A recent survey revealed the important area in which many advisors are failing
A recent survey conducted by Natixis Global Asset Management Canada found that, when making investment decisions, Canadian investors trust their financial advisor more than any other person or source. In fact, trust levels are so high that Canadians trust their advisors more than they trust themselves when it comes to making finance-related decisions. (93% of those polled trust their advisors first, while 88% trust themselves).
Although Canadian advisors are obviously doing something right, according to the survey they are lacking in one important area: helping their clients understand the connection between risk and returns.
The survey asked Canadian investors what annual returns they believe they need to achieve their long-term goals. The average response was a return of 9.85% above inflation, which is around 12 - 13% when you factor in real returns
“However, in our last survey, we asked advisors the same question and they said individuals should realistically expect a return of around 4.6% above inflation - that’s a difference of 105%,” says Dave Goodsell, Executive Director of the Natixis Durable Portfolio Construction Research Center. “Maybe these feelings about returns are wishful thinking or ball-parking, but it’s clearly one of advisors’ biggest challenges.”
What makes these elevated expectations even more difficult to deal with is the fact that Canadian investors are among the most risk averse in the world. Natixis has been working closely with Dr. Andrew Lo, Director, Laboratory for Financial Engineering at MIT, to track and analyze its survey results from the past few years. By looking at responses to a series of game theory questions, Natixis was able to prove what many people had suspected for years: along with Switzerland, Canada has the most conservative investors in the world.
“When I present that information at advisor roadshows, the head nods in the room are so significant – you can feel the people agreeing and recognizing the challenge,” Goodsell says. “It is, however, a situation that makes the role of the advisor even more important. You have people who are risk averse by nature but they have high expectations, so they need good professional guidance to guide them.”
The survey made another significant, although possibly unsurprising, finding: referrals top the list of ways people find a financial advisor. Taking a recommendation from a friend, relative or colleague was the most popular referral source (34%), while acting on a referral from another professional (23%) came in second.
“If you are looking to build referrals, networking with accountants, tax professionals and others who are dealing in the financial space is highly important,” Goodsell says. “It’s all about building relationships with people who might complement your services and vice versa.”
Despite the rise of digitization, internet searches (7%) and social media (6%) fell way down the list of places where Canadians are likely to look when they want a new advisor. “It’s fascinating that people are pushing things like social media aside,” Goodsell says. “It shows that when it comes down to making financial decisions, Canadians want to be face-to-face with somebody. That is the key advantage for advisors.”
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