Financial service companies need to pay attention to downside protection at the same time that they focus on beating their benchmarks, according to a study by Cerulli Associates.
Surveys taken from 2013 to 2017 show that investors have consistently over that time favored protection-focused portfolios over growth-oriented portfolios by a three-to-one margin, according to Cerulli, a global research and consulting firm.
Most important to advisors, the survey information found that clients often take this stance when it's contrary to the strategies needed to accomplish their financial goals, the firm said.
"Our recent research suggests that providers must take a proactive stance to help investors become comfortable with the realities of equity market exposure," said Scott Smith, Cerulli's director of advice relationships. "Balancing downside protection with the growth potential necessary to help investors reach their wealth accumulation goals is one of the most challenging scenarios facing financial service providers."
In one illustration of the quandary financial firms face, the data showed that preference for downside protection was most prevalent among investors with $250,000 to $500,000 (83 percent) and those with more than $5 million (80 percent). While the latter group can be well served by such a conservative approach since they have adequate assets to support retirement, the former group could be hurt by being too averse to risk, according to Cerulli.
"These investors have made headway in accumulating a considerable portfolio, but are reluctant to take on the market risk that is likely necessary to attain their accumulation objectives," Cerulli wrote in the report.
The same dichotomy was seen in certain age groups, with the most risk-averse investors being those over the age of 60 and those under 30, according to the report. While the conservative approach is appropriate for the former group, the younger investors in the latter group may be selling themselves short by focusing on downside protection at such a young age, according to Cerulli.
Cerulli said the study's results highlight why it is important for advisors to educate clients on risk.
"Taken in totality, these results underscore the importance of advisory relationships for investors," Cerulli said. "Left to their own devices, investors would tend to skew away from creating portfolios that would provide them with the greatest likelihoods of achieving their accumulation goals."