Your clients are expecting returns way higher than you’re advising

Financial advisors are going to have to work hard to manage expectations as recovery sparks over-optimistic outlooks

Your clients are expecting returns way higher than you’re advising
Steve Randall

Canadian investors generally fared well during the pandemic, but many are now expecting that returns will soar even higher due to the recovery – and may be disappointed.

The feeling that if investments soared in the bad times, they should be exceptional as economies rebound, is reflected in a new survey from Natixis Investment Managers.

Almost 7 in 10 Canadians said that they had emerged relatively unscathed financially from the impact of COVID-19. Only the Japanese said they fared better.

As part of the international poll, Natixis asked 300 Canadian investors with $100K+ in household investable assets about their expectations. They said they are looking for returns of 10.6% above inflation this year having achieved an average 11% in 2020.

Long-term investment expectations are 11% higher than before the pandemic began.

The problem is that their wealth professionals are advising that returns of 5.1% are more realistic. That’s a gap of 120% between client and advisor expectations, wider than 2019’s 77%.

“Investors need to be emotionally equipped to withstand the higher levels of risk needed to pursue those outsized returns,” said Dave Goodsell, executive director of Natixis Investment Managers’ Center for Investor Insight. “The persistent fear of losses could test investor mettle when markets swing and require financial advisors to help clients keep their emotions in check and their expectations grounded in reality.”

Investor fears

Investors said that they believe long-term returns averaging 11.2% are necessary to achieve their understanding of their investment goals.

Several key themes emerged from the poll regarding Canadian investors’ concerns for their investments, immediately and for the year overall.

Top 5: Investors’ biggest immediate investment concerns are:

  1. Slow economic recovery (49%)
  2. Market volatility (44%)
  3. Inflation (32%)
  4. Tax increases (29%)
  5. Low interest rates (27%)

Top 10: Investors biggest financial fears this year are:

  1. A large, unexpected expense (39%)
  2. Taxes (38.7%)
  3. Maintaining standard of living (29%)
  4. Healthcare costs (22%)
  5. Not having enough money to save (22%)
  6. Cash flow (18%)
  7. Job security (17%)
  8. Real estate values (16%)
  9. Accumulating debt (11%)
  10. Performance of their company (9%)

Lessons learned

While most Canadian investors did not report a major negative financial impact from the pandemic, around one fifth of Millennials and one quarter of Gen-Xers said the pandemic set them back significantly. Just 10% of Boomers said this.

Asked about the lessons they had learned from the past year, Canadian investors ranked keeping spending in check as number 1 (42%) followed by having an emergency savings account (27%), avoiding emotional investment decisions (20%), and understanding risk in their portfolios (19%).

“While not the experience of all Canadians, the investors we surveyed fared better during the pandemic than those in most other countries in terms of employment and income,” said David Giunta, CEO for the US at Natixis Investment Managers. “Yet the long-tail physical, financial and fiscal effects of the pandemic are far-reaching and still unfolding, which creates both risks and opportunities. The big challenge for investors and those who advise them will be to position themselves for success and to remain resilient.”