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Risk tolerance crumbles as economic angst grows

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Clients' risk tolerance is unraveling as market volatility gnaws away at their nerves and new economic worries cloud the horizon, advisors say.

Indeed, the appetite for risk dropped sharply for the third month in a row, 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 slid 5.2 points to 25.8, its lowest level since the index was launched in mid-2012. Readings below 50 indicate a decline and readings above 50 indicate an increase.

“Clients are shell shocked,” an advisor says, as worries about a global growth slowdown have rippled through headline-grabbing corporate earnings announcements and stock swings. Combined with signs that the U.S.-China trade conflict is starting to have a broad effect on economic activity and the potential for a prolonged government shutdown to introduce another drag, “market flux has everyone scared,” another advisor says.

There has been “a noticeable uptick in clients who wish to retest their risk tolerance level,” according to one advisor.

The decline in the risk tolerance component was one of the biggest moves in the index, and helped the composite RACI reach a new all-time low at 45. That was a decline of 0.8 points from the previous low set the month before. 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 they are counseling clients not to make emotional decisions in reaction to market declines, and to stick to contribution levels and asset allocations designed to reach long-term goals. “The turn in the markets to lower values scared some clients, but they stayed the course after discussions with us,” an advisor says.

Some advisors also say that rebalancing activity is generating flows into equities, and that meaningful stock price reductions are creating buying opportunities.

Overall, however, the index component tracking allocations to stocks fell 4.8 points to 40.6, an all-time low. The component tracking allocations to bonds remained in positive territory at 50.5.

One advisor says the shift to more conservative portfolios among some clients is being driven in part by the use of “nondiscretionary, computer-driven risk management overlays from third-party money managers, which kicked in during December and reallocated those portions of their accounts from equities to bonds.”

Despite all the unsettling market gyrations and economic news, the index component tracking the dollar amount of contributions for all retirement plans gained 4.1 points to 54.1. The component tracking the number of retirement products sold also edged up 0.8 points to 50.8.

Advisors say that clients continue to focus on the need to prepare for retirement. “Clients were certainly worried about market volatility,” one advisor says. “This impacted nonretirement business more than retirement business though.” Some advisors say that year-end contributions to tax-advantaged retirement accounts also bolstered flows.

The index component tracking fees for retirement services dropped 0.4 points to 45.3, reflecting the impact of the drop in stock prices on assets under management.