High-net-worth-investors can be excused for exhibiting signs of a financial form of post-traumatic stress disorder. Following the most severe financial downturn since the Great Depression, investors have been buffeted by a series of geopolitical and economic risks ranging from default in Greece to war in the Middle East. And just in the past few weeks, the “wall of worry” confronting investors includes Federal Reserve tapering, the turmoil in Syria, the launch of Obamacare and yet another debt ceiling debate, to name just a few things.

Not surprisingly, many high-net-worth investors have reacted with extreme caution—retreating to the perceived haven of low-yielding government bonds, despite a booming stock market. Yet there has been some tantalizing evidence that investors are emerging from their foxholes and considering a more balanced investment approach. Have we seen the end of the cautious investor? Are aging baby boomers who need retirement income fed up with the low returns of many fixed-income products? And what about advisors and high-net-worth investors—where are they united and where do they differ?

To learn the answers to these questions, Federated Investors commissioned the 2013 Investor Mindset Survey, which measured the attitudes of both high-net-worth investors (U.S. adults with at least $500,000 in investable assets, excluding their primary residence and employer-based retirement funds) and advisors. This survey is one of the few to take such an in-depth look at the same questions from the perspective of both investors and advisors.

What we found is that high-net-worth investors are on the cusp of a decisive shift to equities, a change driven by an optimistic economic outlook and increasing concern about low portfolio returns. Advisors are on the same page with their clients on shifting to equities, but there are surprising differences between advisors and high-net-worth investors related to issues such as risk tolerance and retirement goals. Among the key findings that advisors should be aware of:

The Long-Anticipated “Great Rotation” Has Begun In A Measured Fashion

High-net-worth investors say they are ready to make a decisive shift from bonds to equities during the next 12 months. There have been substantial flows out of bond funds and strong flows into domestic equity funds in recent months, according to Investment Company Institute data. Our survey indicates this trend is likely to accelerate. In fact, 24% of high-net-worth investors plan to invest more in equities over the next year as compared with 10% for bonds. In addition, compared to bonds, nearly four times as many investors plan to add equities and balanced strategies that combine equities and fixed income to their portfolios.

Investors No Longer Consider Income A Bonds-Only Strategy

Why is the long-anticipated shift to equities happening? A key factor is that high-net-worth investors see equities as a better source of income than bonds. Nearly two-thirds of high-net-worth investors said they view owning stock as a “great way to earn income.” Asked what is “top of mind” when thinking of income products, 48% of high-net-worth investors choose equities and balanced. Only 30% choose bonds. The interest in equity-income products also is reflected in the 31% of high-net-worth investors who cite dividends as an important aspect of income products.

Investors View Themselves As Less Conservative Than Their Advisors See Them

The shift to equities is reflected in high-net-worth investors’ responses when they are asked to describe their investment style. A third of advisors viewed their clients as “cautious’’ (lower) and “secure” (lowest) in their risk appetite. However, only 9% of high-net-worth investors described themselves this way. An overwhelming 84% of investors surveyed described themselves as having a “balanced” or “progressive” risk appetite—a more moderate approach to risk. This data indicates high-net-worth investors are open to new approaches—not only stocks but balanced products and even higher-yielding bond strategies. 

What are the implications for advisors? I believe advisors should consider the following when consulting with their clients: 

Recognize The Fundamental Shift In High-Net-Worth Investors’ Mind Set

After five years of hunkering down following the financial meltdown, high-net-worth investors are finally coming out of their shells. Our survey tells us that advisors are on the same page with investors regarding equities. Ninety-two percent of advisors said they were confident or very confident that equities would provide a solid result for clients. And 56% agreed or strongly agreed that they’ve advised clients to increase their equity investments due to anticipated strong returns. 

Will the recent federal budget turmoil fundamentally affect that shift in investor attitudes? The last-minute compromise in October to avoid a default eased immediate concerns, but a new deadline will be looming soon. Clearly, investors see uncertainties in the marketplace. While our survey tells us that 56% of investors expect the U.S. economy to improve over the next 12 months, they have many concerns that temper their optimism. Federal budget issues and changes to health-care laws are at the top of the list—a total of 40% of investors said they are most concerned about these factors. Yet I believe the shift in investors’ attitudes will likely endure. History tells us that federal policymakers will likely arrive at another last-minute compromise that avoids a government default on February 7. With a compromise in place, I believe high-net-worth investors will continue a more balanced investment stance, favoring a conservative income-oriented approach to equities.

