A word that one suspects may be seen more frequently as thoughts turn to the market outlook is "resilience".

Better education of clients, greater use of technology to get rid of back-office chores and more focus on how people behave in different economic environments can help make investors more resilient in the face of a possible jump in market volatility. 

“Resilience” is a key word in a title of a new report exploring how and why wealth managers can help client navigate their situation if or when market conditions become more choppy, as may happen if a long upwards run in equities hits a wall.

A smarter approach to risk management and use of best-in-class technologies hold the key for improving resilience in firms and among clients, the report, by FactSet and Scorpio, said. 

A number of commentaries in recent days and weeks have mused on whether investors are prepared for a possible surge in market turmoil, as may happen because the current bull market in equities has run for over nine years and valuations in countries such as the US are, on some measures, high. 

The FactSet/Scorpio report, entitled The Resilience Agenda, was based on research among 1,123 high net worth individuals worldwide (Australia, Canada, Hong Kong, Singapore, Switzerland, UK and US.) Among its findings is that most clients expect an advisor to contact them immediately after a market shock; that one in five such persons, and more than a third of Millennials, don’t understand what “volatility” actually means; some 60 per cent of investors said that unforeseen market events are a major threat to their wealth creation strategy. 

Other findings show that investors over the age of 55 show signs of struggling to understand exactly how market dynamics affect their portfolios; younger clients stand out for their desire to see evidence. Some 40 per cent of younger clients believe they do not have sufficient clarity on actual portfolio composition. Some 15 per cent of HNW individuals under 35 are sufficiently confident in their overall strategy that they would forgo an advisor.

The study also shows that depending on age, people are far more likely to get in touch with their wealth managers first to understand the economic situation. Baby boomers turn to wealth managers first to understand the market outlook, while Millennials seek access to a broad range of insights.

Some 40 per cent of HNW individuals believe their exposure to certain geographies, sectors or currencies could leave their portfolios vulnerable. Younger clients, on the other hand, are more concerned about the lack of clarity into their complete investment positions.

Also, 48 per cent of interactions conducted online among those whose wealth exceeds $20 million and this is 7 per cent higher than in the $500,000-$1 million wealth bracket.

Risk management and technology
“The concept of risk management is nothing new for the wealth industry. In the years following the financial crisis, overhauling the processes that govern and record investor exposure and appetite for risk was a regulatory imperative. Now, market volatility has brought the topic to the forefront for clients once again. Our findings clearly show that wealth managers need to refresh their approach,” the report said in its conclusion.

“`Risk management,’ from the client perspective, pertains to a very specific profiling process used to measure investor tolerance for loss. While this is an important process, the risks that influence investors’ wealth creation strategies are, in reality, much broader. From market shocks to gaps in investor education, weaknesses in risk assessment to the limited processing power of relationship managers, an investor’s success in achieving objectives may be affected by a range of factors,” it continued. 

“For clients, more comprehensive, actionable portfolio insight can provide confidence to truly understand their exposure to risks. When packaged appropriately, insight can also serve to enhance investors’ understanding of the forces that influence their portfolios. For advisors, advanced collation, connection, and analysis of client behavioral data can improve the ability to anticipate investor reactions to market events and initiate proactive discussions,” it said.