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Client confidence swings higher on economic strength

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Clients are becoming hardened to stock market volatility and political turmoil, advisors say, though there are some concerns about the outlook for equities.

Client risk sentiment improved for the first 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 gained 4.2 points to 52.2. Readings below 50 indicate a decline, while readings above 50 indicate an increase.

“Investors are beginning to realize that the short-term volatility of the stock market is the ‘new normal,’” one advisor says. “Reacting to big swings in the stock market by reallocating into cash is unwise because, a few days later, the market recovers.”

Many clients are also looking past the ongoing multifront trade war as they struggle to understand where the situation is headed, advisors say. President Trump’s promises to permanently reset trade patterns have cycled with sudden de-escalations, and it’s up to clients and investors to attempt to decipher what it all means.

“People are just generally trying to ignore the chaos emanating from the White House every day, and continue with their ongoing plans toward retirement building,” one advisor says.
Broadly, confidence has been supported by strong economic fundamentals. “People overall are still feeling really good about the economy,” an advisor says.

The risk component was the biggest mover in the index, helping to nudge the composite up 0.1 points to 52.2. 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.

The component for client investment flows into equities added 1.1 points to 59.8. The component for flows into bonds also edged up 0.2 points to 52.6, and the component for flows into cash gained 3.1 points, swinging into positive territory at 50.7.

Flows into cash and bonds reflect spillovers from buoyant stock prices, an advisor says, as clients seek to keep portfolios balanced. Advisors also say higher interest rates have pulled clients into short-term debt instruments.

Along with strong investment flows, the index signaled good news for wealth managers across factors tracking retirement plan contributions and products sold, and fees for retirement services. The component for contributions kept positive at 55, as did the component for fees at 54.6. The component for products sold gained 1.3 points to 53.1.

“The economy in this area is booming, and we have a lot of newly hired employees that are enrolling in company retirement plans,” an advisor says.

Despite the index’s generally upbeat indicators, however, advisors say a deep undercurrent of unease persists. Clients are “still investing on the aggressive side, but their concerns of the strength of the markets are more prevalent in our discussions,” an advisor says.

There is a widely held sense that a downturn is becoming more likely as the economic expansion ages into its 10th year, and some advisors say they are positioning clients for it.
“Expecting and hoping for a large, 20%-plus stock market correction that is long overdue,” one advisor says.