The emerging low-cost, low-risk and limited advice model being embraced by investors is a "pup" model that will ultimately lead to disappointment, according to the chief executive of van Eyk Research, Mark Thomas.
Thomas said the shift towards the use of index funds and Government-backed deposits signified investors had "thrown in the towel".
Investors were now being sold "a 'pup' model predicated on low cost, low active risk and limited advice", Thomas said. He described this scenario as "the perfect storm", with the result being ravaged investment expectations over the next three to five years.
"Investors are now giving passive or index funds their full attention, as well as Government-endorsed term deposits," Thomas said.
"Tragically, it's the wrong strategy. And their financial advisers know it."
Thomas said the belief at van Eyk Research was that the market was in the early stages of "lesser certainty".
"In such an environment the broad market can track sideways for decades, with wild swings from year to year. This 'range-trading' environment reflects the stop-start nature of the economy that is restrained by poor confidence, too much government and consumer debt and increased taxes. This also leads companies to be more restrained in their investment, resulting in lower productivity and smaller profits."
Thomas said while some sectors and companies would be "somewhat insulated" due to mega trends - commodities and superannuation being two examples - most would be tied to the economic cycle.
Based on a survey of more than 900 advisers conducted by van Eyk Research last year, Thomas said the majority of advisers, despite their cautious outlook, strongly believed stock selection rather than index management remained the best way to generate returns for clients.
But Thomas said while financial advisers saw the need for active management in this environment, it was unclear whether they would be able to influence their clients in the same manner.
"At a time when retail investors desperately need professional advice and active management, they have never been less inclined to listen or act," Thomas said.
He said advisers are still dealing with clients' "disgust symptoms" arising from recent market events.
"Let's hope they can quickly find a cure. Because if they can't they will soon be dealing with disappointment when these passive investment strategies fail to deliver the anticipated returns."
- See next week's edition of Money Management for Thomas' full comment on this topic.