More than 80% of financial advisers believe the length of the current bull market has made their clients more complacent about risk, according to a survey by Natixis Investment Managers.
The survey, which questioned 2,775 financial advisers globally including 300 from the UK, found 82% said their clients were complacent about risk and 79% said clients did not recognise risk until it had already been realised.
Some 40% of advisers in the UK specifically said their clients reacted emotionally to increased volatility, and 78% of advisers globally felt they had to act as a "voice of reason" during highly volatile periods.
This rising volatility was cited as a threat to investment performance by 56% of advisers and 55% said it was their top portfolio risk. Other risks named included rising interest rates, the threat of asset bubbles and geopolitical events.
Some 60% of advisers said a rise in interest rates would negatively impact their investment performance, although this fell to 52% for UK advisers, and 55% are concerned about the unwinding of quantitative easing.
In order to mitigate the impact of rising rates on portfolios, 40% said they are managing the bond duration in their portfolios.
However, UK advisers were more concerned about inflation at 38% compared to 31% globally. UK CPI inflation was 2.4% in April, the lowest level for a year.
There were also widespread fears about cryptocurrencies with 74% expecting the crypto bubble to burst this year.
The price of one Bitcoin reached nearly $20,000 last year, but has fallen significantly from those highs to currently trade at $6,800. A smaller amount of advisers were concerned about a asset bubble in equities and bonds at 21%.
In light of rising volatility, two-thirds of UK advisers said they were using more alternative strategies to mitigate risk.
Volatility was uncharacteristically low during 2017 but has seen a return this year with a sharp spike in the VIX (or 'Fear') index in February.
For diversification purposes, advisers favoured multi-alternatives and real estate, while market-neutral products and long-short equities were used to manage volatility risk. They were also using managed futures to provide a stable income.
They have also slightly increased their weighting to active investments from 68% two years ago to 69%.
Darren Pilbeam, head of UK wholesale and retail at Natixis Investment Managers, said: "After nine years of steady growth, volatility has returned to the markets and investors have to get reacquainted with the feeling of uncertainty.
"Navigating through such a difficult environment requires avoiding emotional investment decisions but most importantly it requires active portfolio design approaches.
"Our research reveals that UK financial advisers do see the long-term value that can be generated by active management - in terms of portfolio diversification; risk management and return generation - and recommend implementing a broad range of alternatives."
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