The Least Optimistic Investors? Those With Advisor-Managed Portfolios: Report

Investors who gave up control of their portfolios to financial advisors had the bleakest outlook in March.

(Michael Nagle/Bloomberg)

(Michael Nagle/Bloomberg)

The first half of 2020 was a trying one for U.S. investors. It’s hard to blame them for not being optimistic about the future of the economy. But one group of investors was notably far less optimistic than others.

Market indexes continued to tally new record highs in January and February before fear of a novel coronavirus caused a swift reversal. As the Covid-19 pandemic spread, and the number of daily new cases and deaths in the U.S. surged in March, businesses were ordered to close and millions became unemployed. It led to the fastest-ever downturn and bear market. Credit markets “essentially closed over a period of days during March.”

Cash-crunched RIAs began seeking financial support provided by the CARES Act on behalf of clients and for themselves. (Although, even a recession won’t stop RIA buyers or torpedo valuations.) Meanwhile, investors began opening new accounts and trading at record levels.

But investors were not equally downbeat about the U.S. economy in March and the most pessimistic group might not be obvious.

In January and February, investors who were self-directed, investors receiving some form of investment advice from an advisor, and investors who outsourced most or all of investment management to an advisor (advisor-directed), all expressed optimism about the economy. By the end of March, that optimism was “shattered” and all of those groups about-faced. However, advisor-directed investors were far more pessimistic about the U.S. economy than other investors, according to a recent report by Cerulli Associates, a Boston-based research and consulting firm.

Most clients of advisors had a positive outlook (59%) in February, and 62% had a negative outlook in March, the biggest reversal of any group.

The results suggest that advisors, overall, did not communicate enough with their clients (or communicated poorly) about the downturn this spring. “Clients hire their advisors to outsource not only their portfolios, but also their worries and concerns about them. While investors will doubtlessly be concerned until the current situation is resolved, it is incumbent upon wealth managers to help frame this period as a short-term impediment on clients’ long-term financial journeys,” the Cerulli report said.

Cerulli partnered with Phoenix Marketing International to specifically survey affluent investors with more than $250,000 in investable assets, and the “near affluent” who earn more than $125,000 annually and are under age 45. However, responses were weighted to reflect the distribution of households within that segment, which, by definition is wealthier and older than the aggregate U.S. population, according to the report.

“Faced with near unprecedented levels of uncertainty, advisors should reassure their clients that markets typically rebound in the long run, and to reinforce clients’ financial goals and objectives to keep them on track while making the appropriate adjustments to combat volatile markets.”

Wealth managers that communicated well with investors positioned themselves to better retain clients and even attract more, according to Cerulli. But even firms doing those things need to connect with clients and determine how they can serve them better in the future.

For example, markets this year have the “potential to fundamentally change investors’ risk appetite” and advisors need to revisit that topic with their clients, Cerulli says. Even if a conversation doesn’t lead to any meaningful changes, the notion can reassure investors about their portfolios (and financial goals).

Cerulli’s research showed households are “predominantly indicating an interest in adopting a holding pattern for their portfolios” and advisor-directed investors now believe in a buy-and-hold strategy more than any other group.

Across all types of investors, Cerulli found buy-and-hold strategies increased in prevalence by 12% from January to March. The same strategies increase 22% for advisor-directed households over the same period.

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