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Client appetite for risk falters amid stock volatility

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Client risk sentiment dropped sharply for the second month in a row, reflecting clients’ continuing worries about stock selloffs and the economy’s fundamentals, advisors say.

That’s according to the latest Retirement Advisor Confidence Index — Financial Planning’s monthly barometer of business conditions for wealth managers. At 31, the component tracking client risk tolerance remained deep in negative territory in November. Readings below 50 indicate a decline and readings above 50 indicate an increase.

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“People are worried about 2019 and the volatility of the market is weighing on sentiment,” one advisor says.

Clients point to an array of concerns that have set markets wobbling, advisors say: tariffs taking a bite out of trade, high levels of corporate debt, mounting federal deficits, rising interest rates and inflation, and stimulus from 2018’s tax overhaul wearing off and contributing to a growth slowdown.

The clouded outlook and volatility have “paralyzed a few clients,” according to one advisor.

Advisors say clients are increasingly asking to discuss the safety of their portfolios. “With the recent market activity, we have been receiving a flurry of client communications asking about decreasing their risk,” one advisor says.

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The risk tolerance component helped weigh down the composite RACI, which shed 0.8 points to 45.8, its lowest level since the index was launched in mid-2012. In addition to risk tolerance, the composite tracks asset allocation, investment product selection and sales, planning fees, new retirement plan enrollees, and client tax liability.

Advisors say that some clients are looking to buy into high-quality equities on market dips, and that the need to rebalance portfolios after price declines is helping to stabilize flows into stocks.

However, clients remain wary overall. “Cash remained on the sidelines,” an advisor says. “No rush to reallocate.”

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Some advisors say they are counseling clients to invest cautiously in view of stock market gyrations and doubts about the strength of the economy. “We believe it is prudent to take a portion of our clients’ assets and move them to cash and cash-like instruments given the market cycle and recent volatility,” an advisor says.

Another advisor says that uneasy clients who have shifted into short-term fixed income instruments and cash are likely to stay with those positions for the time being because “the global political climate and recent economic data does not lead us to a bullish outlook.”

The index component tracking flows into equities remained in negative territory at 45.4. Meanwhile, the component tracking flows into bonds stayed just in positive territory at 50.9.
Clients are “looking for liquidity and guarantees,” an advisor says.

Deteriorating risk sentiment also reverberated in retirement savings flows. The component tracking the dollar amount of contributions for all retirement plans dropped 5 points to 50, its lowest level in the index’s history. The component tracking the number of retirement products sold also hit 50, a decline of 0.9 points.

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Market conditions and unfavorable trends in retirement savings also hurt revenues, advisors report. The component tracking fees for retirement services dropped 2.6 points to 45.7, its second month in a row in negative territory.