High-net-worth and retail investors in Asia are increasingly keen on passive investments such as exchange-traded funds, but don’t sufficiently consider the risks they represent, according to most financial advisers.

Natixis Global Asset Management conducted its Annual Survey of Financial Advisers, the results of which it is releasing today. While 2,550 advisers participated across the world, the survey included 150 from Hong Kong and 150 from Singapore.

The findings showed that 82% of respondents in Singapore and 77% in Hong Kong felt investors were not fully aware that passive instruments carried their own risks. 

“Advisers in large numbers are saying clients underestimate potential headline risks in passive investing. Essentially, they wrongly equate low fees with low risk,” Madeline Ho, Asia-Pacific head of wholesale fund distribution at Natixis GAM, told AsianInvestor in emailed comments.

“They underestimate the amount of risk in their passive portfolios and don’t always understand that they own the full downside of the market [as well as the full upside], and there is generally no risk management mechanism in place for managing downside risks.”

The rise of products such as ETFs has put pressure on active fund managers and financial advisers, which make their fees from advising clients how to invest their money. However, Ho said their concerns about passive investments reflected a desire to look out for client interests.

She conceded that investors’ desire to turn to passive was understandable, given the poor performance of many active fund managers.

Forty-one percent of advisers say they use passive because there’s too much ‘closet indexing’, noted Ho. “It is disappointing to advisers and clients when managers charge active management fees, yet do not deliver performance attributed to active management.”

However, she said, the best way for investors to minimise the risk of passive investments is to understand what these risks are and consider a mixture of passive and active instruments, with the latter employed to better navigate market moves that passive investments could only track.

Fee contraction

The growth of passive strategies and desire of investors to reduce costs at a time when market returns are falling has put financial advisers under pressure on fees.

Globally, 62% of financial advisers reported being pushed to deliver services at a lower cost, a figure that was notably high in Hong Kong (80%) and the US (71%).

Yet despite their concerns about the proliferation of passive, and fees being squeezed, financial advisers in Singapore remained sanguine about their prospects. They predicted they would see an average 10.2% rise in assets under management, despite market volatility and lower average returns on assets.

“More than ever, now is a critical opportunity for advisers to be explicit in communicating their real value to clients, whether that is asset allocation and investment selection, education and communication, or managing clients’ emotions through market crises,” said Ho.

The good news for these financial advisers is that investors find value in their services. Natixis GAM’s recent Global Survey of Individual Investors revealed that 64% of investors said professional financial advice was worth what it cost.

However, there is a telling difference between the level of returns expected by clients and what advisers feel they can achieve, found the adviser survey. While Singapore investors expect to make 8.7% annually and Hong Kong investors 9.3% (versus 9.5% globally), advisers felt they were most likely to achieve 5.7% and 5.5%, respectively, over the long term.