When Advice Is Missed, Clients Act Out of Fear

More than eight in 10 advisers polled by Eaton Vance report fear is the primary motivator for clients.                 

Turbulent markets continue to rattle investors, prompting financial advisers to rank “managing market volatility” as their top concern for Q1 2016, according to a new survey published by Eaton Vance.

The 123.8 reading for “managing market volatility” in this update of the Advisor Top-of-Mind Index (ATOMIX) is the highest ranking since the index originated in April 2014. Just as telling, the survey found that 80% of financial advisers report fear is the primary motivator for their clients, up dramatically from 51% in Q1 2015.

Nearly half (47%) of the 1,000-plus advisers polled said they are focused primarily on counseling clients to stay the course through volatile periods and adhere to established plans. Hoping to re-focus clients on aspects over which they have greater control than market performance, a sizable portion of advisers are taking time to remind clients that it’s tax time. Especially for clients that have moved large sums of money between or out of different types of retirement accounts, this is an important time of the year to get it right.

Looking ahead, still less than half (44%) of financial advisers polled “believe the likelihood of a U.S. recession by year-end is either moderate or high.” According to Eaton Vance researchers this underscores their growing trepidation over the pace and direction of global growth. John Moninger, managing director at Eaton Vance, believes the volatility spike in the latter part of 2015 and the emotional reaction many investors had to it “may be leading to investment actions that work against their long-term goals.”

“Market volatility is an output of investor sentiment and history suggests that dislocations caused by volatility can present compelling opportunities for investors who remain calm, evaluate the fundamentals and take a long-term approach to their portfolios,” Moninger explains.

NEXT: Staying the course … or not 

Advisers are certainly already aware that investors can be tempted to diverge from a buy-and-hold mentality during periods of heightened volatility, Moninger notes. What they may be less convinced of is the power of a quick reminder of the basic lesson that short-term volatility is the price of long-term gains in the equity markets.

“Advisers can provide invaluable guidance to their clients by instituting a sound investment strategy and then effectively communicating the value of sticking to that strategy, especially when clients are fearful,” he says. The research suggests one clear way advisers can help clients act prudently in volatile markets is to focus them on their tax bills. 

“Tax management consistently ranks lowest on the ATOMIX survey, suggesting that many investors do not fully understand the impact taxes can have on total return,” Moninger adds. “In fact, six out of 10 advisers (61%) reported that they do not believe their clients even know the effective tax rate on their investments. Tax-conscious investors should consider how they can get ahead of tax bills and focus on tax management throughout the year instead of only in the fourth quarter or around Tax Day.”

Also interesting, while 45% of advisers stated they harvest client losses annually, only 3% do so monthly and 17% do so on a quarterly basis.

NEXT: What comes next with interest rates?

“While interest-rate speculation contributed to market volatility in 2015, the December rate hike has led to general consensus among advisers about the pace of future hikes,” the survey report explains. Despite the fact that the Federal Reserve has already passed on one opportunity to hike rates further in 2016, 72% of advisers “believe there will be several small rates hikes in 2016.”

Advisers continue to diverge on how to best prepare client portfolios for a rising rate environment, identifying multisector, municipal, floating rate and high-yield bonds as potential solutions for their clients. Fifty-five percent also noted that they are moving their clients into equity strategies in an effort to combat the impact of rising rates.

“Ultimately, clients are telling their advisers that they are nervous about the economy, interest rates and what market volatility will do to the assets they have spent a lifetime working to accumulate,” Moninger concludes. “Financial advisers can clearly define the value they bring by helping their clients stay focused, invested and opportunistic through challenging markets and over time.”

The ATOMIX is created in partnership with third-party researchers and calculated based on the findings of a survey of 1,000 financial advisers, coming “from a diverse group of companies.” The firm says ATOMIX “uses a similar methodology as the U.S. Consumer Confidence Index … in that it calculates a weighted average of current perceptions (40% of the Index) and what advisers think about the trends (60% of the Index).”

For more findings and firm information, visit www.eatonvance.com