Many seniors (43%) take a similar view of stocks; however, those not fully retired are much more likely to consider stocks for long-term appreciation only (49%), according to a press release on the surveys’ results.
Three out of four advisers surveyed (73%) said they use stocks in their clients’ portfolios both for long-term appreciation and as a way to provide current income and nearly half of advisers (44%) reported they think of stocks first when investing a client’s rollover assets at retirement, and only 20% of advisers think of bonds first.
The surveys found equity income is on its way to becoming recognized by advisers as a full-fledged asset class, and advisers and senior investors are equally accepting of stocks as part of a retirement portfolio. Nearly two-thirds (63%) of financial advisers surveyed said they view equity income as an asset class, the press release said.
Four out of five advisers (80%) said they often recommend equity-income products to their clients. A majority of advisers surveyed (64%) currently recommends stock-focused portfolios or portfolios evenly split between stocks and bonds for senior investors, and balanced portfolios are the ones most seniors surveyed (66%) pursue.
Senior investors who are not fully retired are more likely to have stock-heavy portfolios than those who are fully retired (39% versus 28%). Two out of three advisers (65%) reported that clients prefer a fixed income over a variable income stream (33%) in retirement.
Views on the role of stocks in retirement portfolios are changing, as most seniors now favor a heavy allocation to equities. Advisers views are similar. Nearly two-thirds of advisers (62%) agreed their view of the right mix of fixed income and equities for retired investors has changed over the past 20 years.
Looking forward, most advisers (71%) said they think it is likely equities will constitute a larger proportion of the portfolios of retirees and near retirees. Three-quarters of advisers (75%) said they believe future retirees should have a higher portion of equities in their portfolios than do current retirees.
A New Equity Income Strategy
Among investments that generate current income are closed-end funds, which sell shares in an initial public offering and trade on an exchange like a stock, Eaton Vance noted. Many of today’s closed-end funds include income-producing strategies employing stock options, such as a “covered call’ writing program, and while advisers appreciate the value of a covered call strategy, closed-end funds have not yet attained top-of-mind status among advisers.
Nearly two-thirds of advisers surveyed (61%) said they believe covered call strategies reduce risk by providing a regular source of income.
Bonds (41%) and real estate (20%) led the list of funds named by advisers as a good way to generate income, but advisers were almost as likely to name closed-end funds (11%) as stocks (14%). Only 37% of advisers reported they often recommend closed-end funds to clients.
The Eaton Vance surveys found the reduced 15% tax rate on qualified dividend income originally enacted in 2003 and extended in 2006 is popular among senior investors and financial advisers alike. The majority of senior investors (77%) and financial advisers (94%) want the reduced maximum federal tax rate on qualified dividend income to be extended again or made permanent.
However, the survey found advisers show greater knowledge about the current tax rate on dividends than senior investors:
- Three out of four advisers (75%) correctly identified the top tax rate on qualified dividends as 15%, as compared to only one out of three seniors (36%).
- More than half of advisers (62%) said the 2003 tax cut on qualified dividends affected how they structured clients’ portfolios.
- If the tax cuts are repealed or expire, many advisers said investors will increasingly favor other income-oriented vehicles over stocks, and more than half (58%) predicted companies will de-emphasize dividend payments in favor of capital expenditures and stock buybacks.
- Only one in three (34%) senior investors said the reduced tax rate on dividends affected how they have structured their portfolio.
- If the dividend tax cut is repealed, more than half of investors said they will not adjust their portfolios, and only one in five (18%) said they will invest less in dividend-payers.
Financial advisers are more likely than senior investors to view dividends as a sign of financial strength and to agree that firms that pay dividends tend to be predictable cash generators (93% versus 66%).
In addition, more than half (54%) of advisers knew that over the past 10 years dividend-paying stocks in the S&P 500 Index have outperformed non-dividend-paying stocks in the Index. Only two in nine senior investors (23%) knew that dividend-payers had outperformed over the past decade.
Three in four financial professionals (77%) said they are more likely to recommend dividend-payers than non-payers to their clients. By comparison, three in five (61%) seniors said they invest in dividend-paying stocks.
The Eaton Vance Advisor Study was conducted among 375 financial advisers who work with individuals to identify financial goals and recommend investments based on those goals. Baby boomers (including seniors) make up more than half of the book of business for more than three-quarters (79%) of surveyed financial advisers.
The Eaton Vance Retiree Study was conducted among 402 U.S. residents 61 years or older, who have $50,000 or more invested in stocks, bonds, mutual funds, and qualified retirement plans, such as IRAs or 401(k) plans. More than half of senior investors (59%) use the services of a financial advisor.
The telephone studies were conducted from July through August 2007 by Penn, Schoen & Berland Associates Inc. for Eaton Vance Corp.