Advisers can demonstrate value proposition with downside protection to calm investors' volatility fears

Risk-protection strategies are proving to be popular for advisers to recommend to their skittish clients, but haven't gained traction among the majority of robos

Sep 8, 2015 @ 3:59 pm

By Alessandra Malito

Downside protection, a hedging strategy to reduce portfolio losses during a bear market, is gaining in popularity due to the recent spike in market volatility, and that's opened up an opportunity for advisers to prove that they are more valuable than automated investment services.

Advisers say that more clients are asking about risk-protection strategies, and that the trend has become almost as popular as goals-based investing.

A survey of independent financial services firms' chief executives conducted by the Financial Services Institute in conjunction with Strategy & Resources, an independent consulting firm for advisers, found that on a scale of one to 10, goals-based investing was ranked 7.5 and downside-protection strategies scored 7.3.

"It all comes from the market," said Matt Lynch, a managing partner at Strategy & Resources. "They want to manage their portfolios in such a way to mitigate risk."

Not many robo-advisers have jumped on this opportunity as of yet.


Hedgeable, a robo-adviser headquartered in New York, often boasts of its downside-protection offering, while other platforms lean toward tax-loss harvesting, another strategy that looks to mitigate losses and reduce the amount of taxes that an investor owes by selling declining strategies and replacing them with similar investments after a market decline.

"With tax-loss harvesting, it only works when the markets crash," said Mike Kane, chief executive of Hedgeable. "Would you rather have your portfolio crash or alleviate the losses in the first place?"

Mr. Kane said that downside protection is helpful no matter what the market is doing, and it doesn't only benefit investors when the markets are as volatile as they have been lately.

"Good markets and bad, there's always a need for some risk management in every client's portfolio," Mr. Kane said. "You'll find every time the market has a correction, people talk about it, but you have to do it beforehand."

It's no secret that investors have a hard time with risk.

According to Laura Varas, principal of research firm Hearts and Wallets, on a national level, the number of investors who say that they are uncomfortable taking risks with their investments by accepting volatility in the hopes of getting a higher return jumped to 58% this year from 53% in 2014.


Even so, robo-advisers believe that they are getting a good handle on how to handle market volatility, as seen in the stock market's recent downturn. And some advisers offer an automated investment service to their own digitally inclined clients.

Steve Stanganelli, principal at Clear View Wealth Advisors, said he uses Hedgeable for downside protection and Betterment Institutional for tax-loss harvesting, because they can do the job of mitigating risks more efficiently than he can.

"I recognize people who do things better than what I can do, and I think I have fiduciary responsibility to bring those other resources into the fold," he said. "As much as I believe in the premise taught to me in finance school about buy and hold, the behavior of investors doesn't match up with simply buying and holding."

Mr. Stanganelli does have a say in the investment management on behalf of his clients, and he said that many have called to ask about what he can do to prevent them from losing any money.

Calls from clients who are anxious about recent bouts of volatility represent an opportunity for advisers to introduce a downside-protection strategy if they haven't already.

Scott Hammel, a financial adviser at Atlas Wealth Advisors in Dallas, said that he had clients who wanted to focus on a downside-protection strategy years ago when the market was still on a consistently upward trajectory. Now, even after the market's correction, they are sitting pretty, he said.

While he finds robo-advisers to be helpful with their downside protection and tax-loss harvesting offerings, he said they do not provide the type of advice that would leave clients comfortable making all the financial decisions by themselves. As robo platforms become less simple, that's where an adviser can step in to provide a personal touch and a bit of perspective.

"When throwing in other components, it will take away from the ultimate advantage," Mr. Hammel said. "They'll say they don't know if I need downside protection — this isn't a decision I should be making.

“As far as robo-advisers, I don't think they can help themselves by getting more complex," he added.


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