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Advisors counsel caution as client confidence, risk tolerance surges

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Far from the late-year swoon of 2018, clients' retirement confidence and risk tolerance surged in the waning months of the year amid persistently strong market conditions, according to the latest Retirement Advisor Confidence Index — Financial Planning's monthly barometer of business conditions for wealth managers.

"Equities are still the place to be," one advisor says, summing up the general sentiment.

“Clients seem to be more optimistic about the bull market running longer," says another, noting however that “this has not changed our firm's asset management or asset allocation."

The component of RACI that measures assets allocated to equities notched a score of 63.8 in the most recent month, the highest score posted in that category since April, and a staggering 18.4 points ahead of the same mark last year.

RACI scores above 50 indicate an uptick in investor confidence, while scores below that mark show a decrease.

Investor confidence in equities rose 6.2 points from the previous month, posting the second-highest score of the year, which some advisors attribute to an enduring bull market that continues to draw strong client interest.

In addition to equities, clients also expressed strong interest in adding bonds or debt-based securities to their retirement plans.

"Based on positive market momentum, we found clients were more willing to participate in their retirement plans and allocate to more-risky securities, including funds with market exposure," one retirement advisor says.

Another advisor reports that clients "are feeling better about [the] market environment [and] more open to adding equities."

The RACI component that measures bonds or debt-based securities saw a score of 53.1 in the most recent month, the highest mark in that category since May 2018, and up six points from the prior month and 2.2 points from the same period a year ago.

Overall, the composite retirement confidence index saw a mark of 53.2 in the most recent period, the third consecutive monthly increase and the highest score since April. This month's composite score represented a 1.8-point increase over the previous period and 7.4 points higher than last year.

The spike in confidence was reflected — outpaced, really — by clients' risk tolerance, which checked in with a score of 53.6, up 6.8 points from the previous month and 22.6 points from last year, when risk tolerance was on its way down to the lowest level since 2011.

One advisor reports having "received fewer 'panic' calls [and] emails" for the survey period, which he attributed to clients becoming more comfortable as markets rise.,

"I wouldn't say risk tolerance really changed ... more [that] clients feel less pain at the moment."

Other advisors see the continued market strength and corresponding appetite for risk among clients as a sign for caution. One advisor observes that clients are becoming "complacent" amid the prolonged bull market, which some predict has nearly run its course.

"We feel that we are approaching the peak of this business cycle and are making investment decisions accordingly," one advisor says.

"We're surprised how strong business is so late in the cycle," says another. "We are expecting a downturn."