Advisers’ top concern in the second quarter was interest rates, Fidelity Financial Advisor Solutions found through its quarterly updated “Fidelity Advisor Investment Pulse” research project.
Many advisers say they are trying to address their clients’ concerns about when rates will rise, and by how much, Fidelity found. Following interest rates, advisers’ other concerns are portfolio management, market volatility, fixed income and client guidance (see “Interest Rates and Practice Management”).
“In an uncertain market environment, we’re hearing that advisers would like to receive support in managing their clients’ emotions,” says Scott Cuoto, president of Fidelity Financial Advisor Solutions. “On the one hand, advisers are looking to set client expectations on a potential rate hike and the longevity of the bull market in equities. On the other hand, advisers want to help their clients understand the impact of what’s happening in the market on their portfolios.”
Couto points to some factors that advisers should keep in mind when discussing interest rates with clients. First, despite the start of a Fed tightening cycle, equities have historically averaged double-digit gains in the year after the first Fed move, he says. While bonds have averaged a slightly negative performance in the first few months immediately following a rate hike, advisers should encourage their clients to take a longer view.
Second, advisers should not recommend that investors move into defensive sectors too quickly, as the end of the business cycles doesn’t typically occur until two years after the first rate hike, Couto says.
Third, advisers should recommend high-quality bonds, given their low correlation to equities, he says. Investment-grade bonds can play an important role in a diversified portfolio, he says.
“Taking the time to look at an individual investor’s portfolio goals, time horizon and tolerance for volatility can help advisers respond in a way that will foster a stronger relationship with the client,” Couto says. “Market fluctuations occur more often than clients may realize, so offering them the historical context and making a plan that helps them diversify and stay fully invested over the long term is important.”
Fidelity’s report is based on a survey of 250 advisers.