Advisers must adjust to the new wave of investors

Hrishi Rajadhyaksha

Hrishi Rajadhyaksha

How will economies rebound following the end of lockdown?

And will there be a second wave of infections that create a second wave of lockdowns?

These are the two key questions driving investment activity in the current crisis.  

According to Bank of America’s April Global Fund Manager survey, 74 per cent of investors expect either a U- or W-shaped recovery, only 15 per cent expect a V-shaped one.

The lack of economic certainty is leading to three trends among investors:

  1. they are transacting more
  2. new, younger investors (typically underserved by advisers) are entering the market in increasing numbers and
  3. they are moving to passive instruments at an even faster rate. 

March saw a 144 per cent jump in the number of trades and an 85 per cent jump in value of trades transacted on the London Stock Exchange compared with the same time last year.

Self-directed platforms are seeing some of the highest volumes on record.

In the last week of March, major platforms recorded 60 per cent to 70 per cent of trades as buy trades while the value of the sells was higher than the value of the buys – a classic sign signalling portfolio churn. 

Self-directed platforms also saw an increase of two to three times in the number of account openings for March compared with the same time last year, even though the FTSE100 was down more than 20 per cent this time around.

The 18-34 demographic are typically more attracted to these platforms.

As ‘asset-builders’ they are more likely to view the crisis as a buying opportunity. They are also chronically underserved by advisers - according to the FCA only 6 per cent of this demographic took financial advice in 2017.

Economic uncertainty will also accelerate the trend of favouring passive investments as investors become more price-sensitive.

In the UK, March saw roughly 3x net inflows into index equity funds as well as 3x net outflows out of active equity funds, compared with the same time last year, according Calastone, a global funds network.

Equities have seen a strong pull-back in April.

However, there is no bear market without a bear market rally.

Investor sentiment will become more cautious over the coming months and there is likely to be particular scrutiny with respect to advisory costs. 

Where does that leave advisers? Responding to changing investor behaviour requires a change in the way financial advisers communicate their value or even the way they charge for their services.

Based on a recent survey of >1300 retail investors by Simon-Kucher & Partners, the services that are most valuable to individuals when it comes to investment propositions are:

  1. access to a trusted adviser
  2. personal recommendations tailored to financial goals and
  3. regular follow-ups on investment decisions.

Financial advice should be in high demand once lock-down restrictions are relaxed.

Advisers that will end up winners are the ones who can most clearly communicate value through their offering and pricing – value which is less about stock-picking and more about providing financial guidance.

Investors should be able to link what they pay for (range of services) and how they pay (fixed, ad valorem, hourly,) to the value derived from having a financial confidant who helps them chart a clear path of action in both certain and uncertain times.