Research: Advisors Need Content About Downside Protection

A new study conducted by Advisor Perspectives reveals that downside protection for U.S. equities is the biggest concern for registered investment advisors (RIAs).  The study looked at how fund companies and ETF sponsors should focus their messaging and marketing efforts. Among other key findings in the study were that the return-on-investment from product representatives (wholesalers) was not clear, and that advisors value specific types of analysis and thought leadership.

Advisor Perspectives, a Boston-based publisher of newsletters and research for advisors, conducted the study as an online focus group on APViewpoint, its on-line community that has more than 17,000 advisors as members.  This research was conducted in July with 30 large RIAs, each with at least $250 million under management, of which a minimum of 10% of assets are allocated to actively managed U.S. equities; the RIAs had no plans to decrease that allocation in the near term.

The RIAs were asked whether the current equity market environment is lulling investors into passive choices at the risk of not managing risk effectively or proactively. An overwhelming number (70%) of respondents said “yes” and another 16.7% said “possibly.” No question in the survey generated as uniform a response as that one.

This suggests that fund companies and ETF sponsors should educate advisors about downside protection strategies, and explain how their products have historically protected investors in adverse market conditions.

The study also found that, in order to provide downside protection, 30% of advisors are looking to increase exposure to alternative products, such as long/short funds, and 20% are planning to increase their fixed-income allocation.

As a warning to marketers, the study revealed that advisors have an unfavorable view of product representatives. Asked whether there were things that fund companies do that advisors find particularly annoying or useless, nearly half (46.7%) of respondents reacted negatively to interactions with product representatives. Approximately 20% specifically cited product representative visits and 26.7% cited excessive phone calls, which are most likely from product representatives.

Asked how much influence product representatives have in advisors’ decision-making processes for recommending actively managed U.S. equity funds, approximately 70% of respondents answered “very little” or “none” to this question.

The implication is that fund companies need to carefully scrutinize how they use product representatives. The study revealed that advisors value thought leadership, in terms of economic, market and product-specific research. It could be that the use of product representatives is justified based on their ability to deliver this information.

Still, two-thirds of the study’s focus-group participants would be willing to speak with a product representative, implying that fund companies and ETF sponsors should obtain advance permission from participants as a validated pathway for product representatives to establish relationships with advisors.

Reported by:

Robert Huebscher, founder and CEO of Advisor Perspectives, a Boston-based provider of newsletters and research. For more information about this research, contact him at [email protected].