Clients unaware of risk of passive investing, say UK advisers

Added 29th September 2016

Around 60% of financial advisers in the UK have concerns that clients are unaware of the risks of passive investing which tracks a market-weighted index or portfolio, according to a new survey by Natixis Global Asset Management.

Clients unaware of risk of passive investing, say UK advisers

The study, conducted by the active fund manager questioned 300 UK-based financial advisers, found two-thirds (67%) of adviser said investors do not realise that index funds can leave them exposed to risks such as environmental, social and governance issues.

Almost half (48%) of respondents believe that low fee index funds, which have no risk management, have lulled investors into a false sense of security.

Around 41% of advisers said they started using passive investments after becoming disillusioned with the active management industry’s use of closet-indexers.

Chris Jackson, deputy chief executive at Natixis Global Asset Management, believes advisers are right to be concerned about the rise of closet-indexers.

“The actual number of closet-indexers relative to the size of the asset management industry is very small but it should not exist at all, as it is morally wrong to charge a fee if you are simply following a benchmark.

"The issue for advisers is that when they are making an active decision on behalf of their clients they want to be assured that that portion of the portfolio is truly active,” said Jackson.

Passive vs active

Jackson added the debate is no longer about passive versus active, rather “it’s about making sure advisers and investors understand the true risk in their portfolios and the level of active risk management in the products in which they invest”.

The Natixis report also found that around 80% of UK advisers said active strategies will play an important role in portfolio management as a result of anticipated market volatility.

Low returns

The survey showed that expectations among UK financial advisers for annual returns (above inflation) have fallen to 3.8% in the long term, down from 6.8% in 2015.

While expectations have fallen globally, UK advisers are among the most pessimistic, with average global expectations for returns down to 5.3%, from 6.6% the previous year.

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About Author

Monira Matin

Senior Reporter

Monira joined International Adviser in March 2016 from Informa Global Markets where she worked as a eurobond reporter for over two years, covering fixed income markets. She has previously held a number of editorial positions covering politics, insurance and technology. Monira has a degree in Journalism and Economics from City University.


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