Advisers are not paying enough attention to protecting portfolios from downside risk and instead are preferring to promote low management expense ratios (MER) to clients.
Advisers were trying to deliver good news to clients through reduced costs in order to retain business during the current volatile market environment, Pengana Capital chief executive Russel Pillemer said.
"[They're] using the MER as part of their value proposition and overemphasising it," Pillemer told InvestorDaily.
"It might sound great to clients, but then what happens if the markets take a tumble? It's very a shortsighted approach."
In particular, low MER index funds were exposing investors to 100 per cent of the volatility in equity markets and therefore the cost savings would be insignificant in the case of another severe market crash, he said.
In addition, saving clients money in the immediate short term is driving the client conversation away from understanding the importance of looking at investment from a long-term perspective.
Advisers needed to consider investment strategies that managed downside protection and incorporated measures into portfolios that could at least soften the blow in a falling market, Pillemer said.
"There's some level of discomfort from advisers and investors with these strategies," he said.
"But managing the downside through asset allocation is not sufficient; markets are moving so quickly that it's not effective [for] an adviser to make asset allocation decisions on a macro basis."
During the past six months, large independent dealer groups advising higher-end clients had been quick to restructure their approved product lists and models in order to include downside protection strategies, he said.
"The larger dealer groups are starting to get their heads around how they can actually do this, but those with less sophisticated clients have been slower on the take up," he said.
"The shift is already happening and I think it will become mainstream. As nice as it is for the adviser to say 'I can save you 30, 40, 50 basis points', it is insignificant when you see the risks you're exposing clients to."
