Investors’ Financial Knowledge Base Has Room for Dramatic Improvement, According to AMG Funds Study

Majority of investors struggle to understand basics of risk and diversification, reinforcing the need for financial advisors’ expertise

GREENWICH, Conn., Sept. 06, 2017 --  Most investors consider themselves at least somewhat knowledgeable when it comes to personal investing, and believe they have a good sense of the strategies that will help them achieve their financial goals, according to a recent survey conducted by AMG Funds LLC, the U.S. retail distribution arm of global asset management company Affiliated Managers Group, Inc. (NYSE:AMG). However, survey results demonstrate that many investors have a limited understanding of basic investing principles, including the assessment of risk and importance of diversification. The survey polled 1,000 individual investors with over $250,000 in household investable assets.

While seventy-three percent of investors surveyed have a financial advisor today, there remains substantial room for improvement in investors’ financial ‘IQ.’ Even though more than half of surveyed investors have primary investment goals which require diversification and risk management to succeed, only nine percent of survey respondents could correctly identify market risk measures. Fewer than 10 percent of investors identified beta and/or standard deviation as risk measurement tools, and only 42 percent were able to identify reasons for the importance of diversification in investing. Moreover, only one in five investors is concerned about diversification in their own portfolios, while only 19 percent of respondents are aware that diversification requires investing across asset classes as opposed to choosing only a broad selection of equities. Furthermore, 41 percent of investors are rebalancing their portfolio quarterly or more often, but their lack of understanding puts their reasoning into question.

Millennials (ages 18–35) are particularly confident about their investment abilities – 81 percent consider themselves “extremely or very knowledgeable” compared to just 19 percent of Boomers (ages 52–70) who describe themselves as such. However, according to survey results, Millennials’ understanding of diversification concepts is weak compared to older investors. Just one in 10 Millennials understands the benefits of diversification, compared to 50 percent of Boomers – but across all age groups, there remains room for improvement.

Although investors’ understanding of risk management and diversification could be much stronger, they have high expectations for portfolio returns – on average, 8.8 percent annually over the long term. Furthermore, 37 percent expect their portfolio to return 10 percent or more per annum over the long term.  With an expected average annual return of 13.7 percent, Millennials are more ambitious, even as they also have an average cash allocation of 25 percent – and they may not be aware that in order to achieve targeted returns with the drag of such a large cash allocation, risk-seeking assets within the portfolio must return more than 18 percent per year. 

“Our study highlights the ongoing need for professional financial advice, even though investors may not fully recognize its worth,” said Jeffrey T. Cerutti, CEO of AMG Funds. “Given the proliferation of investment options along with evolving technology, financial advisors must demonstrate the value to investors of working with a qualified professional. To that end, they should make a concerted effort to educate current and prospective clients on managing their portfolio toward financial goals, including how to best manage risk and utilize diversification, as well as optimal asset class allocations.”

For more information on the results of AMG Funds research, please visit www.amgfunds.com/wealth-trends.

Methodology

The AMG Funds survey was conducted online among affluent investors with over $250,000 in household investable assets who participate in making household savings and investment decisions. Data was collected from November 28, 2016, through December 7, 2016, among 1,000 respondents, age 18 or older, through an online consumer panel. The data was weighted by distribution of age and investable assets from the 2013 Survey of Consumer Finance. Percentages may not total to 100 due to rounding.

About AMG and AMG Funds

AMG is a global asset management company with equity investments in leading boutique investment management firms. Through AMG’s innovative partnership approach, each Affiliate’s management team retains ownership of significant equity in their firm while maintaining operational and investment autonomy. AMG Funds LLC is the U.S. retail distribution arm of AMG, and provides access to premier boutique asset managers through a unique partnership wherein the investment managers remain truly independent. AMG Funds is not beholden to a single investment approach or a single manager in delivering quality investment solutions. This innovative approach leverages the independent manager’s specific expertise to deliver products that cover the complete asset class spectrum. AMG Funds offers access to specialized investment expertise by delivering the talents of independent management teams under a consolidated platform.

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