Everyone has financial needs, but do they know what they are and how to fulfill them? When it comes to Canadian investors, 57% have no financial plan and 49% have not set financial goals. These eye-opening statistics come from the Natixis Global Asset Management 2016 Global Survey of Individual Investors,1 which gauged investors' attitudes towards investing.
According to David Goodsell, Executive Director of Natixis Global Asset Management's Durable Portfolio Construction Research Center, "Today's advisor must act as a therapist, teacher and coach in order to help clients meet their investment goals."
The commotion about emotions
Our previous article, When risk aversion becomes risky, highlighted how Canadians may fall short of their financial goals because they won't tolerate risk. Advisors have their work cut out for them. As therapists, they need to help clients confront and overcome their emotions and fears. In a Natixis advisor survey,2 the vast majority of advisors stated that convincing clients to avoid emotional decisions is critical to long-term success.
Consider the two distinct views of a market decline:
Advisor: "It's a natural part of the cycle. It provides an opportunity to buy at attractive prices. Over the long term, markets trend higher."
Client: "What's happening to my hard-earned money? Can I sustain my lifestyle? Will this hurt my family?"
Advisors can help clients overcome this emotional, visceral reaction to market volatility. As educators, they must equip clients with knowledge of how markets work, teaching them to develop a rational perspective on investing. Advisors can also teach clients to better understand the risk/return trade-off, which means encouraging clients to invest in equities to build their savings.
When it comes to coaching, it's similar to sports. If a baseball player keeps striking out, the hitting coach may refine his approach: "Develop a plan against the pitcher or you won't be prepared for whatever he throws you. Take a disciplined approach to hitting and stick with it."
Similarly, advisors recognize the biggest investor mistakes are not having a financial plan – meaning no methodical savings approach and no clear goals to aim for – and making emotional short-term decisions that undermine their long-term plan. Unadvised investors typically make these critical mistakes, so good coaching is key to winning.
Adapt, act, succeed. Repeat as required.
While advisors will need to wear many hats, changing demographics means that advisors must also adapt to different client goals and emotional triggers. For example, many Millennials now require financial help. Contrary to the popular belief that Millennials prefer to jump online and manage their own finances, 73% of them say professional advice is necessary to manage their investments and meet their retirement goals.1
Not only that, but Goodsell says "Millennials are more likely than the average investor to accept greater risk exposure, which is surprising as some experts suggest this group invests conservatively. Although Millennials may be receptive to equity investing, they often panic when markets decline, so advisors should coach them on the virtues of a long-term plan."
5 building blocks for constructing great portfolios
Although the advisor's role continues to evolve, portfolio construction remains integral to that role. With Durable Portfolio Construction, Natixis provides advisors with a strong foundation for addressing market challenges. The key tenets of Durable Portfolio Construction are:
1. Put risk first. Use risk parameters as the main input for asset allocation to manage volatility.
2. Maximize diversification. Consider the broadest possible range of asset classes and investment strategies.
3. Use alternatives. Non-traditional asset classes are used as an effective portfolio diversifier and source of returns.
4. Make smarter use of traditional asset classes. Seek new, efficient ways to capitalize on the long-term potential of stocks and bonds.
5. Be consistent. Maintain a consistent portfolio construction process to focus on the big picture, not short-term market events.
Advisors who can evolve and adapt their business – customizing their value proposition by segment – stand the best chance for sustainable success.
Learn more about Natixis' innovative approach to portfolio construction at durableportfolios.com.
1 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February-March 2016. Survey included 7,100 investors from 22 countries, 300 of whom are Canadian investors.
2 Natixis Global Asset Management, Global Survey of Financial Advisors conducted by CoreData Research, June-July 2015. Survey included 2,400 investors from 14 countries and territories, 150 of whom are Canadian advisors.
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