Portrait of a modern investor

By David Goodsell, Firstlinks.

What is the biggest threat to investment savings today? You’d be forgiven if you answered volatile markets and anemic growth when in fact, it’s investors themselves.

Modern investors aren’t just nervous, they’re deeply conflicted. Our recent survey (the Natixis Global Survey of Individual Investors included 7,100 global investors of which 300 were in Australia) shows how deep this conflict runs. Investors say they want to grow assets but don’t want to take on risk. They value passive investments for their low fees but mistakenly translate that to mean less risk. They want to evaluate their investment performance based on personal goals but then admit they don’t have them. They understand more of the responsibility for retirement is theirs but drastically underestimate the cost. And the list goes on.

Why is this important? Because left unresolved, these conflicts reduce savings and investment and deter people from doing what they need to do today to provide for a stable future tomorrow.

Cautious, but searching for double-digit returns

A majority of individuals we surveyed call themselves ‘cautious’ investors. But in the same breath, they said they needed returns of 8.6% above inflation to meet their goals – which in today’s world would expose investors to significant volatility. Not many are likely to stomach the risk when 67% of investors say they’d take safety over investment performance. What investors need is education about risk and help understanding just how much they are willing to take on.

See low fees and think less risk

When it comes to passive index investments, a surprising number of investors wrongly assume that lower fees mean less risk. Some 55% think index strategies are less risky and help minimise losses. But by their very nature, passive investments have no built-in risk management. When markets rise, they generate market returns. When markets decline, they generate market losses. Passive strategies have a place in portfolios, right alongside active investments, but investors need to understand what they own. Professional investors get it. Our annual survey of institutional investors found they mix in passive to keep overall fees down, but they turn to active management to generate returns and provide risk management.

Goal oriented, but lacking clear goals

Seven out of 10 Australian investors claim to evaluate their investment performance based on personal goals. But that seems unlikely for many when less than half (45%) say they have clear financial goals in the first place. Fewer still say they have a financial plan (34%). The first step forward for any investor should be to write down specific goals and work with a financial professional to help set a realistic plan.

Understand retirement, but underestimate what’s needed

Government benefits and employer pensions once shared equal duty with personal savings for retirement funding, but 77% of Australian investors now believe the responsibility of shoring up retirement is increasingly theirs. The problem is that few realise just how much this responsibility really adds up to. They believe on average they will need to replace only 70% of current income in retirement – this is on the lower side of the 70% to 80% most experts recommend, but above the global average expectation of 64%. Investors need to consider longevity risk as their biggest challenge. Determining how much to save needs to begin with a serious accounting of how much they will actually need to live in retirement.

Investors have much to resolve, but the good news is that they recognise the value of professional advice and believe it is worth the fee. Just under two thirds say individuals who get professional advice are more likely to meet their goals. However, investors today have a clear vision of what they want from an adviser – and it’s not a hot stock tip. They want to become more informed investors. They want solutions for managing risk. They want help setting goals and plans, and they want a more collaborative relationship with their adviser.

One out of every two investors globally thinks the investment industry is not putting their interests first. If we are going to rebuild that trust, we need to get on the same side of the table with investors. We need to put risk first in the investment discussion so they understand what to realistically expect from their investments. We need to stop talking about investment products and start talking about personal portfolios designed to fit their unique goals. It’s our responsibility to help them make more informed decisions about their financial future.


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