Investors demonstrate a lack of knowledge about financial markets that impacts their investments, according to a study by Natixis Investment Managers.

While 56% of 750 surveyed investors claimed they understood how interest rates affected bonds, only 3% correctly answered the question in a multiple-choice question, the study found. Despite this lack of knowledge, 37% of investors added bonds to their portfolios this year and 39% said they will invest more next year.

“This is a very basic level of education that needs to come with bonds,” said Dave Goodsell, executive director at the Natixis Center for Investor Insight. 

While investors do not seem to fully understand bonds or how they're impacted by interest rates, they are curious about it, as 68% said they would like more information about bonds from their advisor.

Also, 43% want to know about the tax implications of investing in bonds, 41% want to know if some bonds are riskier than others, and 39% want to know how long they should hold on to a bond, the study said.

This represents an opportunity for advisors to help their clients, Goodsell said. Bonds can be a difficult concept for clients because, according to Goodsell, bonds are math.

“Math is hard,” he said. “There’s an inverse relationship between interest rates and bond prices which can make it tricky for a lot of people to grasp what a higher rate means for their fixed-income investments.”

Investors also lacked suitable knowledge of risk, according to the survey. Of those surveyed, only 9% described risk as failing to meet their financial goals, which is how most advisors would define it. 

In addition, 29% defined it as exposure to market volatility, while 23% called it a loss of assets, and 18% said it was underperforming market benchmarks.

Advisors should not make assumptions about their clients' financial knowledge regardless of their background or their level of sophistication, Goodsell explained.

“We do this for a living and we understand it, but understand that no matter how sophisticated one of your clients is, they don’t have the same grasp of it as you,” he said.

The survey also found that many investors are expecting returns of about 15.6% above inflation over the long term. In contrast, advisors are expecting returns of about 6% above inflation, according to Goodsell. 

“That gap between what investors expect and what advisors say is realistic is 123%,” he said. “That’s a big gap to overcome in terms of expectations and education.”

“Make sure clients are grounded in their expectations and understand where the risks lie in their plans,” he said. “It’s critical to coach clients on how to maintain a long-term outlook in periods of short-term distress or uncertainty. Use the financial plan as a touchstone that helps them to frame their challenges in terms of how it impacts their ability to achieve their goals.”

Many investors find advisors' advice and expertise valuable, the study found. The study found that 89% had equal trust between an individual and a financial advisor while 71% put their trust only in a financial advisor. In comparison, 70% trusted their family while 59% trusted a close friend.

“More people trust their advisor than trust their own family when it comes to investment decisions,” Goodsell said. “As an advisor, it is important to recognize that clients are looking to you for a comprehensive relationship. They are willing to share more with you as you prove their trust is well founded.”