Advisors Identify Rising Interest Rates As A Top Client Conversation Topic
The survey, sponsored by
However, these themes could prove to be challenging conversations for advisors, as more than two-thirds (69%) say they often find themselves acting as part psychologist and part financial advisor.
"Clients are not only seeking financial advise from their advisors, but also looking to engage with them on a more personal level," said
Concern for Rising Interest Rates
The survey found that advisors are more concerned than their clients about rising interest rates, by nearly a 2-to-1 margin, and only 7% of advisors say clients are actively seeking advice on the topic. With so few clients actively seeking advice, advisors have the responsibility to initiate conversations to help clients better understand the potential risks rising rates presents to their portfolio.
"While we believe opportunities exist for risk-adjusted fixed income returns, advisors need to initiate conversations about the potential impact of rising interest rates as many of their clients have never seen a significantly down or flat bond market," said
According to Denzler, advisors need to begin by making sure their clients truly understand the basic mechanics of bonds. It's critical to ensure clients have an understanding of how bonds work and how rising interest rates can impact a portfolio first before advisors can engage clients in productive, meaningful client conversations around how to navigate a rising rate environment.
Examining Equity Market Highs
Almost half (47%) of advisors say their clients are well-informed and are open to advice on how to invest more in the equity markets. However, the 2013 run up in equities has created the potential for some clients to have an imbalance when it comes to what is generally accepted as the starting point for a properly diversified portfolio.
"The need to rebalance to client portfolios coming out of 2013's equity market highs should be the starting point for advisors, because the most important thing an advisor can do for a client is to set a properly diversified portfolio based on risk tolerance," said
The survey found that advisors anticipate that clients will agree to a slight increase in allocations to equities (53% of client assets under management (AUM)). However, advisors report that clients will agree to bond allocations of around 24%, which is significantly lower than the generally accepted equities to fixed income ratio for a properly diversified portfolio.
"There is a stress point when advisors need to have a disciplined asset allocation process in place, because that's when clients will be least likely to do the right thing," Chang said. "Together, advisors and clients should have the discipline in up markets and down markets to believe that they've done the right level of work to come up with the 60 vs. 40 or 65 vs. 35 allocation mix."
Education on Income Generation
Clients are proactively bringing up a number of income goals for 2014. Despite this, advisors do not believe their clients are connecting the broader economic issues to their personal portfolios – only 8% of advisors believe clients truly "understand" how income is generated in their portfolio.
Looking forward to 2014, advisors feel clients will be most receptive to recommendations of two investments known for their income-generation potential – dividend-paying stocks/stock funds (86% of advisors surveyed) and high-yield corporate bonds/bond funds (53% of advisors).
"It's important for advisors to keep in mind that yield is not free," said Denzler. "Conversations about high-yield strategies are really about exercising proper risk management and making sure the client truly understands an investment the advisor is recommending."
Download the Advisor Viewpoints 2014 Executive Summary for more in-depth information on the types of conversations advisors should use to navigate critical client conversations, or watch a replay of the Advisor Viewpoints panel discussion to learn more about 2014's more pressing conversation themes.
About the study
A national, online study of advisors was conducted from
At the end of
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Investing involves risk, including the possible loss of principal and fluctuation of value.
Bonds in a portfolio are typically intended to provide income and/or diversification. In general, the bond market is volatile. Bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
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