For the financial planning industry, the UK's Brexit vote and ensuing market volatility highlights the need to adopt a new reality: this is what the markets will continue to look like in the foreseeable future.
That said, how can RIAs and fee-based advisers adequately protect clients’ portfolios from dramatic swings without completely eliminating any potential upside?
Long before the Brexit vote, volatility was rated a top concern for both advisers and investors in our second annual Advisor Authority study conducted by Harris Poll, which surveyed 638 RIAs and fee-based advisers and 733 individual investors nationwide.
Both advisers and investors cited volatility as one of the top three macro issues that will most adversely impact portfolios over the next 12 months, and three-quarters of all advisers anticipate that volatility will increase in the coming year. Among the listed drivers of volatility were energy prices, U.S. Fed policy, the U.S. presidential election, instability in China’s markets, and rising interest rates.
PLANNING GOALS MUST EVOLVE
When the survey was taken in the late spring, Brexit was far from the minds of advisers and investors, but has proven to be yet another stumbling block in a market that has been struggling to get back on its feet over the past year.
As volatility remains a very real concern, advisers and investors’ approach to financial planning will need to evolve and continue to transition into holistic and goals-based advice, guided by the clients’ best interests. This will require out-of-the-box solutions, but advisers are up to the challenge.
After establishing that volatility is top of mind for advisers and their clients, we wanted to find out the measures they were taking to combat this issue.
The study showed that advisers are gearing up to take action—nearly two-thirds of advisers felt pressure to revise their investing strategy due to the current market. Three fourths of those advisers who were revising their strategies planned to take a more tactical approach to investing, with 69 percent planning to invest more conservatively.
To address volatile markets, integrating more alternatives proved to be the top strategy of advisers.
Nearly half of advisers rate alternative mutual funds and ETFs, such as those using long-short equity, managed futures and multi-strategy approach, as their number one solution. That number increased for advisers who manage more than $250M in assets (53%) and those who earn more than $500,000 per year (60%).
Long-only alternatives, such as REITs, commodities and currencies, were the second most popular anti-volatility strategy, with 42% of advisers using those vehicles. Defined outcome investing—structured notes, managed options portfolios, index annuities, etc.—were third, used by 37% of respondents, with that number rising to 51% for both advisers with high AUM and high-earning advisers.
While Brexit is an extreme example of a volatility-inducing event—particularly as many investors had expected, and priced in, a ‘remain’ vote in the referendum—global economies are still trying to find steady ground following a bull market that began to look wobbly late last summer.
'ONGOING CHOPPINESS' NEEDS EFFECTIVE SOLUTONS
Advisers and investors have started to accept the reality of ongoing choppiness in the markets, and are working to implement innovative strategies to meet it head on with effective solutions.
Advisers in particular must realize that, while volatility can be managed through a variety of asset management and asset selection tactics, in order to truly differentiate and distinguish themselves, they will need to begin and end with true goals-based planning, combined with comprehensive understanding, management and acceptance of risk.