By Cyril Tuohy
In a new survey, financial advisors named the top three challenges to their success and the success of their clients. Those challenges are clients’ emotions, managing investor behavior and convincing investors to stick to their financial plan.
Though the findings aren’t necessarily news — other surveys have come up with similar results — they reinforce the importance of making a plan and sticking to it, no matter which direction the investing winds blow.
“When investors make emotional decisions, they decrease the odds of reaching their financial goals,” John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia, said in a news release announcing the company's survey results.
No financial advisor can control the markets but advisors can “head off adverse reactions” by creating long-term plans, Hailer said.
Which is, of course, what long-term planning is all about.
“Managing emotions may be easier said than done,” Hailer said. “Investors may not realize the potential negative effects hasty decisions can have on their investment portfolios.”
Advisors never tire of repeating the mantra that the more trading in and out of investment positions, the more it costs investors in taxes and trading fees. More often than not, investors act too late only to see the value of a holding fall.
The survey, conducted online in June, also found 84 percent of advisors said rising interest rates and inflation would be a concern, and 57 percent of advisors would change investing strategies if the stock market suddenly dropped by a large percentage.
To mitigate the volatility of market swings, some advisors use alternative investments to stocks, bonds and cash.
Alternative investments, which include precious metals and commodities, are not directly correlated to the stock and bond markets. The survey found that 83 percent of advisors have spoken with clients about using an approach that invests in alternative assets.
“There is an opportunity for advisors to talk to clients about using alternative strategies as portfolio construction tools,” Hailer said.
Only 35 percent of advisors regularly use alternative strategies in client portfolios, an increase from 29 percent last year, the survey found.
In addition, 60 percent of advisors surveyed said they infrequently use alternative strategies in client portfolios compared to 57 percent in 2013.
The top reason advisors don’t use alternatives in 2014 is because they think clients perceive alternatives as risky; in 2013, advisors said the top reason for not using alternatives was that clients have very little understanding of these investments.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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