Fidelity Encourages Advisers to Exploit ‘State of Flux’

Advisers have been in a “constant state of flux,” according to a quarterly Fidelity survey, but they are also “making sense of the range of short- and medium-term factors in play.”

Results of the latest Fidelity Advisor Investment Pulse survey should surprise few regular readers of

The Pulse survey program is an ongoing research effort that captures the views of Fidelity Institutional Asset Management broker/dealer and registered investment adviser (RIA) professionals, as well as the views of their clients. Respondents are asked open-ended questions about the investing environment and outlook, and the potential impact of recent news events on portfolio risk and returns.

Forward-looking results from the latest survey are little changed from the previous edition: “Market volatility, regulatory reforms, and political and macroeconomic shifts were top-of-mind for financial advisers across the first half of 2016,” the research finds. “These factors generated nervousness among advisers and investors, who in turn directed their attention toward portfolio management to help their clients navigate the uncertainty.”

Especially within the retirement space, investors for the most part are busy diversifying their investment approaches and market exposures. Many are turning to asset-allocation funds and multi-asset portfolios to add to diversification, while others are seeking to blend the benefits of active and passive investing philosophies.

Against this backdrop, “portfolio management” was the top area of focus cited by more than 26% of advisers surveyed, Fidelity explains, closely followed by market volatility (nearly 26%) and developments in the regulatory and political landscape (18%). These results are very similar to findings from the second quarter of the year, when 27% of respondents focused on portfolio management, 23% were concerned about market volatility, and 21% were keeping an eye on regulatory and political developments.

“Without question, volatility was a big concern for both advisers and investors in the first six months of the year,” says Scott Couto, president, Fidelity Institutional Asset Management. “Regulatory changes like the introduction of the Department of Labor (DOL)’s investment advice rule and political developments such as Brexit and the U.S. election campaign added to a degree of uncertainty to global markets.”

NEXT: Long-term planning is never easy

Looking ahead, Fidelity urges advisers to “identify the ideal mix of risk and return for their clients,” applying multiple perspectives and time horizons to their analysis. For example, through a short-term tactical lens, advisers ought to consider how “geopolitics, investor sentiment and flows are factors that may result in the market deviating from longer-term trends.”

“These may create investment opportunities and offer attractive entry and exit points,” Fidelity finds, “but advisers should not be overly dependent on a tactical time horizon when evaluating portfolios.”

Looking out between five and ten years, Fidelity urges advisers to think about the fundamentals of the business cycle: “Asset performance has historically been driven by business cycle factors that are connected to the state of the economy, including corporate earnings, credit growth, and inventories. In the U.S., there is currently a mix of mid- and late-cycle dynamics, with recession risks remaining low.”

Because of less reliable asset performance patterns, Fidelity says advisers “should consider smaller cyclical tilts, as well as continuing to educate their clients about the importance of diversification.”

Looking even further ahead, Fidelity suggests it “may be useful to apply a secular lens when, over a 10- to 30-year time frame, demographic shifts, productivity changes, and other macroeconomic trends may influence asset performance.”

“As advisers use multiple time horizons to look beyond immediate developments like the Department of Labor’s investment advice rule, Brexit and the U.S. election campaign, they may be able to develop a disciplined and differentiated approach to portfolio management,” the survey report concludes. “Advisers should set their own guardrails around the three time horizons: Some advisers update their secular views annually, their business cycle views weekly, and their tactical views on a daily basis.”