Respond To Clients’ Appetite For Income 

While advisors cited volatility as the top-of-mind worry related to clients’ portfolios, investors selected low returns. Tired of the meager results from low-yielding government bonds, investors yearn for better returns as long as they are reliable and consistent. A total of 35% of investors and 41% of advisors say predictability and reliability come to mind first when thinking of the benefits of income products. Striking a similar theme, an additional 15% of investors and 15% of advisors cite “stabilizes portfolio returns” as what comes to mind first.

The desire for consistent income is a key driver of the shift to equities and balanced strategies. High-net-worth investors increasingly view equity income as a central component of their portfolios—in addition to the nearly two-thirds who view stock ownership as a “great way to earn income,” 31% cited dividends as an important aspect of income products. Similarly, when asked, “What does investment income mean to you?” 31% of investors selected “dividend payments from stock holdings” and only 23% chose “receiving a regular, guaranteed payment provided by a bond, annuity or other fixed-income security.”

Advisors reflect a similar mind set related to income products, although they are more focused on balanced strategies than investors. When asked which income products they recommend the most, only 27% cited bonds while 43% selected balanced and equity. In addition, 56% of advisors agree they had advised their clients that “buying stock in a company is a great way to earn income.”

Dividend stocks provide a great opportunity in today’s environment, with investors seeking more robust, yet reliable, returns. Looking at equity market returns from the last century, dividend yield delivered 42% of returns. If you add together dividend yield and dividend growth, they account for 91% of returns. While many U.S. firms (unlike their counterparts overseas) de-emphasized dividends during the ’80s and ’90s, I believe we will see a resurgence in the coming years as corporate America reverts back to a tried-and-true approach that served both investors and public companies well for many decades.

Educate Clients On Longevity And Inflation Risk

High-net-worth investors are very focused on retirement—78% say ensuring a secure retirement is their top investment priority. Yet, surprisingly, they are much less concerned than advisors about reaching their retirement goals and outliving their assets. Only 7% of investors strongly agree they are very concerned about their ability to meet retirement goals, while 32% of advisors think their clients are very concerned about retirement goals. Similarly, only 8% of investors strongly agree they are concerned about outliving their assets while 27% of advisors think their clients are very concerned.

Why the disconnect? It may reflect, at least in part, clients’ faith in their advisors’ ability to safely guide them to a secure retirement. But our survey indicates that advisors have a higher level of caution regarding longer-term factors such as longevity risk and inflation risk. Investors are more focused on shorter-term concerns, such as low returns. Advisors have an opportunity to educate clients about the very real risks associated with longevity and inflation. 

While investors are underestimating the effect of longevity and inflation risk, they do understand that lower-yielding bonds are not going to provide adequate retirement income. In fact, investors view income products as an important part of retirement security, even more so than advisors. A total of 65% of investors cite a positive effect on retirement as the most important aspect of income products as compared with 53% of advisors. Given the survey data, it is clear that dividends can play an important role in the portfolios of the approximately 76 million baby boomers near or just entering retirement. The parents of baby boomers already understand the appeal of dividends—current retirees receive about half of all dividend income earned.

More information about the survey can be found at www.federatedinvestors.com/2013investormindset

About the Survey

The 2013 Investor Mindset Survey was fielded online nationally between June 20 and July 5, 2013. Interviews were conducted with 1,013 high-net-worth investors, who were U.S. adults, age 18 and older, with at least $500,000 in investable assets, excluding their primary residence and employer-based retirement funds. The 301 financial advisors interviewed were primarily certified financial planners, chartered financial analysts, registered investment advisors and personal financial planners.

KRC Research, an independent third-party research firm, designed and conducted the survey on behalf of Federated Investors.

Bio

Linda A. Duessel is senior equity strategist and senior portfolio manager at Federated Investors. As senior equity strategist, she works as part of the team responsible for formulating Federated's views about various equity market conditions and the firm's positioning strategies within the equity strategic value team. As senior client portfolio manager, she articulates the strategy, process, positioning and performance of each of Federated's strategic value portfolios.