Managing expectations against reality can consume a person, as Marc Webb so poignantly juxtaposed in the adored romantic comedy 500 Days of Summer. Cinematic digression aside, such a balancing act is not only an undeniable component of life, but also a major factor in the hyper-dynamic, multi-faceted world of selling goods and services. Quite often in business, particularly the area of marketing, much is invested in managing the unintended yet eventual disparity between what consumers expect from a product or service and the realities of what each can deliver.
While this factor is primarily associated with CPG marketplaces, the fundamental basis for differences in perception isn’t absent from financial services either, with wealth management clients and advisors approaching investing with contrasting strategies and goals. As a result, the necessity and ability for an advisor to differentiate and tailor their offerings has started to affect other spaces within financial services.
Natixis Global Asset Management conducted a survey of 300 financial advisors on the industry’s widening expectations gap, and the results are revealing. Advisors are under pressure from clients to offer lower-cost passive investments—a product of both the rise of robo-advising and the implementation of the DOL fiduciary rule—but 75 percent of them believe investors don’t understand the risks associated with such strategies, especially when the market becomes volatile. But in trying to incorporate a better understanding of investors’ level of risk, financial goals and personal values, which 85 percent respondents said is critical to their business’ success, 61 percent indicated they find it hard to manage clients’ performance expectations when it comes to integrating goals-based planning.
The strongest illustration of this divide comes by way of the following: Investors expect an average annual return of 8.5 percent above inflation, 44 percent higher than the 5.9 percent that advisors say is realistic in the current market. Achieving such returns is a tall order, especially considering the aforementioned push for lower-cost passive products. Even still, 43 percent of advisors said they are utilizing passive for a variety of reasons, including to compete against some active managers who track benchmarks without offering much else in terms of active management. Mix in regulations like the new DOL fiduciary rule, and advisors are left with few options for providing such lofty returns.
“The challenges facing financial advisers are tougher than ever as they are asked to do more with less in an environment that seems to put low fees ahead of other considerations, including risk management,” said John Hailer, chief executive of Natixis Global Asset Management, in a Wall Street Journal piece on the survey. “Low cost does not always equate to good value, and what’s lost in the big picture is the importance of professional guidance and risk management, especially in today’s complex and volatile markets.”
Managing expectations versus reality is what prompted Natixis to conduct the survey in the first place, as it, along with numerous other asset management firms, is feeling the residual effects of what’s transpiring within the wealth management arena; it wants to understand exactly “what’s [being] lost in the big picture.” As advisors try to meet or even adjust investors’ expectations, the realities of each investment strategy are impacting what asset managers can build, but, as Hailer opined, the current set of circumstances isn’t entirely shocking nor unwarranted.
“Our industry hasn’t been the best at being completely transparent and doing all the things that we needed to do,” he said. “If it had been better over the last 20 years, we probably wouldn’t have seen so much in the way of regulatory [oversight],” Hailer said. “We need to do a better job of delivering to our investors.”