This content is from: Wealth Management

The Great Advisor Balancing Act of 2021

More than 80% of clients would prioritize investment protection over performance. Can advisors make them happy and achieve the returns needed to meet their goals?

Early last year, the stock market inched to an all-time high before the Covid-19 pandemic unleashed the fastest-ever bear market. The Cboe Volatility Index — Wall Street’s fear gauge — also hit an all-time high. But while the global health crisis continued throughout 2020, equity markets recouped their losses and reached new highs again. 

A year of relentless anxiety about the novel coronavirus also took portfolios for a ride, and not one that investors cared for. 

Discount brokerages like Charles Schwab, Fidelity, Robinhood and others, experienced record trading volume in 2020. But the majority of affluent investors are more interested in preserving their wealth than they are growing it. From 2016 to 2019, almost three-quarters of affluent investors said their primary goal for their portfolios was to protect them from significant losses, even if it meant underperforming the market at certain points, according to Cerulli Associates, a Boston-based research and consulting firm.

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That was especially the case for investors whose financial advisor was managing their portfolio. Over 80% of advisor-directed clients prioritized protection over performance. 

Self-directed investors, and investors who only work with an advisor in special circumstances, are more likely to put performance first. But even among those investors, less than one-third were focused on beating the market.

Aversion to losses is “one of the strongest behavioral biases clients have” and 2020 reinforced those, according to Cerulli.

“With 2020 being marked by some of the most volatile markets since 2008, protecting current levels of wealth and ensuring stable retirements are the two most common financial goals for investors, leading to advice relationships where the objective is to ensure those assets are sustainable for when they need them the most rather than taking a chance to aggressively grow wealth, even as equity prices soared this summer.”

But will investors be able to achieve their goals if advisors bend entirely or routinely to their risk-averse ways? This is the balancing act of 2021.

“One of the most significant challenges facing advisors is helping clients consider the implications of limiting equity exposure when pursuing long-term portfolio goals. While the value of professionally managed equity investments are of course subject to daily fluctuations, including substantial equity exposure is integral to optimizing expected returns over time,” according to Cerulli. 

“Portfolios with reduced short-term volatility can offer immediate comfort, but substantially increase the fundamental risk of not being able to reach ultimate savings goals.”

It’s a conversation advisors will need to have with clients, if they haven’t already, and one that should be approached with some finesse, Cerulli says.

“This will require a fair degree of empathy and attentiveness from advisors, who must not only consider the risk-averse nature of their clients, particularly older clients, but also serve as educators on the concept of time horizons when considering the true risk of an investment.” 

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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