No matter how well investors may think they understand the markets, and advisors may think they understand their clients, the gap between the two is a Great Divide that must be breached if advisors are to get a handle on clients’ actual risk tolerance.

That’s according to a survey of financial advisors by Natixis Global Asset Management, which found that 85 percent of advisors say their success depends on understanding client risk tolerance—something they are increasingly aware of.

In fact, investors expect an average annual return of 8.5 percent above inflation; that’s 44 percent higher than what financial advisors say is realistic.

While advisors are busy trying to manage client expectations about returns, they agree that active investments are a stronger choice than passive for most objectives, including generating alpha, providing risk-adjusted returns, taking advantage of short-term market movements and gaining access to alternatives and exposure to uncorrelated assets.

Still, one of the reasons advisors use passive investments is because clients prefer them—76 percent of respondents said investors have a “false sense of security” about passive investing—and because they’re less costly.

Another 43 percent of advisors say they use passive investments because there are so many active managers who are really “closet indexing.”

For advisors, the challenge is striking the right balance between clients’ interest in passive investments and the best way to help them achieve their investment goals. And when it comes to diversification, 75 percent say they’re using liquid alternatives to diversify client portfolios.

The vast majority (86 percent) say they’re not concerned that automated advice will make the traditional, high-touch advisory model obsolete.

But those aren’t the only issues that advisors are dealing with; they’re really spooked by the prospect of new regulations.

A whopping 86 percent of financial advisors say that meeting strict regulatory and disclosure requirements are some of the biggest challenges to the growth of their business.

They expect the worst, with 79 percent saying that new regulations will increase costs for investors and 37 percent saying they’ll shed their smaller clients because of those new regulations.

Advisors are so concerned over what’s to come that more than a quarter plan to drastically change how, or even if, they do business; 27 percent are planning, within the next three years, to sell their book of business, merge with another firm, leave the financial industry altogether or simply retire.

Instant Insights /

Investors, advisors 'miles apart' in return expectations

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