Most independent financial advisors are feeling bullish about the future of their own businesses, but they're much more bearish about the financial prospects of investors, especially for Gen Y investors, according to Charles Schwab Advisor Services' 12th semi-annual Independent Advisor Outlook Study released today.
According to Schwab's study, 63 percent of advisors say it will be difficult to achieve their clients' goals going forward, and they point to headwinds such as federal debt, high unemployment, college education costs and health-care costs as having the most negative impact on the ability to achieve the American Dream. Eighty-one percent of advisors polled believe that the American Dream is still alive, but say it will be much harder for Gen Y investors to achieve than it was for their parents.
"By and large, what we're seeing is individual investors are still extremely cautious and uncertain about what is going to go on in the marketplace," says Bernie Clark, executive vice president and head of Schwab Advisor Services.
Ironically, Clark says investors may be a tad more optimistic about reaching their market objectives than their advisors are, based on results in Schwab's High Net-Worth Study released last summer. "Advisors felt cautious; they think it's going to be difficult in meeting their clients' objectives," Clark says. "In turn, those somewhat bearish clients are almost certain that their advisor will meet their financial objective. That's the kind of trust investors have developed in them."
Advisor confidence in the financial markets is down 12 percent since the beginning of the year and is in line with levels seen in the lead up to the 2008 election. Just 55 percent of advisors predict the performance of the S&P 500 will increase in the next six months, despite the fact that the S&P is approaching levels not seen since 2007.
Clark says a new role that advisors may be called on to play is helping the next generation of investors re-adjust their goals and objectives. "Possibly helping them to rethink what their financial future may be," he says. "That may be as simple as a retirement date, returning to the workforce, or more complex decisions as well."
More than half of advisors surveyed think the U.S. economy and the state of the capital markets has worsened in the past four years, and the rising economic optimism reflected in the Independent Advisor Outlook Study released in early Spring has not been sustained.
In contrast, advisors are optimistic about their own businesses prospects for the next four years, with eight out of ten saying they're bullish about their asset under management and firm profitability. Thirty-seven percent indicated they've hired new staff, especially in the areas of investment management (48 percent), client service (47 percent), operations support (47 percent) and business development (32 percent). These new jobs come on the heels of four years of growth for most advisors. Seventy-five percent of advisors report their assets under management have grown in the last four years and 55 percent report improved profitability in their firm. Released in July, Schwab's 2012 RIA Benchmarking Study reported record levels of AUM and revenues in 2011.
The business issues that advisors are following most closely are regulatory changes (49 percent), changing client demographics (27 percent), succession planning (25 percent) and the costs of running an advisor firm (24 percent).
Regarding investments, advisors are pulling back from U.S. large- and small-cap equities and increasing allocations to cash and real assets. Thirty-two percent of advisors said they are likely to invest more in U.S. large cap, a drop of nine percentage points from earlier this year. A similar drop was seen for U.S. small cap, from 23 percent to 18 percent.
Thirteen percent of advisors say during the next six months they are likely to put more in cash, compared to 8 percent earlier this year. The percentage who are likely to put more in real estate in the next six months jumped from 14 percent to 18 percent. Canada was seen as the most attractive international equity market by 30 percent of advisors, followed by 23 percent for Australia and 19 percent for Germany.
Advisors say ETFs are the investment vehicle they're likely to invest more in over the next six months. Advisors polled say that their level of interest in ETFs is double or more than in any other investment vehicle.
Eight in ten advisors say the November presidential election is affecting their clients' financial frame of mind. Nearly 60 percent say the election is a major topic of conversation at client meetings and 40 percent said they avoid getting involved in any partisan political discussion.
One in three advisors say it's difficult to get clients to focus on the long term, while close to a third of advisors say clients are keeping money on the sidelines until they know who wins the election. Regardless of who is elected president, advisors feel the top priorities of the newly elected president should include reducing the deficit (61 percent), increasing employment (53 percent) and reforming the tax code (52 percent).
Schwab's Independent Advisor Outlook Study was conducted by independent research firm Koski Research. The survey was based upon the responses of more than 830 registered investment advisors representing $183 billion in assets under management. Advisors participated in the study between August 21 and 31.