Clients planning for retirement are getting skittish.
Concerns about rising interest rates, inflation and other factors helped plunge one of the most critical gauges of client confidence to its lowest point since April 2020, according to the Retirement Advisor Confidence Index, Financial Planning's monthly barometer of business conditions for wealth managers.
In the January survey, the component of RACI that tracks risk tolerance checked in at 34.8, tumbling 11.3 points from December 2021, and off 17.7 points from the same period a month ago.
"Clients are concerned about inflation and taxes," one retirement advisor said. "They are more risk-averse because of higher inflation and concerned that rising interest rates are going to cause a decline in the markets. Clients have been willing to sell what have been high-growth market leaders and look to more conservative investments."
RACI scores above 50 indicate an increase in confidence, while scores below that mark signify a decline.
It was telling, then, that the overall composite score for the confidence index posted a score of exactly 50 in January, continuing a more or less consistent slide from the mid-50s, where RACI scores had been hovering for much of the first part of the year. January's RACI score was off 1.2 points from December 2021, and down 5.2 points from the year-earlier period. It came in as the lowest score since October 2020.
Some of that decline in confidence came from the jolt the markets experienced in January and also reflected some of the global supply chain challenges that have seized up production and distribution networks.
"We believe that market conditions are not particularly favorable at the moment, given the major supply chain issues that our economy is grappling with," one advisor said. "We have been advising clients to ease up on investing in certain equities as a result."
The element of RACI that tracks investments in equities slipped for the third straight month, posting a score of 52.3, off 10.5 points from the same period a year ago for the lowest mark in that category since October 2020.
"With the inflation we are experiencing, along with the Federal Reserve wanting to raise interest rates, more clients are becoming very nervous about the market," one advisor said.
That anxiety has driven retirement savers to other asset classes perceived as safer, advisors said.
"Clients have been more receptive to bonds as yields have risen," one retirement advisor said. "This has been funded by investing cash on the sideline and rebalancing some stocks to bonds."
The RACI component that measures investments in bonds or debt-based securities notched a score of 59.3 in January, up 3.5 points from December 2021 and 5.7 points ahead of the same period last year. January's bond score was the highest in the category since May 2021.
Advisors aren't soothsayers, but looking ahead to the rest of 2022, some anticipate a bumpy ride owing to an array of market conditions that include the lingering effects of the pandemic. Some advisors are laying the groundwork for that expected volatility by having frank conversations with clients about what to expect.
"My firm believes [that] due to inflation, continuing COVID-19 cases among other variables, 2022 will be a volatile year," one advisor said. "Clients' expectations as far as market returns must be kept in check."