Schroders UK Financial Adviser Survey: Optimism returns to UK equities as advisers increasingly embrace ESG

UK financial advisers are anticipating a rebound in allocations back towards UK equities, believe the Covid-19 recovery could deliver investment opportunities and are increasingly taking ESG into account, Schroders UK Financial Adviser Survey[1] has found.

The study – now in its sixth year and encompassing the views of 125 advisers – has found that although investor sentiment has become more bearish since April 2020, pockets of optimism have emerged.  

ESG: No longer a ‘nice-to-have’

Against a backdrop of increasing ESG integration, many financial advisers still lack the confidence to successfully navigate the maze of ESG regulation, terminology, industry frameworks and integration, when speaking with clients. The pandemic is expected to have a tangible impact on the ESG investment landscape.

  • 74% of the financial advisers surveyed now explicitly consider ESG factors as part of their fund selection process, a significant rise from 43% in 2019
  • More than half (52%) of the financial advisers surveyed expect that client attitudes to sustainable investing will change as a result of the coronavirus crisis
  • Only 17% of financial advisers rate their confidence as very high when speaking to their clients about investing sustainably

Top three concerns for financial advisers: Regulation the biggest headache going into 2021

Regulation is the single biggest concern for investors looking ahead to 2021

  • 84% of financial advisers said regulation was among their top three concerns
  • The next two areas of greatest concern were professional indemnity cover (46%) and finding new clients (45%)

Covid-19: Are green shoots of optimism emerging?  

  • Amid significant uncertainty, many financial advisers (54%) reported that they have spent more time servicing long-standing clients and 43% cited a reduced level of activity towards attracting new clients
  • 45% of financial advisers see a recovery from Covid-19 as a distinct, investable theme
  • The pandemic has had a significant impact on the way financial advisers conduct client meetings, with virtual meetings replacing face-to-face as the norm
  • If life were to return to normal in 2021, 60% of financial advisers expect to have an even balance between virtual and face-to-face meetings, with only 6% expecting to conduct all meetings face-to-face, against 58% before Covid-19

Doug Abbott, Head of UK Intermediary, Schroders, commented on the asset allocation findings:

“It’s been a challenging year for the UK investment community and the long-term consequences of the global pandemic are yet to be fully understood.

“But this study has shown there are still reasons for remaining optimistic. In terms of asset allocation, UK equities are starting to look attractive again with the proportion of advisers expecting to increase their UK equity allocation having increased from 13% to 40%.

“Sustainable investing has also stood the test of Covid-19 and indeed gained in importance, while there is hope that any recovery from Covid-19 may be supportive from an investment perspective. Despite the year we have experienced, it is encouraging that the survey has identified pockets of optimism and resilience among UK financial advisers and investors.

“Furthermore, it is interesting to note that just under a third of advisers (32%) expect to increase their allocations to multi-asset funds over the next 12 months. We launched the Schroder Portfolios in 2020 to meet this client demand and as part of our commitment to continue to meet the investment needs of financial advisers.”

Intergenerational wealth transfer: An opportunity or a threat?

Financial advisers are lagging when it comes to offering differentiated client acquisition strategies to attract younger clients and women. Could this be a missed business opportunity?

  • 78% of financial advisers view the impact of wealth transfer between generations as an opportunity for their business
  • However, only one third of financial advisers surveyed have a specific proposition for targeting the generational transfer of family wealth

A recent US survey suggests that two thirds of ‘baby boomer’ wealth is currently held within couples and the first point of wealth transfer is typically husband to wife[2]. And yet, less than 10% of financial advisers had a differentiated strategy for attracting, retaining or advising women - particularly divorced or widowed. In a similar vein, only 21% of financial advisers surveyed have a differentiated sales and marketing strategy targeting younger investors, almost the same as in 2019.

Gillian Hepburn, Intermediary Solutions Director, Schroders, commented on the intergenerational challenges:

Despite financial advisers continuing to agree that wealth transfer is a significant opportunity, the average age of clients remains high. The requirement minimum levels of investment are also increasing with very few advisers delivering a proposition for younger investors.

“At a time when financial advisers are reporting that finding new clients is one of their main challenges and with Covid-19 contributing to this, potentially some of these new clients are already within the next generation of their existing client bank. Perhaps of greater concern should be divorced or widowed clients where less than 10% of advisers have a differentiated proposition and there is the potential to lose assets as significant numbers of these women change their adviser at the points of wealth transfer.”

Asset allocation for 2020 and beyond: Are UK assets back in favour?

Interestingly, more financial advisers expect to increase than decrease their allocation to UK equities.

  • The main areas where advisers have increased asset allocations over the past 12 months are developed international equities, emerging markets and alternatives
  • Conversely, UK equities, government bonds and corporate bonds have seen decreased allocations over the same time period
  • Over the next 12 months the trend of increased allocations to alternatives and equities, coupled with reduced allocations to bonds, is expected to persist

What does the future hold for UK financial investors?

Disruption emerged as the most prominent investment theme over the next five years, driven by Covid-19, geopolitics, technological advances and environmental changes.

  • 63% of investors expect disruption caused by geopolitics to increase, some 62% foresee environment-related disruption to grow while 51% predict technology-driven disruption to gain traction
  • The majority (71%) of financial advisers expect little change in interest rates
  • 47% of financial advisers expect inflation to rise, while 11% expect it to fall
  • Financial advisers expect lower returns from bonds and equities compared with their historical averages

Tom Walker, Co-Head of Global Real Estate Securities, commented on the broader disruption theme:

“Cities have faced many crises before and the ultimate outcome has been the acceleration of inevitable change – the fire of London leading to the creation of fire proof bricks or cholera and the development of modern sanitisation.

“Covid-19 is no different; working from home trends and e-commerce are not new to real estate markets. The demand for real estate is always evolving. The key question for investors, is whether your real estate portfolio has evolved with the market?

“Real estate is no longer about retail and offices, the most resilient assets are those linked to the digital economy. We want to be the landlord to the cloud, this is where the most resilient income streams are, assets such as data centres, last-mile logistics, macro towers and fibre optic cable.”

 

Full research presentation available on request.

[1] Schroders UK Financial Adviser Survey has been conducted between 2 and 6 November 2020, completed by 125 financial advisers.

[2] McKinsey & Company report, July 2020, Women as the next wave of growth in US wealth management