Financial Advisors Question Traditional Portfolio Mix
Financial advisors believe traditional diversification and portfolio construction techniques need replacement, and are questioning the relevance of time-honored asset allocation strategies that rely on a 60/40 mix of stocks and bonds and long-term, buy-and-hold approaches, according to a new study. The study of 163 U.S.-based advisors by Natixis Global Asset Management, found that nearly half of advisors (49 percent) are ambivalent about the benefits of the traditional 60/40 mix of stocks and bonds to achieve performance.
Nearly twice as many advisors believe that the traditional 60/40 portfolio allocation is no longer the best way to pursue returns and manage investment risk as those who believe it still is (40 percent vs. 22 percent). This “out with tradition” approach is shared across advisor classes, including half of advisors with 15 or fewer years of experience and 43 percent of those with more than 15 years of experience.
A majority of advisors (63 percent) do not believe in, or are unsure of the value of, long-term buy-and-hold strategies, and 77 percent say their clients are questioning this approach as well. Only 38 percent of the survey respondents said they believe longer holding periods decrease the likelihood of a negative annualized return.
Nearly twice as many advisors believe that new approaches in asset allocation and portfolio construction are needed, compared to those who favor the status quo (46 percent vs. 22 percent).
While 80 percent of the advisors surveyed said the majority of their clients are torn between a desire to increase returns and the need to keep their investments safe, 49 percent said a majority of their clients are increasingly willing to take on more risk in search of returns. Fifty-eight percent said clients are beginning to place a higher priority on asset growth over protecting principal. Up to 33 percent of advisors said a majority of their clients are eager to make up for past losses, even if it means taking on more risk.
“Our research confirms that financial advisors are questioning the merits of time-honored portfolio construction strategies and looking for new solutions,” said John T. Hailer, president and chief executive officer, Natixis Global Asset Management – The Americas & Asia. “We think that by putting risk first, managing volatility and incorporating alternative investment strategies, investors can both reduce risk and produce the growth that will help allow them to meet their long-term savings goals.”
Advisors increasingly are interested in adding a mix of alternative investment strategies to client portfolios to manage the impact of market volatility and seek greater diversification. They are doing so not just for high-net-worth clients but also for a broader range of clients, and client asset levels, than ever before.
A majority of advisors (64 percent) said they are inclined to employ alternative investment strategies even for their mass-market clients, those with $200,000 to $300,000 in investable assets.
Half of the advisors polled (49 percent) said they regularly employ alternative investing strategies across their client base, with 79 percent saying they do so to improve diversification, 68 percent to reduce risk, 51 percent to enhance returns, and 42 percent to dampen volatility.
“Advisors understand the importance of building more durable portfolios that are designed to do well in both up and down markets, and they are tackling the correlation across asset classes by incorporating alternative investments,” Hailer said.
Veteran advisors with more than 15 years in the industry are more cautious about employing alternative strategies than less-seasoned advisors, with 59 percent of veteran advisors saying they are inclined to recommend alternative strategies for mass market clients, while 76 percent of less-seasoned advisors would do so.
For those advisors who don’t use alternative investing strategies in their client portfolios, the top reasons for not doing so are: Clients believe fees are too high (20 percent); clients don’t understand how they work (19 percent); and clients don’t believe alternatives should replace traditional investments (19 percent).
Although 9 in 10 advisors (89 percent) said they are confident that their clients’ current investment portfolios are designed to manage volatility, the same proportion (89 percent) recognize that mitigating the impact of market volatility is a “challenge.” In fact, 39 percent of advisors polled said it is a “major challenge.”
Advisors who are adapting to new market conditions and investor expectations are also taking advantage of opportunities to grow their business and achieve competitive differentiation. Almost half of advisors (46 percent) said market conditions enabled them to boost their business in the past three years, and 54 percent claim market volatility has enabled them to capture assets their clients previously held elsewhere.