Majority of Singapore Investors Not Fully Aware of Passive Investments Risks
According to the latest survey of financial advisors by Natixis Global Asset Management, 71% of Singapore advisors think investors have a false sense of security regarding passive investments (68% globally) and 82% of Singapore advisors think investors are not fully aware of the risks associated with passive investments. The 2016 Global Survey of Financial Advisors involved 2,550 financial advisors across 15 countries, including 150 from Singapore.
Over-reliance on passive investments
While 8 in ten (80%) Singapore financial advisors (vs. 78% globally) agree that active strategies will have an important role in portfolio management in light of the anticipated market volatility, passive investments are expected to constitute 41.7% of Singapore investors’ portfolio (vs. 37% globally) in the next three years despite the potential shortcomings of passive strategies. Of note, a greater number of Singapore financial advisors say investors in Singapore have a false sense of security with passive products (71% vs. 68% globally) and do not realise that index funds leave them exposed to headline risks i.e. short-term market changes triggered by headline news stories (82% versus 71% globally).
Madeline Ho, Executive Managing Director, Head of Wholesale Fund Distribution, Asia Pacific, Natixis Global Asset Management, said, “While passive strategies will continue to have a place in investors’ portfolio, it is important for investors to understand that the very nature of index funds has 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,” Ho 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.”
Managing markets and volatility
Market volatility remains high on the list of challenges for both financial advisors and investors alike. 82% of Singapore financial advisors surveyed (vs. 88% globally) said that market performance/volatility is the top challenge to their business growth. Correspondingly, more than 6 in ten (62%) Singapore financial advisors (vs. 55% globally) have cited managing volatility as a key focus for Singapore investors over the past 12 months.
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:
1. Making emotional investment decisions (59% vs. 61% globally)
2. Having unrealistic returns expectations (50% vs. 51% globally)
3. Focusing too much on short-term market noise and movement (50% vs. 47% globally)
Financial advisors are generally optimistic and expect their assets under management to grow 10.2% (vs. 9.4% globally) over the next year, despite the ongoing volatile market conditions.
An important factor to their success would be the management of clients’ return expectations, according to 92% of Singapore financial advisors surveyed (vs. 86% globally). Findings from the survey showed that while Singapore investors report needing an 8.7% (vs. 9.5% globally) annual return to achieve their investment goals, Singapore financial advisors think their clients can realistically achieve a 5.7% (vs. 5.3% globally) return over the long-term.
Ho said, “Volatility, uncertainty and complexity are the hallmarks of the new reality in financial markets in which professional advisors will have a critical role to play in helping investors stay the course in achieving their financial goals.”
Against this backdrop of volatility, Singapore investors are thought to have a less accurate view on their retirement income (34% vs. 23% globally).
Ho said, “Our survey data reveals that investors often underestimate the amount of income they will need to live comfortably in retirement, believing that they will need to replace 61% of their pre-retirement income, which is considerably less than the 75% to 80% experts believe to be a more accurate benchmark.
“Having a detailed financial plan with measurable goals that outlines the steps to achieve financial security in retirement will be critical for investors gain a better picture of their retirement needs,” Ho added.
The rise of automated advisory (robo-advisory) and Environmental, Social And Governance (ESG) investing
Despite the nascency of ESG investing and automated advice in Singapore, a greater number of Singapore financial advisors believe that incorporating ESG will be a standard practice for all advisors within five years (46% vs.34% globally), while 34% of Singapore financial advisors (vs. 22% globally) believe that robo-advisors will be the future of financial advice.
More than 6 in ten (64%) Singapore financial advisors agree that the rise of automated advice will make traditional advisors better by encouraging them to work harder to demonstrate value to clients (vs. 58% globally).