Survey: Investors' great expectations unrealistic

There appears to be a mismatch in investment return expectations and what can be achieved realistically, according to a survey of financial advisers by Natixis Global Asset Management.

It noted that while investors here said they need an 8.7 per cent (compared to 9.5 per cent globally) annual return to achieve their investment goals, financial advisers think their clients can realistically achieve a 5.7 per cent (5.3 per cent globally) return over the long term.

This means an important factor in a financial adviser's success would be managing a client's expectations, according to 92 per cent of advisers surveyed. The level is 86 per cent globally.

The survey polled 2,550 financial advisers across 15 countries, including 150 from Singapore.

MANAGING MARKETS AND VOLATILITY

Not surprisingly, market volatility remains high on the list of challenges for advisers and investors alike.

The survey also revealed that the biggest mistakes made by Singapore investors, amid the persistent market volatility that has dominated the investment landscape in recent years, include:

• Making emotional investment decisions (59 per cent compared with 61 per cent globally);
• Having unrealistic returns expectations (50 per cent compared with 51 per cent globally); and
• Focusing too much on short-term market noise and movement (50 per cent compared with 47 per cent globally).

Ms Madeline Ho, executive managing director, head of wholesale fund distribution, Asia Pacific, at Natixis, said: "Volatility, uncertainty and complexity are the hallmarks of the new reality in financial markets in which professional advisers will have a critical role to play in helping investors stay the course in achieving their financial goals."

Despite volatile market conditions, financial advisers here are generally optimistic and expect their assets under management to grow 10.2 per cent over the next year.

RETIREMENT INCOME

Singapore investors seem to have a less accurate view on their retirement income than those globally.

The survey showed that investors often underestimate the amount of income they will need to live comfortably in retirement.

Investors believed that they would need to replace 61 per cent of their pre-retirement income, which is considerably less than the 75 per cent to 80 per cent experts believe to be a more accurate benchmark.

OVER-RELIANCE ON PASSIVE INVESTMENTS

About 80 per cent of Singapore financial advisers agree that active strategies will have an important role in portfolio management.

In the light of anticipated market volatility, passive investments are expected to constitute 41.7 per cent of Singapore investors' portfolios (37 per cent globally) over the next three years despite the potential shortcomings of passive strategies.

However, the survey indicated that 70 per cent of Singapore advisers believe investors have a false sense of security regarding passive investments and 80 per cent of advisers here think investors are not fully aware of the risks associated with passive investments.

This is because index funds leave investors exposed to short-term market changes triggered by major news stories.

Ms Ho said it is important for investors to understand that the very nature of index funds means there is no built-in risk management to protect against market loss.

"The physics of passive investing is that they produce positive returns when markets go up, but they also produce losses when markets go down," she said.

"Investing starts with understanding risk. It is crucial to remind investors about this investment basic which can easily be taken for granted, whilst explaining to them at the same time how active management can help to better control the risk of their portfolio and navigate through such complex and volatile markets."

lornatan@sph.com.sg

This article was first published on October 02, 2016.
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