Advisers need to get real with clients about what reasonable investment returns look like

Hope and confidence are good attributes to have, especially when one is young — but there is such a thing as wild optimism.

A recent survey by the British asset management company Schroders, which has $467 billion in assets under management, found that most investors have extremely unrealistic investment expectations; and U.S. investors, and millennials in particular, have the most inflated expectations of anyone in the world.

The average stock market yield globally is about 4%, and benchmark interest rates in major developed markets are at 0.5% or lower, or even negative.

What do Americans expect to generate in annual income? A whopping 11.1%. U.S. millennials, aged 18 to 35, are nearly as optimistic, with expectations of 10.2% returns, the study found. Compare that with the only slightly more sober expectations of their investing peers in Europe and Asia, who seek 7.9% and 9.7% returns, respectively.

For financial advisers, the disconnect between such high expectations and stark economic reality represents a chance to get real. Advisers should set more realistic expectations with clients, starting with a conversation on what reasonable returns really look like. As investors perpetually search for yield, it is important for advisers to ascertain what their clients’ appetite for risk is and devise investment plans to achieve goals that are within clients’ comfort zones.

ADVISERS’ HIGH HOPES

The gap between expectation and reality also isn’t a uniquely American problem — or limited to investors. The expectations of financial advisers globally also appear high overall. The Schroders study, which surveyed 20,000 investors across 28 countries, found that advisers worldwide wanted to generate a minimum of 7.9% a year for clients, which is still high given low interest rates.

U.S advisers cited 5% as their target for annual investment income and recommend holding investments for an average of 5.3 years. Meanwhile, U.S. and global investors hang on to their investments for an average that is barely more than three years.

COUNTERING VOLATILITY

This short-term investing bias is fine for cash and certain types of bonds, but the strategy will more than likely prove too short a time period to counter stock market volatility, as investors saw at the start of this year. The study also found that less than 18% of investors heed their advisers’ advice to hold on to their investments for at least five years — the minimum realistic holding period for equity investments. Almost a third, or 31%, have an extremely short-term strategy, and invest for less than a year. That trend is most pronounced among millennials, who tend to hold on to their investments for over a year and a half less than investors over the age of 36, the study found.

There was one silver lining to the study. When it comes to saving and investing, financial advisers remain an important player in the decision-making process. Half of the respondents said they would consult a financial adviser for their next investment decision, and that held true for millennials and baby boomers alike.

“Investing is seen as an important contributor to meeting current and future financial goals. This is evident in the high demand for income,” said Gavin Ralston, head of thought leadership at Schroders. “The survey showed that getting back the money invested and getting a return higher than inflation are what is most important to investors. However, investors’ short-term outlook and unrealistically high-return expectations raise concerns that investors could be left disappointed.”

Indeed, managing expectations and making sure clients consider long-term investing, especially investments of more than 5 years, should be key goals for financial advisers to help bridge the knowledge gap that still exists.

”We encourage investors to think long term when investing, as our fund managers do,” Mr. Ralston concluded. “Speaking to a financial adviser can help investors align their investment portfolio with their needs and their financial goals.”