Advisers critical for risk-averse Aussie investors

According to the Safe Hands on the Wheel report, commissioned by specialist investment firm Milford and conducted by Ensombl, Australian financial advisers are prioritising capital protection and a smoother growth journey for their clients thanks to this loss-averse mindset among investors.

While it is frequently understood that retirees and pre-retirees move to a more conservative portfolio construction than younger investors, the research found that the loss averse positioning runs across all age groups for Australian investors.

Among all investors, regardless of age range, 19 per cent prefer guaranteed returns and 48 per cent look for stable, reliable returns, while 22 per cent are willing to accept moderate variability in returns. Just 10 per cent were willing to accept higher variability with the potential for higher returns.

Interestingly, younger investors leaned heavier towards guaranteed returns, with 28 per cent of next-generation investors and 25 per cent of wealth accumulators noting this as their preference. This fell to 15 per cent and 12 per cent for pre-retirees and retirees, respectively.

Additionally, the report said that around 40 per cent of clients could only accept a 5 per cent annual loss on their portfolio, with 23 per cent not accepting any annual loss.

Financial advisers, therefore, are looking to limit downside losses when constructing a portfolio, including at the expense of some “upside capture”.

Among the advisers interviewed for the report, the consensus view was that the majority of clients were suited to a strategy designed to capture much of the market upside, while limiting the downside.

Milford’s chief country officer, Australia, Kristine Brooks, said: “Helping clients navigate the current challenging investment landscape while progressing towards their goals and dreams takes expertise, empathy, and the right tools.

“It is clear that one of the tools advisers are using is active management, strategically applied in a way that can smooth the growth journey and help clients to get a better night’s sleep.

“While some are keen to frame the passive and active narrative in a black and white context (one way versus the other way), the majority of advisers we speak to prefer to skilfully blend both approaches when tailoring portfolios for their clients.”

Another factor in loss aversion among investors is the tendency to feel the pain of losses much more acutely than they enjoy the gains.

“Not many clients would call to congratulate their adviser for delivering a big upswing in performance, but if the market takes a nosedive, the phone doesn’t stop ringing,” Sean Dunne, managing director at Dominium Capital, said.

The report added that clients are not engaging financial advisers to chase investment performance, instead they are looking for help to achieve their higher goals.

“Our focus is on getting the strategy right and solving client problems. They see us as having the knowledge and connections to bring in the right experts,” said Marisa Broome, principal at wealthadvice.com.au.