Risk Reluctance: Three-Quarters of U.S. Investors Prefer Protection Over Alpha

Risk Reluctance: Three-Quarters of U.S. Investors Prefer Protection Over Alpha


August 2018, Boston. “Financial services providers and advisors frequently focus on beating their benchmarks, but investors prefer an emphasis on downside protection by a three-to-one margin,” says Scott Smith, director of advice relationships at Cerulli Associates, a global research and consulting firm.

“Our most recent research suggests that providers must take a proactive stance to help investors become comfortable with the realities of equity market exposure,” explains Smith. “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 services providers.”

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. “While there are myriad avenues to educate themselves on the basics of portfolio construction, most investors lack the willingness, confidence, or time to take this on themselves,” adds Smith. “This is simply not an area that most investors are eager to spend substantial time and effort learning.”

“However, this gap between investors’ preferences and accepted best practices in long-term portfolio construction leaves providers facing the real threat of disenchanted customers when markets struggle,” continues Smith. “Regardless of previous gains, when faced with adversity, investors will frequently find fault with incumbent providers.”

“To help bridge this gap, providers must make every effort to help investors view their appetite for risk in terms of their risk capacity, rather than independently,” Smith suggests.

Cerulli’s third quarter 2018 issue of The Cerulli Edge – U.S. Retail Investor Edition compares the responses of protection-focused investors with their performance-seeking peers to help better understand the dynamics facing participants in the retail investor market.

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