Wealth Management Trends in America

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Many investors don’t understand risk in a time when there’s deep skepticism on gaining advice and increasing awareness of robo-advisors. That provides financial advisors a unique inflection point to showcase value through education and advice on investment risks.

How little do U.S. investors understand risk?

Only 9% of investors recently surveyed by AMG Funds can identify risk correctly.

AMG Funds asked 1,000 investors:

Which, if any, of the following would you use to assess risk in your portfolio?

Only 9% selected standard deviation and/or beta. We’ll call them knowledgeable investors and the other 91%: unknowledgeable.

Look at a few key complementary points on unknowledgeable investors.

Unknowledgeable investors are clearly demarcating their interest in scenario planning and if unable to get truly customized advice, may seek new outlets.

The first step to protecting investors is to educate on the basics about risk. We’re not talking about risk budgeting and modern portfolio theory stuff made for CFAs.

Investors Should Be Able to ​Answer These Questions:

What is risk?

Risk involves the chance an investment’s actual return will differ from the expected return. Risk includes the possibility of losing some or all of the original investment.

Then, how do people measure risk? By calculating the standard deviation of previous returns. The bigger the standard deviation, the greater the risk of an investment. The top illustration represents less risk than the bottom illustration.

What are different types of risk?

For example, your investment value might rise or fall because of market conditions (market risk). Corporate decisions, such as whether to expand into a new area of business or merge with another company, can affect the value of your investments (business risk). For those who own an international investment, events within that country can have a significant impact on its performance (political risk and currency risk, to name two). 2

Can we eliminate risk?

No, but an investment plan can manage risks through asset allocation and diversification.

Both can be described simply: don’t put all your eggs in one basket. Asset allocation means your client invests in stocks, bonds, real estate, cash and other investment categories. In most environments, these investments don’t rise and fall in value at the same time. Diversification means picking many different investments within each category; so not a single company’s stock but many different stocks.

Let the abovementioned research be a call-to-arms for financial advisors to educate their clients on risk. It all begins with that phone call or e-mail and can only improve client satisfaction.


Millennial Investors Are Fundamentally Different

Millennials are much more likely than older investors to perceive computer-generated portfolios as:

  • Less Risky: 63% of Millennials (vs. 17% of older generations) agree that computer generated portfolios are almost always less risky than those selected by a human
  • High Performers: 70% of Millennials (vs. 14% of older generations) agree that computer generated portfolios almost always outperform

However, Millennials also understand that computer generated portfolios have limitations:

  • 71% believe these portfolios follow a cookie cutter approach to portfolio construction
  • 83% are disappointed they do not provide specialized advice for tax, estate or retirement income planning
  • 77% would prefer to have a dedicated contact person to address questions or concerns

Playing An Active Role in Their Financial Planning

Millennials expect nearly twice as many interactions (in person or by phone) with their advisors than older investors. On an annual basis, Millennials expect 9 interactions vs. Boomer+ who only expect 4.

Millennials will be an increasingly important part of this industry and the reasons why millennials seek out professional financial advice are different than older investors. The top three reasons why Millennials sought the help of an advisor:

  • Desire to get into new investment categories or strategies
  • Reached a certain age
  • Market or economic conditions

Wealth Preservation

Investors seeking wealth preservation should consider funds which favor high-quality securities and value investments.

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Investors seeking diversification should look beyond traditional investments. By expanding their search beyond the U.S. borders, investors can tap into a world of opportunities.

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Investors in search of income should turn to Funds investing in higher-yielding securities such as high dividend stocks and high yield fixed-income.

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Investors seeking growth should consider investing in alternative asset classes with strong performance.

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Managing Taxes

Tax management may be one of the most reliable ways to impact total return for investors, but it is also often overlooked. Only 6% of investors chose managing taxes as their top investment goal, demonstrating a need for advisors educate their clients on how to they keep more of what they earn.

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