Affluent investors ended the first half of the year on a sour note, their confidence slipping seven points to negative-12 on the Spectrem Group’s Affluent Investor Confidence Index, but advisors counter that falling confidence is an opportunity rather than a challenge.
The last time affluent investors’ confidence fell so far so fast was in June 2009, when the index dropped by eight points. This June’s drop means investors with between $500,000 and $1 million to invest are feeling bearish.
Millionaires, too, lack confidence in the investment climate, their index dropping six points to negative-7. So while all wealthy investors are worried about their accounts, richer clients are less worried.
At 26% (29% for millionaires), the political climate is what worries wealthy investors the most, particularly uncertainty about future tax hikes and the potential impact of the nation’s bloated deficit, says George Walper, president of the Spectrem Group in Chicago. Other prominent concerns include the economy (24%), market conditions (10%), unemployment (5%), inflation (4%) and health-related issues (3%).
All this worry is a clear call to advisors to expect gloomy clients, but Walper says it’s not all bad news. “This is an opportunity,” he says. “Make sure you understand your clients’ psychological feeling about the market and Washington, listen to that and build solutions for them,” be that through additional financial planning or simply tweaking their portfolios to assuage clients’ fears. “People are shifting toward far more conservative investment strategies.” Walper says. “The definition of that is in the eyes of clients, which is why it’s so important to really know your clients well.”
Barry Jones, with Axa Advisors in Davison, Mich., agrees that what seems like a negative is actually a positive for advisors. “Market gyration is a great reason to sit down with clients to articulate what’s going on,” he says. “A lot of people are keeping their money on the sidelines.”
The goal is to get them to move that money into a relatively safe investment strategy that will reward clients far more than the CDs and money market funds many of them are holding out in. For the past eight months, Jones has been talking to clients about Curian’s dynamic risk account, a seesaw consisting of one to three-year Treasuries on one side and a basket of global equities, commodities and emerging market debt exchange-traded funds, among other things. Jones says that when the portfolio falls any more than 1.2%, assets are shifted to Treasuries. If it gains by 1.4%, then assets are shifted from Treasuries to growth. Almost 10% of Jones’s $60 million book is now with Curian, which Jones combines with annuities for guaranteed income and pools of “sometime” money in long-term growth strategies.
Maris Ogg, president of Tower Bridge Advisors in West Conshohocken, Pa., also seesaws between market exposure and safety, depending on how the market is acting. She says most of her firm’s clients fall into the 60:40 to 40:60 ratio of stocks to bonds. The firm uses a proprietary but “simple” market indicator that uses factors such as bond yields, earnings yields and risk premiums to figure out whether the current market is overpriced or underpriced relative to the past 25 years. Right now, she says, the market was only more undervalued 25% of the time, making it a buyer’s market. Typically, “we’ll pull back when stocks go up,” i.e. sell them, and move the money to cash until a suitable bargain emerges or hedge against sudden slumps with puts and covered calls. Right now, though, market volatility is making both advisors and clients skittish, so they’re holding back until prices stabilize. “With volatility so high, all you can do is offer sympathy and keep people calm,” Ogg says. However, she notes that it’s sometimes an advisor’s job to counter excessive client negativity. The market will get more stable come November, when “there will be more of a balance in Congress, and a stop to the anti-business agenda. The underlying economic numbers are clearly moving in the right direction,” she says.
In short, just because investors are scared, that doesn’t mean they’ll stay on the sidelines if an advisor can offer them a viable alternative that could actually make them some money back. What seems to work is active management that minimizes downside risk, buys low and sells high. “This strategy works tremendously well in a sideways market,” Jones says. “I think we’ll be stuck in it for a long time, so it’s very attractive to clients right now.”