Client risk tolerance has tumbled as long-standing worries about stock valuations boil over, according to the latest Retirement Advisor Confidence Index — Financial Planning’s monthly barometer of business conditions for wealth managers.
Advisors highlight concerns that the market is due for a major correction — and is highly vulnerable to a range of domestic and geopolitical shocks — as the monthly index’s risk perception component plummeted 9.7 points to 46. That is the biggest decline in more than a year and the first time the component has been in contraction territory since the election. Readings above 50 indicate improving conditions, while readings below 50 indicate deterioration.
“We are de-risking accounts as equity valuations become more stretched,” one planner says. In addition to the widespread belief that stocks are overpriced, some advisors singled out specific risks like the prospect of war with North Korea and the possibility that the Trump administration will make an erratic decision that would severely damage the economy. “Clients are concerned with the irrational president and divisiveness in Washington,” one advisor says.
The slide in the risk perception component was the biggest factor in a 2.7-point drop to 51.4 in the composite index, which tracks asset allocation, investment product selection and sales, client risk tolerance and tax liability, new retirement plan enrollees, and planning fees. The decline in the composite was the biggest since the election and pushed the index below its level of a year ago.
Some advisors say they are keeping gains on the sidelines and rebalancing toward fixed income securities. RACI components tracking allocations to equities, bonds and cash all fell, however, led by a 7.8-point drop into contraction territory for the cash component at 45.9. The components tracking flows into equities and bonds continued to show long-term expansion.
Advisors have voiced misgivings about clients who continue to position their portfolios aggressively. “I am seeing my clients really get brave with the market,” one says. “I am a little nervous with all the volatility, but this is what we are seeing.”
The RACI component tracking fees charged for retirement services dropped 2.6 points but remained in expansion territory — and above levels posted for most of the past year — at 54.2.
Advisors say that clients have more money to save and are looking to add to retirement accounts. Some attributed inflows to recent strength in hiring, with new employees becoming eligible to enroll in their company retirement plans, spurring “a substantial increase in new retirement account openings and participation.”
But advisors also say that the new fiduciary rule has interfered with product sales — particularly individual retirement account rollovers. One said that the rule “has brought on a lot of new paperwork with regulation and has slowed the business production down in order to get aligned with new policies and procedures for the business.”