While some experts say that clients need to brace for a market without the Fed's help by adding cash to their portfolios (see story), others are worried that the rush for cash is already being overdone.
In spite of improving markets, mass-affluent investors are pessimistic, a new study shows. They are worried about the lingering effects of 2008's financial crisis and looming threats, including possible cuts in Social Security and rising health care costs. And experts urge advisors to talk to these skittish clients now, rather than wait for sunnier skies.
MFS Investment Management surveyed 600 of its mass-affluent clients—those with $100,000 to $1 million in investable assets—and found they were grumpy about the outlook for the markets, government spending and entitlement programs. That pessimism has translated into defensive investing. Nearly half, 44%, have cut back their discretionary spending in the last 12 months. Meanwhile, 59% agreed with the statement: "I am more concerned than ever about being able to retire when I thought I would."
Similarly, 49% agreed with the statement: "Over the past few years, I've lowered my expectations about what life will be like in retirement."
The result of all this gloom? Almost two-thirds, 65%, described themselves as protective, pessimistic or fearful. Their portfolios bore them out, with the average cash holding at 28%, although fewer than half the respondents, 42%, are highly confident that their portfolios are in shape to help them meet their long-term goals.
So what's an advisor to do with frightened clients clinging to inflated cash cushions?
As with many other problems in life, the first step is acknowledging it, says Bill Finnegan, senior managing director for retail marketing for MFS.
He says that besides the serious hits their portfolios suffered in 2008, this group is unhappy about their level of home equity.
Although they may be in good shape relative to the rest of the country, they do not feel that way based on what their homes were worth before the real estate bubble burst.
"That weighs heavily on them. They say, 'I'm looking forward to Social Security, but the talk is there'll be Social Security reform because the government can't afford it,'" says Finnegan. "This is an opportunity for the bank advisor to step back and understand the behavior. Say, 'Help me understand your goals, time frame, risk parameters. I can come up with something to help you do what you need to do.'"
Matt Matrisian, director of practice management for Genworth Financial Wealth Management, says it's completely understandable that clients are pessimistic—they're not getting clear direction about what's going on in the markets. "Some of that needs to be the responsibility of the individual advisor. Those advisors who had regular conversations with clients and could provide education and talk about where they thought the markets were going, gave clients a better comfort level because their advisor had a handle on things [during the recent downturn]."
Matrisian adds that advisors should be talking to clients and focusing on goal-based planning. "Not necessarily the amount of money, but what their goals are, what their time frame is. Do a cash-flow analysis and understand what they'd like to do with their money, and center the conversation around those goals."
Matrisian also notes that some of the pessimism can be chased away by simply educating clients. He suggests holding a client appreciation day with speakers, including an expert on the economy, health care or one of the other issues worrying clients. Alternatively, discuss the issues in a monthly or quarterly newsletter. "Providing education around those topics will give clients a better level of comfort. They may not be happy about it, but at least they know. A lot of it is fear of the unknown."
MFS' Finnegan says, ironically, in many cases the most fearful investors with the biggest worries about inflation have their money in instruments that likely aren't beating inflation. "This is where the advisor needs to dig deeper."
Clients didn't just stumble into having too much cash the way a stock portfolio can become skewed too risky or too conservative simply by neglecting to rebalance. The consumer had made a conscious decision to tighten the reins and get control. "They've probably overcashed and probably need half to a third of what they have now. I think they reacted appropriately to the environment. But now that environment is past, things are looking a lot brighter, [the question is] how can I make you feel better about them?" he says.
Finnegan also adds that bank advisors must have strategies for helping people understand the challenges of being too conservative as well as being too risky.
"If you have too much of either, you won't hit your goal," he says and warns advisors to steer clear of words that make jittery clients, who are already protective of their assets, even more nervous. "Proposing something perceived as risky is not good. Most of them—70%—say they don't want to grow assets. They don't like that phrasing—it's the notion of the risk associated with the wording. Talk about accumulating wealth to reach your goal. These changes may seem subtle, but are important in helping people get past this," he says.
"Most of these people want to participate in the process. This will require more hand-holding. It's more time consuming and it drives up expenses from the advisors' perspective. But remarkable events require remarkable responses. The Great Recession was an incredible event. I don't think that can be minimized."
He added that for many clients, this won't likely be a "one-purchase-and-you're-done event." He says advisors should use transition products to get people back in the market. He suggests strategies like conservative allocation products or balanced funds.