,” David Goodsell, executive director of the Natixis Investment Managers’ Center for Investor Insight, said in a statement. “On one hand, they will need a firm analytical grasp of the forces driving the market to adjust investment strategy. On the other, they will need to understand the motivations of investors to avoid emotional decisions that could disrupt long-term plans.”

And, while advisers expect their skills to be in high demand in the next several months as investors seek to navigate the choppy markets, they also report giving much more than investment advice to their clients, including help in navigating life events, guidance on identifying and achieving life goals, and help with mediating family financial affairs.

I have been using FinaMetrica for over 17 years for onboarding new clients. They like the extensive value of the reports; but what we appreciate is the innovations in technology, the value of the client-facing materials and the development of the life-long client relationships as I get to really know their behavioral tendencies. FinaMetrica has assisted me in building a very successful practice and we highly recommend it for any advisor who wants to enhance the overall value of their client relationships.

Ron Wilkinson - Portland, Oregon, USA
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