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As Markets Dip, Client Concerns Rise for Advisors, Experts Warn

By Miriam Rozen October 29, 2018

When investment returns decline – as may be inevitable with a full-scale market correction – will clients respond by investing less? With the Nasdaq, Dow Jones Industrial Average and S&P 500 all closing down at Friday, some advisors have begun wondering.

A study published this month by the National Bureau of Economic Research concludes that may happen.

“In a low return regime, workers build up less wealth in their tax-qualified 401(k) accounts versus the past, claim Social Security benefits later, and work more. Moreover, the better-educated are more sensitive to real interest rate changes, and the least-educated alter their behavior less. Interestingly, wealth inequality is lower in periods of persistent low expected returns,” write the study’s co-authors, including Olivia Mitchell, professor of business economics and public policy at the University of Pennsylvania Wharton School of Business, who also serves as an independent trustee for Wells Fargo Advantage Funds and has received more than $10,000 from the TIAA Institute for research on retirement security.

Despite those conclusions, advisors who talk to clients every day second-guess that prediction.

“We don’t have a crystal ball,” says Dusty Wallace, the director of planning and the chief compliance officer at Lee Financial in Dallas, which has more than $1 billion under management.

Wallace recognizes that “as returns have risen, you do see people more comfortable with adding to their portfolio.”

But, in her shop, advisors steer clear of dictating what is a “normal” return, since over the decades that figure has shifted from 9% to 4% and back up again, and therefore clients have no fixed expectations.

During financial planning sessions, Wallace helps clients focus more on longevity risk since those numbers, unlike returns, have steadily increased for the population for decades, and therefore ranks as a significant factor in investment and retirement-timing decisions, Wallace says.

The study’s conclusions also throw into sharp relief other key financial planning strategies advisors should offer to clients, according Sheryl Rowling, the principal of Rowling & Associates in San Diego, which has more than $340 million under management.

“It points out the importance of diversification,” Rowling says. “It’s extremely rare for all the indexes to go down at once,” she adds. If clients are diversified, even in a low-rate environment, they will not see returns suffer that much, Rowling says.

Sheryl Rowling

Clients also need to be reminded about the double bonus of delaying retirement, she says. “If you delay one year, it’s one more year of savings and one year less of retirement funding needed,” Rowling says.

But “no matter what the market is doing,” Rowling stresses, “clients have to continue to save. The only way you ever get to retire is to live beneath your means.”