Welcome to Financial Advisor IQ

AMG Study Finds Client ‘Cognitive Dissonance’

By Murray Coleman March 2, 2017

As the U.S. stock rally enters its eighth year, advisors are still hearing plenty of bullish sentiment from their clients. But that’s not necessarily leading investors to expose themselves to greater market risks.

At least that’s one key takeaway from a study of mass affluent and high net worth investors set to be released Thursday by AMG Funds.

“There is conflicting sentiment between investors’ outlook over the next 12 months and how they want to actually see their portfolios managed,” says Bill Finnegan, an AMG marketing executive who headed up the report for the U.S. domestic distribution arm of Affiliated Managers Group.

Most Gen X and Millennial participants polled — the survey reached out to 1,000 investors with $250,000 or more of investable assets — characterized themselves as “aggressive” in nature.

At the same time, Millennials also told the asset manager they put a high priority on generating income through rich dividend-paying stocks and other investment vehicles usually considered somewhat staid.

“You can almost see a line drawn around age 50 — those under are still very interested in growing their asset bases but seem to want some sort of tangible gains to help temper their risks,” Finnegan says.

Academics might argue that to boost portfolio growth, clients’ exposure to riskier types of assets must rise as well. Such a blurring of the lines between risk and return that AMG’s new study finds among younger investors should raise a red flag for professional money managers, Finnegan warns.

“If Millennials in greater number seem to want to generate more income while still trying to aggressively grow their portfolios,” he says, “then this can present a very interesting challenge for advisors.”

Andy Kapyrin, a partner at RegentAtlantic in Morristown, N.J., is seeing a rise in “cognitive dissonance” among investors of all ages.

In the later stages of a bull market he finds that investors both new and old want to gain as much as possible from their portfolios without taking on more risk. It can create a sort of “schizoid” behavior in clients – particularly younger ones, notes Kapyrin, who serves as the chief investment officer at the indie RIA which manages $3.2 billion.

Bill Finnegan

“Even in a bull market, part of our responsibility as advisors is to play therapist by helping people to understand what the driving forces are behind their emotions about money,” he says.

Kapyrin believes that “in times like these advisors need to guard against becoming too complacent” in making sure their clients remain disciplined in their approach and “stick with their long-term investment plans.”

AMG’s survey finds optimism spreading strongly across all investment age groups. Yet with plus-50 investors, researcher Finnegan says he sees a stronger set of “entrenched” investment strategies that are likely to hold true in good times and bad.

But that’s a trait, he warns, that could make turning older prospects into regular full-time clients more difficult in coming years.

“If you’re focusing on some type of notable shorter-term change in markets,” he says, “then as an advisor you’re probably going to face a fairly difficult time capturing these types of investors as new clients.”

The study does offer a glimpse into how FAs might be able to utilize clients aged 50 or older. In a nutshell, Finnegan sees advisors’ greatest tool to be tapping into advisors’ current base of clients. But that’s not only in terms of traditional referral generation of late-career prospects.

The study noted younger investors were willing to work with financial professionals in some manner – at least at the high net worth wealth level.

“Since we know that younger investors are interested in professional guidance, advisors who don’t engage with their existing families’ children are probably missing out — both in terms of gaining referrals as well as creating new working relationships with the next generation of a family’s wealth,” Finnegan says.