Financial advisors are caught between two rocks and a hard place: clients’ mismatched performance expectations, volatile markets and costly new regulations, according to a study published today by Natixis Global Asset Management Canada.
As a result, many advisors yield to a demand for low-cost passive investments, but 69% worry that investors don’t appreciate the associated downside market risks. A significant majority says market complexity and volatility highlight the importance of active management and professional guidance. Yet it’s harder for advisors to satisfy clients, comply with new regulations and manage a thriving practice. The pressure may compel many to reinvent their businesses or exit the industry.
Natixis surveyed 150 Canadian financial advisors and found:
- Investors expect an average annual return of 9.3% above inflation; advisors say 4.8% is realistic.
- More than half of advisors (51%) say clients have asked for help managing volatility in the last year. In response, 75% of advisors say active strategies, such as using non-correlated assets, will play an important role in addressing increased volatility.
- About half (46%) use passive investments because many so-called active portfolios are really “closet indexers,” meaning they closely track market benchmarks.
- Meeting strict regulatory and disclosure requirements is the biggest challenge to business growth (73%).
- Nearly a third (32%) say they will disengage from smaller clients due to new regulations.
- Over the next three years, 30% are planning a dramatic change by selling their book of business, merging with another firm, leaving the industry or retiring.
- Most advisors (82%) aren’t threatened by automated advice, because robo-advisors can’t deliver tactical asset allocation, particularly in volatile markets.