Client confidence has climbed and that rosier outlook for the economy and the stock market is propelling robust flows into equities and retirement accounts, advisors say.
Allocations to stocks strengthened sharply, according to the latest Retirement Advisor Confidence Index — Financial Planning’s monthly survey of wealth managers — and helped to support further improvement in business conditions for the investment industry.
The component measuring the amount of client assets used to buy stocks and stock funds increased 5.1 points to 66.4, nearly the highest level in a year. Readings above 50 indicate expansion, while readings below 50 indicate contraction.
“People are more confident about the economy and more willing to invest in stocks after a great 2017,” one planner says.
The upswing in the equities flow component was one of the biggest factors behind a 2.7-point increase in the composite RACI to 57.1— its highest level in more than a year. The composite tracks asset allocation, investment product selection and sales, client risk tolerance, tax liability, new retirement plan enrollees and planning fees.
Advisors attribute the confidence in part to reassuring economic fundamentals and growing comfort with the high returns stocks have recently delivered. “Clients are more optimistic based on gains,” one says.
Planners also say that the tax legislation Republicans enacted in December helped improve sentiment. “Though some feel that the tax plan was already ‘baked’ into the market, others felt it would be positive and lead to higher profits,” says one advisor.
Worries that risks are building continue to be widespread, however. One advisor says, “The number one question I’m getting in every meeting is this (or some derivation of this): When do I think the market will either crash or have a serious selloff?”
Planners report that they are urging clients to resist both overreacting to fear of potential losses and the temptation to invest too aggressively. “We have been counseling everyone to maintain their previous risk tolerance unless their circumstances have changed,” one says.
Nevertheless, some also say that they are positioning clients to take advantage of bargains that might appear during future periods of volatility. One advisor reports “significant selling” of U.S. stocks “to raise cash for potential future investment opportunities which so far remain unknown.”
Overall, the RACI component measuring client risk tolerance jumped 6.2 points to 62.8, its highest level in a year.
Wealth gains from strong market performance, combined with year-end financial planning led to strong flows into retirement accounts, with the RACI component tracking the dollar amount of contributions to retirement plans jumping 8.6 points to 69.3. That level even surpassed last April’s mark of 67.5. Tax time is typically the seasonal high for retirement contributions.
The latest RACI, which is based on advisors’ assessment of conditions in December relative to November, is accompanied by the quarterly Retirement Readiness Index. RRI tracks advisors’ evaluations of their clients’ income replacement ability, likely dependence on Social Security and exposure to big economic shifts.
Advisors say that the vulnerability of mass-affluent clients (net worth of $250,000 to $1 million) to a range of potential economic shocks has dipped a bit, but that the threat of a significant increase in health care costs still looms particularly large.
About 34% of advisors say that such a shift would be extremely damaging to mass-affluent clients’ retirement security. “It is tough to understate the uncertainty associated with health care cost risks,” one advisor says.
Overall, advisors expect that about 60% of mass-affluent clients will be able to replace their income for 30 years by the time they retire, compared with 75% of high-net-worth clients ($1 million to $10 million) and 80% of ultrahigh-net-worth clients (more than $10 million).