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Clients raise stock allocations as they are 'less concerned with volatility'

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Confidence in the fundamental strength of the economy, as well as the opportunity to add equity exposure at lower prices, are helping to sustain robust investment flows, advisors say.

Client allocations to stocks have accelerated, recovering from a slowdown tied to heavy volatility early in the year, according to the latest Retirement Advisor Confidence Index — Financial Planning’s monthly barometer of business conditions for wealth managers.

The component tracking assets used to buy stocks and stock funds jumped 7.7 points to 60.3 – the biggest move among factors covered by the index. That level is far into expansion territory, with readings above 50 indicating an increase and readings below 50 indicating a decline.

Advisors say some clients are looking past renewed volatility to focus on the outlook for long-term performance, and they are discovering attractive values in stock market dips.

“Clients are becoming less concerned with volatility. Tweets and headlines have a smaller impact on investment decisions.”

“The market has been and is fickle,” one advisor says. But “even with the increased volatility, there are still bargains, and I highly recommend my clients be invested.”

Advisors also say rebalancing triggered by lower stock prices is channeling flows back into equities.

“We’ve been encouraging clients and retirement plan participants to reallocate their cash holdings and increase their contributions,” one advisor says. “We believe that the recent volatility presents a good opportunity for clients to reposition their assets for growth.”

The index component tracking allocations to cash also increased 5.2 points to 51, suggesting an abiding current of nervousness among clients. Similarly, the component tracking allocations to bonds increased 4.2 points to 54.1.

Boosted by healthy investment flows, the composite RACI added 2.1 points to reach 52.8. In addition to asset allocation, the composite tracks investment product selection and sales, client risk tolerance and tax liability, new retirement plan enrollees and planning fees.

“We’ve been encouraging clients and retirement plan participants to reallocate their cash holdings and increase their contributions.”

Robust investment activity may come in part from higher contributions to retirement accounts, which typically increase around tax season as clients transfer money into IRAs to meet deadlines and invest refunds. The component measuring contributions to retirement plans remained well into expansion territory at 61.7.

The component measuring fees for retirement services – which track closely with contributions and managed assets – gained 1.7 points to 52.9.

Strong equity investment flows suggest a rebound in risk tolerance, and, indeed, some advisors say clients are becoming acclimated to a “new normal” in which renewed volatility has supplanted years of steady gains in stock prices.

“Uncertainty has settled in,” an advisor says. “Investors are cautious, but mostly seem to shrug it off.”

Some advisors say clients are becoming desensitized to the unceasing barrage of news about the country’s chaotic politics and turbulent international relations. “Clients are becoming less concerned with volatility,” one advisor says. “Tweets and headlines have a smaller impact on investment decisions.”

At the same time, other advisors say clients remain highly attuned to President Trump’s impulsive and norm-shattering administration. “In one word: Trump, the definition and cause of great market and account volatility,” one advisor says.

While the RACI component tracking client risk tolerance increased 6.6 points to 45.2, the gain failed to lift it out of contraction territory, implying that investor confidence remains dented.

Volatility and uncertainty have put clients in the mode of “waiting to see what happens next,” an advisor says.