Client Fear: Econ­omy is Los­ing Steam

Re­tirees — and those with near-term cash needs — are be­hav­ing es­pe­cially cau­tiously. New clients are afraid to en­ter the mar­ket.

Financial Planning - - Benchmark - By Harry Ter­ris

Clients are on edge as they re­assess the growth out­look for the econ­omy and a range of risk sce­nar­ios.

Client risk sen­ti­ment de­te­ri­o­rated for the sev­enth time in eight months, ac­cord­ing to the lat­est Re­tire­ment Ad­vi­sor Con­fi­dence In­dex — Fi­nan­cial Plan­ning’s monthly barom­e­ter of busi­ness con­di­tions for wealth man­agers. The com­po­nent track­ing client risk tol­er­ance dropped 5.1 points to 47.1. Read­ings be­low 50 in­di­cate a de­cline, and read­ings above 50 in­di­cate an in­crease. The lat­est in­dex is based on ad­vi­sors’ as­sess­ment of con­di­tions in Septem­ber rel­a­tive to Au­gust.

Ad­vi­sors say clients are con­flicted about se­cu­ri­ties val­u­a­tions and fear­ful the eco­nomic ex­pan­sion could run out of steam.

Re­tired clients and clients with large near-term cash needs are par­tic­u­larly cau­tious, mov­ing into cash and bonds to in­su­late them­selves from stock fluc­tu­a­tions. “New clients set­ting

up ac­counts are ner­vous to get into the mar­ket,” one ad­vi­sor says, mak­ing dol­lar-cost av­er­ag­ing pop­u­lar.

De­spite a re­treat in risk tol­er­ance, the com­pos­ite RACI stayed in pos­i­tive ter­ri­tory at 51.6. The com­pos­ite also tracks as­set al­lo­ca­tion, in­vest­ment prod­uct se­lec­tion and sales, plan­ning fees, new re­tire­ment plan en­rollees and client tax li­a­bil­ity.

The com­pos­ite was buoyed by strong per­for­mance in the com­po­nent track­ing sales of re­tire­ment prod­ucts, which jumped 4 points to 57.1. The com­po­nent track­ing con­tri­bu­tions to re­tire­ment plans also gained 2.7 points to 57.7. With sales and con­tri­bu­tions up, the com­po­nent for fees for re­tire­ment ser­vices also re­mained in growth ter­ri­tory at 52.3.

Plan­ners note they are work­ing to keep clients from mak­ing rash mis­takes and in­stead con­cen­trate on dis­ci­pline in stick­ing to long-term plans. “Ad­vi­sors coach clients to re­main con­sis­tent and fo­cus on long-term goals rather than mar­ket fluc­tu­a­tions,” an ad­vi­sor says.

Ad­vi­sors also at­tribute healthy re­tire­ment ac­count con­tri­bu­tions to a strong em­ploy­ment en­vi­ron­ment.

In­deed, de­spite the un­ease ev­i­dent in the risk tol­er­ance com­po­nent, flows into eq­ui­ties have been ro­bust with the com­po­nent track­ing al­lo­ca­tions to stocks re­main­ing well into ex­pan­sion ter­ri­tory for the third con­sec­u­tive month at 58.8.

Al­lo­ca­tions to bonds also stayed in ex­pan­sion ter­ri­tory for the third con­sec­u­tive month at 51.9, with ad­vi­sors say­ing ris­ing yields are draw­ing client at­ten­tion. “For first time in many years clients are tak­ing no­tice of bonds,” an ad­vi­sor says. “Some have even stated if the five-year gets into the 4% range, they would con­sid­er­ing pur­chas­ing.”

This RACI is ac­com­pa­nied by the quar­terly Re­tire­ment Readi­ness In­dex, which tracks ad­vi­sors’ eval­u­a­tions of their clients’ in­come re­place­ment abil­ity, likely de­pen­dence on So­cial Se­cu­rity and ex­po­sure to big eco­nomic shifts.

The num­ber of ad­vi­sors re­port­ing their mass-af­flu­ent clients would be ex­tremely vul­ner­a­ble to a sig­nif­i­cant in­crease in hous­ing costs fell to 7.2%.

Health care costs con­tinue to raise con­cern in plan­ners. While ad­vi­sors’ as­sess­ment of clients’ ex­po­sure to the po­ten­tial for a sig­nif­i­cant in­crease in health care costs also im­proved, al­most a third say their clients would be ex­tremely vul­ner­a­ble.

“Health care is the num­ber one con­cern that I talk about with my clients,” one ad­vi­sor says. Many ad­vi­sors cite the cost of long-term care, the need to pro­vi­sion for it and the risk of out­liv­ing one’s sav­ings.

Ad­vi­sors are also con­cerned about in­ter­gen­er­a­tional drains on fi­nan­cial plans. One ad­vi­sor spe­cial­iz­ing on mil­len­nial clients says it is im­por­tant to con­sider the like­li­hood that baby boomer par­ents will have to de­pend on chil­dren for med­i­cal and liv­ing ex­penses.

An­other ad­vi­sor says, “We see re­tired and near-re­tired clients pre­par­ing for fluc­tu­a­tions in the cost of health care and mar­ket fluc­tu­a­tions, but most are caught off-guard when adult chil­dren re­quire sig­nif­i­cant fi­nan­cial as­sis­tance.”

In an­other as­sess­ment of clients’ re­tire­ment prepa­ra­tions, ad­vi­sors say they be­lieve that about 58% of mass-af­flu­ent clients will be able to re­place their in­come for 30 years by the time they re­tire, com­pared with 72% of high-net-worth clients and 80% of ul­tra­high-net-worth clients.

RE­TIRE­MENT AD­VI­SOR CON­FI­DENCE IN­DEX

CLIENT RISK TOL­ER­ANCE

CON­TRI­BU­TIONS TO RE­TIRE­MENT PLANS, PROD­UCTS SOLD AND FEES FOR RE­TIRE­MENT SER­VICES

CLIENT AS­SETS USED TO PUR­CHASE EQ­UI­TIES AND BONDS

ABLE TO RE­PLACE IN­COME AT RE­TIRE­MENT

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