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.