Con­fi­dence Soars With Stocks

Clients are bullish on the econ­omy and eq­ui­ties, ad­vi­sors say, but wor­ries about an even­tual stock mar­ket down­turn re­main.

Financial Planning - - BENCHMARK - — Harry Ter­ris

CLIENT CON­FI­DENCE HAS CLIMBED, AND A rosier out­look about the econ­omy and stock mar­ket is pro­pel­ling ro­bust flows into eq­ui­ties and re­tire­ment ac­counts, ad­vi­sors say.

Al­lo­ca­tions to stocks rose sharply, ac­cord­ing to the lat­est Re­tire­ment Ad­vi­sor Con­fi­dence In­dex — Fi­nan­cial Plan­ning’s monthly sur­vey of wealth man­agers — and helped sup­port fur­ther im­prove­ment in busi­ness con­di­tions for the in­vest­ment in­dus­try.

The com­po­nent mea­sur­ing the amount of client as­sets used to buy stocks and stock funds in­creased 5.1 points to 66.4. Read­ings above 50 in­di­cate ex­pan­sion, while read­ings be­low 50 in­di­cate con­trac­tion.

“Peo­ple are more con­fi­dent about the econ­omy and more will­ing to in­vest in stocks after a great 2017,” one plan­ner says.

The up­swing in the eq­ui­ties flow com­po­nent was one of the big­gest fac­tors be­hind a 2.7-point in­crease in the com­pos­ite RACI to 57.1 — its high­est level in more than a year. The com­pos­ite tracks as­set al­lo­ca­tion, in­vest­ment prod­uct se­lec­tion and sales, client risk tol­er­ance, tax li­a­bil­ity, new re­tire­ment plan en­rollees and plan­ning fees.

Ad­vi­sors at­tribute the con­fi­dence in part to re­as­sur­ing eco­nomic fun­da­men­tals and grow­ing com­fort with the high re­turns stocks have de­liv­ered. “Clients are more op­ti­mistic based on gains,” one plan­ner says.

Plan­ners also say the tax over­haul helped im­prove sen­ti­ment. “Though some feel that the tax plan was al­ready ‘baked’ into the mar­ket, oth­ers felt it would be

pos­i­tive and lead to higher prof­its,” one ad­vi­sor says.

Wor­ries that risks are build­ing con­tinue, how­ever. One ad­vi­sor says, “The No. 1 ques­tion I’m get­ting in ev­ery meet­ing is: When do I think the mar­ket will ei­ther crash or have a se­ri­ous sell-off?”

Plan­ners re­port they are urg­ing clients to re­sist both over­re­act­ing to fear of po­ten­tial losses and the temp­ta­tion to in­vest too ag­gres­sively. “We have been coun­sel­ing ev­ery­one to main­tain their pre­vi­ous risk tol­er­ance un­less their cir­cum­stances have changed,” one plan­ner says.

Nev­er­the­less, some plan­ners say they are po­si­tion­ing clients to take ad­van­tage of bar­gains that may ap­pear dur­ing fu­ture pe­ri­ods of volatility. One ad­vi­sor re­ports “sig­nif­i­cant sell­ing” of U.S. stocks “to raise cash for po­ten­tial fu­ture in­vest­ment op­por­tu­ni­ties, which so far re­main un­known.”

Over­all, the RACI com­po­nent mea­sur­ing client risk tol­er­ance jumped 6.2 points to 62.8, its high­est level in a year.

Wealth gains from strong mar­ket per­for­mance, com­bined with year-end fi­nan­cial plan­ning, led to strong flows into re­tire­ment ac­counts, with the RACI com­po­nent track­ing the dol­lar amount of contributions to re­tire­ment plans jump­ing 8.6 points to 69.3. That level sur­passed even last April’s mark of 67.5. Tax time is typ­i­cally the sea­sonal high for re­tire­ment contributions.

The lat­est RACI, which is based on ad­vi­sors’ assess­ment of con­di­tions in De­cem­ber rel­a­tive to Novem­ber, is ac­com­pa­nied by the quar­terly Re­tire­ment Readi­ness In­dex.

This in­dex tracks ad­vi­sors’ eval­u­a­tions of their clients’ in­come-re­place­ment abil­ity, likely de­pen­dence on So­cial Se­cu­rity and ex­po­sure to large eco­nomic shifts.

Ad­vi­sors say that the vul­ner­a­bil­ity of mass-af­flu­ent clients (net worth of $250,000 to $1 mil­lion) to a range of po­ten­tial eco­nomic shocks has dipped a bit, but that the threat of a sig­nif­i­cant in­crease in health care costs still looms par­tic­u­larly large.

About 34% of ad­vi­sors say such a shift would be ex­tremely dam­ag­ing to mass-af­flu­ent clients’ re­tire­ment se­cu­rity. “It is tough to un­der­state the un­cer­tainty as­so­ci­ated with health care cost risks,” one ad­vi­sor says.

Over­all, ad­vi­sors ex­pect close to 60% of mass-af­flu­ent clients will be able to re­place their in­come for 30 years in re­tire­ment. This is com­pared with 74.8% of high-net-worth clients ($1 mil­lion to $10 mil­lion) and 80.4% of ul­tra­high-net-worth clients (more than $10 mil­lion).

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