Get real, investors: Financial advisors urge lowering expectations
One of the biggest challenges for financial professionals is managing their clients’ emotional decisions, says an industry expert.
At the height of the COVID-19 pandemic that included rolling shutdowns, US investors on average still reported gains of 16.5 percent in 2020. So as the US economy emerges out of the worst and starts humming again, why not expect even higher returns?
That’s just the investor sentiment that Natixis Investment Managers found in its Global Survey of Individual Investors — but a far cry from what financial advisors believe is more attainable.
American investors’ long-term investment return expectations rose to 17.5 percent above inflation, greatly exceeding pre-pandemic levels and historical averages, and 161 percent more than what financial advisors say is realistic, according to the survey of 750 investors in the United States who have at least $100,000 in household investable assets, as part of a larger global survey.
While investors often have higher expectations than what advisors believe they can achieve, this year the gap has skyrocketed – more than double the 73 percent gap between investor and advisor sentiments in the 2019 survey, says Dave Goodsell, executive director of the Natixis Center for Investor Insight in Boston.
“To me, the logic that goes behind this is that last year people did really well with their investments, so their thinking likely was that if they did really well in bad times, then when things get better, they’ll do even better,” Goodsell says. “But when we ask advisors about the long-term return in equities, we believe their view is more realistic.”
This goes to the heart of one of the biggest challenges for financial professionals: managing their clients’ emotional decisions, he says.
“We tend to think we need to manage clients’ emotions more in a downturn, but we also need to do that when the market is up,” Goodsell says. “Advisors should help clients moderate some of their expectations and lock in what they’ve earned already.”
Moreover, investors’ expectations are disconnected from financial fears: 60 percent say they are comfortable taking risks to get ahead, however, most (77 percent) would prefer the safety of asset protection over investment performance. All of the respondents rank volatility as their biggest immediate investment concern.
The pandemic also reinforced the prudence of keeping one’s spending in check — 44 percent of investors, including 51 percent of both Gen Xers and Gen Yers, say this. Many were impacted financially during the shutdowns, particularly those who either contracted COVID-19 or a family member did – or both.
Of that group, 31 percent experienced a significant setback to their financial security, nearly twice as many as those in households in which no one contracted the virus (16 percent). One in five (21 percent) reported a loss of household income, and 15 percent were forced to borrow from their retirement savings plan. Ten percent were forced to retire altogether, roughly three times more than those in households that didn’t contract the virus (3 percent).
“In times of crisis, you start really thinking about having emergency savings, putting money aside so you can cover basic bills, and making sure you don’t overspend,” Goodsell says.
For advisors, helping to meet all of a clients’ financial needs that also includes making sure they are covering the basics to boost their overall financial well-being is increasingly becoming a best practice within the industry, he says.
“More and more advisors are moving to a more comprehensive financial planning approach, helping clients to view all of their financial goals more holistically so they can see how all of the pieces fit together – rather than viewing them in silos,” Goodsell says.
Other key survey findings include:
- Feelings about financial security: When asked to describe how they have felt about their financial security during the pandemic, the vast majority of investors say they feel fortunate (79 percent), resilient (76 percent) and confident (70 percent).
- Circumstances during pandamic: Natixis found a mix of emotions among investors depending on their circumstances during the pandemic. Four in ten (43 percent) say they are stressed about their financial security. One in three have felt vulnerable (30 percent), even fearful (30 percent).
- Setbacks: Gen Yers and Gen Xers are twice as likely than baby boomers to say the pandemic significantly set them back financially (23 percent of Gen Y and 28 percent of Gen X, compared to 11 percent of baby boomers).
- Emergency savings: Four in ten (41 percent) investors say the pandemic taught them the importance of having an emergency savings account. For those households directly affected by the virus, the percentage was higher (53 percent), while for those who weren’t, the percentage fell to 38 percent. Half (50 percent) of Gen Xers and 53 percent of Gen Yers say they realized this last year, compared to 31 percent of baby boomers, who likely already knew the importance of having an emergency account.
- Realizing breadwinner role: More than a third (38 percent) of investors in households where they or other members caught COVID-19 say the pandemic opened their eyes to the role they play in their household’s entire financial picture. Nearly as many (36 percent) say the experience taught them the importance of having an estate plan. The percentage (24 percent) is lower for those whose households were not infected.
- Understanding risks: After a year that saw both the swiftest market downturn and the swiftest recovery on record, nearly a quarter (24 percent) of investors say the pandemic taught them the importance of understanding risks in their portfolio. Slightly more (27 percent) say they learned the importance of avoiding emotional investment decisions, including 34 percent of both Gen Xers and Gen Yers.
- Changes prompted by pandemic: For all investors, 58 percent made changes in their investing accounts as a result of the pandemic. A third (33 percent) increased trading activity, 20 percent say they invested more money and 16 percent increased contributions to their retirement savings plans.
- Generational based: While 63 percent of baby boomers say they have made no changes in their investment accounts, 82 percent of Gen Yers and 75 percent of Gen Xers have, including roughly one in four who invested more money.
- Online trading: Gen Yers are most likely to increase online trading activity (43 percent) and to have opened a margin account (13 percent). They also are most likely to say in that, in retrospect, they learned the importance of weighing the tax consequences of their investment decisions (27 percent).
- Comfortable with risk: A majority of investors (60 percent) say they are comfortable taking risks to get ahead. Three-quarters (75 percent) recognize market swings of 10 percent up or down as a normal occurrence, and 68 percent have even grown comfortable with the idea that volatility can create opportunities to grow wealth.
- Asset protection over performance: However, most investors (77 percent), including 75 percent of Gen Xers and 79 percent of Gen Yers, say they would choose the safety of asset protection over investment performance. They rank volatility as their biggest immediate investment concern, ahead of a slower-than-expected economic recovery, inflation and political dysfunction. Meanwhile, they say their greatest financial fear is the prospect of increased taxes, ranking it ahead of healthc are costs and job security.
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