Jul 2, 2022 - Economy

Your investments won't do as well as you think

Long-term real investment returns
Data: Natixis, Morningstar; Chart: Axios Visuals

Financial advisers' bullishness is reaching new and ever more unrealistic levels, even as the stock market pulls back from its recent excesses.

Why it matters: Advisers are already doing a bad job managing their clients' expectations. But it turns out their own instincts have also been skewed by the long bull market of the past decade.

By the numbers: Every two years, Natixis polls 2,700 financial professionals across 16 countries, and asks them for the annual returns — above inflation — that their clients "can realistically achieve in the long term."

  • This year, answers ranged from 6.2%, in the UK, to 14.9%, in Colombia.
  • U.S. advisers were near the bottom of the range, at 7.0%, but that number has been rising steadily: It was 6.7% in 2020, 6.3% in 2018, and 5.9% in 2016.

Be smart: Markets have been performing uncommonly well over the past 10 years, but even during these halcyon times they haven't done as well as advisers expect them to do over the long-term future.

  • A good proxy for the typical portfolio of an adviser's client is the Morningstar Moderate Target Risk index, which "represents a portfolio of global equities, bonds, and traditional inflation hedges, and seeks approximately 80% exposure to global equity markets."
  • That portfolio has risen by 4.2% per year, in real terms, on average, over the past 10 years — a full 2.8 points behind advisers' current long-term expectations.
  • The Morningstar index's returns have consistently run a point or two behind advisers' expectations — but the size of the current gap is unprecedented, and the best real-world returns, in 2020, are still lower than the lowest adviser expectations, in 2016.

The big picture: Advisers' clients have expectations that are off the charts. Surveyed last year, they said that they expected long-term real returns of 17.5% per year — numbers that would put them in the top tier of legendary hedge fund managers.

The bottom line: Clients' expectations are filtering back into the expectations of the advisers themselves.

  • After all, given the choice between an adviser promising higher returns and one promising lower returns, it's rational to expect clients to gravitate towards the higher number.
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