A column by Hannah Grove and Russ Prince in last month's issue of Financial Advisor caught my attention. Judging by the number of e-mails I received, it also caught some of yours.
Based on a study the two columnists conducted, the article dealt with the attitudes of middle-class millionaires and their advisors and it spotlighted an interesting disconnect. Specifically, their research found that 88.6% of middle-class millionaires, defined as those with investable assets of between $500,000 and $5 million, are very concerned about losing enough of their wealth so that their lifestyle would suffer. Yet only 15.4% of advisors surveyed said they believed that 20% of their clients were worried about a significant loss of wealth.
It's not the first time such a glaring disconnect has been uncovered. At the end of the long bear market from 2000 to early 2003, several studies showed that clients cared much more about investment performance than most advisors thought.
This doesn't mean that most clients are performance pigs, although many investors were spoiled by the bull market and gave advisors fits in the late 1990s. What a difference three or four years makes. At the end of the bear market (which was surprisingly beneficial for this profession) in 2003, one of the smarter advisors I know remarked how deluded she thought some of her colleagues were in saying that clients didn't care about returns.
It's true that reasonable people have since come to realize that advisors don't control the market and that reaching for excess returns involves assuming high levels of risk. But it's their money. Most have worked very hard for it and are interested in keeping it.
They know an advisor can't deliver consistent straight-line 8% annual returns. What they really want is to know that you have an investment philosophy that will offer them some protection on the downside and still enable them to reach their goals.
All of this raises the question: Are people becoming overly risk-averse? And that question applies to institutional investors as well. The nation's corporations also are carrying more cash on their balance sheets today than at any time in recent memory. Moreover, the flood of foreign and domestic institutional funds into 10-year Treasuries sporting anemic yields certainly would support that case.
To the extent that investors are willing to accept lower returns-or demand higher returns as in the previous decade-they can make it a self-fulfilling prophecy. But only in the short term. Over the long term, economics will exert as much influence over returns and risk premiums as investor sentiments. That's one reason why investors' low expectations, exhibited in the flat-line returns in equities, won't last forever. When that happens, people will start talking about reversion to the mean in a very different context than they have for the past decade.