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