Fewer than two-thirds of advisers (64%) hold a positive outlook on the markets for the next three years, according to the latest Financial Professional Outlook from Russell Investments—the lowest adviser sentiment in five years. But the distractions of market noise could mean that nervous advisers and their clients miss an opportunity for conscious, structured conversations about income goals, Russell cautions.
Adviser sentiment hit a high of 87% early in 2014, but in the current outlook more than half of advisers (56%) cited concerns about future market volatility. Client uncertainty, at 53%, matches the adviser sentiment. Together, these concerns may loom over adviser conversations with clients, distracting from long-term planning efforts.
Market volatility, driven by recent spikes, probably fed into other conversations initiated by investors, the Financial Professional Outlook contends, such as portfolio performance (cited by 48% of advisers) and global events (35%). But instead of buckling, Russell recommends turning the current sentiment to an advantage, and using it as an opportunity to refocus client conversations.
“It’s key for advisers to not let these concerns derail their efforts to have long-term planning conversations with clients based on their goals and needs for the future,” says Phill Rogerson, managing director, consulting and product for Russell Investments’ U.S. adviser-sold business. “One way advisers can address current market concerns is to provide context as to what a typical market looks like, in historical terms. Advisers should be explaining what typical asset class and broader economic performance looks like, and use that as a foundation to help clients understand and navigate the increasingly complex investing environment.”
More conversations about long-term planning are needed. Nearly one-third of advisers (30%) said as many as half of their clients are not on track to maintain adequate assets for an optimal retirement. Advisers surveyed said the two key challenges they face are setting reasonable expectations around spending (55%) and maintaining the sustainable spending plans they do manage to create with clients (44%).NEXT: An investing risk advisers may be overlooking
When it comes to investing strategies, advisers may not be fully considering the risks of chasing yield. An overwhelming majority of advisers surveyed said that they believe yield-focused investment strategies (or strategies that rely on dividends and interest alone to provide income) are a strong option for some or all of their clients.
But paradoxically few advisers believe it is a superior strategy, pointing to potential risks as a main deterrent from pursuing such strategies, including capital erosion because of inflation (53%) and higher credit risks (40%). Only 11% of advisers said they would recommend these strategies to the majority of their clients.
A primary hazard of over-focusing on yield is that it’s not always an optimal investment approach, according Rogerson. “These strategies can actually put sustainable income at risk,” he points out. “To help reduce the level of risk and portfolio volatility, we believe that income solutions should pursue a responsible, sustainable level of yield through a well-diversified, multi-asset approach.”
Rogerson counsels advisers to evaluate the risks and potential opportunities of an investment strategy as a matter of course. The other component is encouraging clients to balance long- and short-term income needs and to be mindful of global diversification, risk and adaptability, among other factors.
“The best way to manage these four factors is to take a total-return approach to portfolio management,” Rogerson says, and advisers agree. Of the advisers who said that yield-focused strategies were not a good option for all of their clients, more than-two thirds (70%) would recommend a total-return approach which looks at the sum of interest, dividends and capital appreciation when considering the ability to generate income.
“Instead of focusing on short-term market events, advisers need to remember to center conversations on client goals,” Rogerson says. “Clients may call with apprehensions about the market, but advisers need to be able to defuse these concerns and move the conversation toward one that instead weighs the current progress of the client’s portfolio against their desired outcome. This way, actions stay connected to the clients’ individual needs without jeopardizing their future financial security.”
Russell’s Financial Professional Outlook includes responses from 297 financial advisers working in nearly 213 national, regional and independent advisory firms nationwide. It was conducted between October 6 and October 21.